After sliding for several months on fears of a looming recession, the stock market has started to bounce back. The S&P 500 has rebounded more than 10% from its low point in June.
However, despite that recovery, there are still a lot of bargains. Three value stocks our contributors want to highlight are Rockwell Automation (ROK 1.05%), Kinder Morgan(KMI -0.32%), and Ford Motor Company (F 0.47%). Here's why these stocks still look cheap even with the recent rally.
Saving money never goes out of style
Reuben Gregg Brewer (Rockwell Automation): Recessions are difficult, and one would definitely impact industrial automation expert Rockwell Automation. During economic downturns, one of the first things companies do to protect their margins is look for ways to save money. While business automation requires a cash outlay, in the end the purpose is to reduce costs. Sure, a recession would likely be a headwind, but Rockwell Automation's main business is probably going to end up just fine over the long term.
That's highlighted by management's comment about a record backlog at the end of the fiscal third quarter. This is work that is lined up, but hasn't yet been performed -- basically, future revenue. Yet Rockwell Automation lowered its revenue guidance for the full year and narrowed its earnings range, which got investors worried. So what's going on?
There are a couple of issues. First, on the top line, Rockwell Automation has been dealing with supply chain issues that have stopped it from completing as much work as it had hoped. Those bottlenecks will eventually get worked out. Then there's inflation, which is really out of management's control. That said, the company is increasing prices, as you'd expect, but it will just take time to muddle through this period. It isn't likely to be a long-term issue.
If you can think long-term, the stock's drop of 30% or so since the beginning of the year should probably be seen as a buying opportunity.
Still incredibly cheap
Matt DiLallo (Kinder Morgan): Shares of Kinder Morgan have rallied about 20% so far this year. However, the natural gas pipeline stock is still very cheap.
The company expects to produce about $2.17 per share of distributable cash flow (a proxy for free cash flow) this year, after recently boosting its guidance by 5%. With the share price lately around $19 apiece, Kinder Morgan trades at less than 9 times its free cash flow. That low valuation is a big reason why Kinder Morgan now offers a high dividend yield, now at over 5.8%.
In addition to paying its big-time dividend, Kinder Morgan uses its free cash flow to expand its operations. The company is increasing capacity on several natural gas pipelines to support growing demand for the cleaner-burning fuel. It's also investing $1.1 billion to build a renewable natural gas platform. These investments will help grow the company's cash flow, which should enable it to continue increasing its dividend, something it has done for five straight years.
Kinder Morgan also uses some of its free cash flow to opportunistically repurchase its cheap stock. The company has repurchased about 16 million shares this year at an average price of around $17.09 per share. These repurchases are helping reduce the outstanding share count, helping boost its per-share growth rate. For example, while its overall distributable cash flow was up 14.7% in the second quarter, it rose 15.6% per share.
Kinder Morgan offers a lot of value these days. It trades at a cheap valuation for a cash-gushing company with decent growth prospects. Because of that, investors get paid well while they wait for its valuation to improve.
Stepping on the gas
Neha Chamaria (Ford Motor Company): Despite gaining almost a quarter in value in the past month or so, Ford is still a value stock that you don't want to ignore. To be sure, the auto giant has had its fair share of challenges in recent months. Supply constraints have been a major headwind, and a series of recalls amid rising interest rates and fears of a slowdown further took the sheen off Ford stock. Even after its recent rebound, the auto stock is still down about 24% so far this year.
Yet Ford's sales remain robust, and the company is absolutely crushing it when it comes to electric vehicles. EVs are touted to be Ford's biggest growth drivers in the coming years, and the company is going all out to make up for lost time and expand its presence in the industry. Its latest move is testimony of its focus on EVs: Just days ago, Ford said it'll lay off 3,000 workers from its traditional fuel-burning vehicles business to cut costs and save money to invest in EVs.
The electric version of Ford's uber-popular F-150 pickup truck, the F-150 Lightning, is already selling out fast. It stopped taking orders in December last year after receiving an unprecedented number of preorders, and is now reopening its order book but with a big price hike. Likewise, Ford announced on Aug. 25 that it'll resume orders for the Mustang Mach-E as well, again with a price hike.
So on the one hand, Ford is ramping up production rapidly to meet demand and is passing on higher costs to consumers. On the other, it's restructuring its legacy auto business to make more money out of it so it can scale up its EV operations. These efforts should eventually show up in Ford's numbers, and in its stock price.
