While it's impossible to absolutely time a bottom in the markets, when the market is down, economic news is the scariest, and you feel least like buying, history has shown that tends to be a great long-term opportunity.
High-multiple growth stocks fell hard late last year as interest rates rose, but cheaper, dividend-paying cyclical stocks have plummeted more recently, as investors fear that central banks and geopolitical events may put the economy into recession.
However, even high-quality cyclical names with staying power have become really cheap, with compelling shareholder returns when adding up their dividends plus share repurchases -- like the the following three stocks.
KLA
The semiconductor sector is coming off two and a half boom years, but some now fear a bust as the global economy slows. Consumers who stocked up on computers and phones during the pandemic probably have a relatively new device, and recent estimates for this year's PC sales have been particularly bad.
However, looking past this year at the long-term growth of chip-heavy applications such as artificial intelligence, autonomous EVs, and the Internet of Things, a rebound should eventually occur.
KLA (KLAC 3.03%) is one of just a handful of companies that dominate the semiconductor equipment space. It's far and away the leader in inspection and metrology equipment, which inspect logic and memory chips for imperfections at each step of the chipmaking process.
In this downturn, KLA's price-to-earnings (P/E) multiple has fallen to a lowly 13.9, a valuation only seen last in the 2014 and 2018-2019 chip downturns.
Yet even in 2019, which was a pretty nasty semiconductor recession, KLA's revenue growth decelerated but didn't go negative. Operating income dipped slightly, as KLA kept investing in research and development and sales. After that soft year, growth reaccelerated.
KLA's financial metrics have been pretty stable relative to other equipment-makers, generating cash in good times and bad. That could be because as chips get denser and transistors are deposited on silicon at ever tinier distances, it requires more metrology.
So even in down years, leading chip designers still invest in the next node to stay competitive. This year, we're seeing foundries become highly competitive. Intel (INTC 0.19%) and Samsung are investing to try to catch Taiwan Semiconductor Manufacturing (TSM 2.10%), which took the lead in terms of leading-edge production capabilities several years ago. Helped by the CHIPS Act and other subsidies, these companies are likely to keep investing to catch up, even in the soft part of the cycle.
KLA has also stepped up its repurchases recently, with a $3 billion accelerated repurchase program that was completed near the June lows, retiring a high-single digit percentage of its stock. The stock can be bought near those price levels today.
Thanks to those repurchases, KLA should see accelerated EPS growth coming out of this cycle, when revenue and profits eventually reaccelerate.
Bank of America
Another cyclical stock that has taken it on the chin is Bank of America (BAC 1.67%). Ever since the global financial crisis of 2008-2009, CEO Brian Moynihan has positioned Bank of America to withstand the next big downturn. Pursuing a "smart growth" strategy, Bank of America has methodically pursued steady, if not spectacular, growth, while focusing on prime customers.
Although it is diversified with sales and trading and investment banking segments, BofA's revenue mix skews more toward plain vanilla lending relative to other big Wall Street banks. In addition, Bank of America's national scale allows it to pay less on deposits than other smaller banks and upstart competitors.
The combination of a lending focus, high-quality borrower base, and low deposit rates positions Bank of America perfectly for this environment. Interest rates have gone up very quickly this year, so BofA will see its net interest income rise rapidly along with it. Net interest income is the spread between interest charged on loans, mortgages, and other loans products minus the rate BofA pays out to depositors. While the company had already forecast a strong year of net interest income last quarter, larger-than-expected interest rate increases since then are likely to improve upon those prior projections.
Meanwhile, recession fears have knocked down BofA's P/E multiple to just 9.7. While a bad recession could impact earnings, charge-offs are very low right now, as consumers still have lots of savings leftover from the pandemic. Moynihan's "smart growth" strategy is likely to pay off, so perhaps the bank can see its multiple rerate higher on the other side of a downturn. If we avoid a recession, this stock could really take off.
Pioneer Natural Resources
Oil prices have fallen recently, nearing the prices at which they started the year. However, Pioneer Natural Resources (PXD 0.26%) should have no trouble minting profits even at these lower prices, thanks to its prime acreage in the low-cost Midland Basin of the Permian Shale in Texas.
In fact, Pioneer has more than 20 years of high-quality oil inventory with breakeven prices below $40 per barrel. That's the largest sub-$40 U.S. inventory position of any shale driller. Furthermore, Pioneer has a rock-solid balance sheet, with just $3.1 billion in net debt. For reference, the company generated $2.7 billion in free cash flow last quarter alone.
With that solid balance sheet, Pioneer is paying out most of its cash flow to shareholders, consisting of a fixed dividend of $4.40, yielding about 2.14% at this valuation. However, Pioneer also pays out a variable dividend with the remaining 75% of its free cash flow after the fixed. On top of that, the company is even repurchasing a bit of stock. On a trailing basis, the stock has yielded 9.74%, but last quarter, when oil prices were high and Pioneer realized sales at $110 per barrel, the total dividend amounted to 16.7% on an annualized basis.
Oil prices are of course lower now, but given Pioneer's low-cost asset base, low debt, and still-solid dividend, it's another top-quality, resilient stock that has recently gone on sale.
