The Nasdaq tech sell-off has transitioned into borderline capitulation for many once red-hot names like DocuSign.
Investors probably don't want to be worrying about volatility as they look forward to relaxing this holiday season. Fear not. Caterpillar (CAT -0.04%), Huntsman Corporation (HUN 0.04%), and The Chemours Company (CC -1.26%) are three value stocks that can add stability to your portfolio. Here's what makes each a great buy now.
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Mediocre results, yet still a great value
Daniel Foelber (Caterpillar): The stage was set for Caterpillar to soar in 2021: Widespread vaccinations, an economic recovery, low interest rates, and an industrial sector that was looking to get back on its feet compounded into a tightly coiled spring. Yet supply-chain issues, rising raw material costs, and a pandemic that isn't going away have dampened Caterpillar's real results.
Caterpillar recognizes that the economic expansion has yet to enter full swing. Its results have been good but have failed to live up to expectations. Despite this backdrop, Caterpillar is still making a lot of money, but its stock price is underperforming the market. This dynamic has brought Caterpillar's price-to-earnings (P/E) ratio down to 21. Granted, this is still above Caterpillar's historic levels, and all the more impressive considering that the company is producing somewhat weak results. But it's a lot lower than the market average.
The good news is that many of the factors that teed up Caterpillar to have a great year are still largely in play. The oil and gas industry has been a pleasant surprise for Caterpillar, bolstering its energy and transportation division. The company's mining segment has directly benefited from customer demand to ramp up supply. Guidance suggests that free cash flow (FCF) and revenue growth are headed in the right direction.
As a cyclical company, Caterpillar's results are heavily dependent on the broader economy. Yet through it all, the company has raised its dividend for 27 consecutive years, making it one of the few cyclical Dividend Aristocrats. With a current dividend yield of 2.3% and a reasonable valuation, Caterpillar looks like a good stock to buy now.
Hunting for value with Huntsman
Lee Samaha (Huntsman Corporation): In a market that's looked expensive for a while, it's somewhat surprising that investors can find a stock trading less than 9 times estimated 2021 earnings, but that's the case with chemicals and materials company Huntsman.
Of course, there's generally a reason why companies have such low valuations. For Huntsman, it's probably a combination of two factors: its recent history of margin underperformance compared to its peers, and concerns that its current earnings strength is not sustainable.
On the last point, the recent earnings season was replete with companies warning about soaring material cost inflation. Huntsman makes many of those materials. The fear is that these price increases are not sustainable, and when the market cools down, so will Huntsman's earnings.
For example, management reported a whopping 41% increase in revenue in the first nine months of 2021 compared to the same period in 2020. The growth was driven by the rise in average selling prices; Huntsman's largest segment, polyurethanes (used in insulation, automotive, construction, spray foam, etc.), reported a 31% increase in average selling prices in the first nine months.
The market is right to be cautious about the sustainability of Huntsman's pricing, but perhaps it's being overly harsh. After all, it's tough to predict where pricing will go in the future. Moreover, it's not all about favorable end markets. The company has made significant strides in shedding its more commodity-type businesses in favor of higher-margin downstream businesses.
There's also a real opportunity for Huntsman to improve its earnings margin in line with its peers:
HUN Operating Margin (TTM) data by YCharts.
All of this adds up to an exciting value proposition, one that bargain hunters might find impossible to pass up.
A materials stock to gift-wrap for budget-conscious investors
Scott Levine (The Chemours Company): Now that the turkey and stuffing are behind us, it's time for some holiday gift shopping. To help stretch budgets a little further -- maybe enabling us to buy an extra present or two -- investors are looking for deals in the stock market. With the S&P 500 frequently flirting with all-time highs, the choices for value-oriented investors may seem limited. However, there's a leading chemicals stock that deserves a close look: Chemours.
The company is a leading producer of titanium dioxide, a compound supplied to customers in the clothing, agriculture, and packaging industries. Chemours also provides an assortment of other specialty chemicals such as Freon for refrigeration and Teflon for the military. Because its customer base spans such a diverse range of industries, Chemours mitigates the risk associated with any one industry suffering a precipitous decline, thus impacting Chemours' business.
Like so many other businesses over the past several months, Chemours has suffered from supply-chain challenges -- an issue that management alluded to numerous times on the company's third-quarter conference call. It's likely this factor that led investors to exit their positions. However, the sell-off seems to have been premature: Chemours foresees a strong end to 2021. In fact, it raised its FCF guidance to approximately $500 million from about $450 million.
But it's not only the 2021 guidance that suggests Chemours is a smart investment choice. The company's industry-leading position and history of success suggest that it will be able to weather the current headwinds and prosper well into the future.
Currently, shares of Chemours are changing hands at about 23% less than at their 52-week high of $29.82, but there are better indications of how inexpensively the stock is presently valued. For one, Chemours is trading at about 5.2 times operating cash flow, representing a discount to the stock's five-year average multiple of 7.6. And investors who favor the price-to-earnings yardstick will find another demonstration of its bargain-bin valuation: Chemours is trading at 12.8 times trailing earnings -- a notable discount to the S&P 500's P/E ratio of 28.8.
