Bear markets can be a great time to buy down-beaten stocks at discount prices. But sometimes, stocks go up during bear markets for the right reasons.
It's human nature to want to buy something at a discount. But basing whether a stock is expensive or cheap on the price action alone isn't a recipe for sound long-term investing. It's better to look at the fundamentals and results of a company to see if the stock's price is justified.
Baker Hughes (BKR 0.12%), Phillips 66 (PSX +0.19%), and Deere (DE +0.71%) are three dividend stocks that beat the market last year but are still great buys today.
Image source: Getty Images.
Favorable end market conditions will help Baker Hughes in 2023
Lee Samaha (Baker Hughes): Yes, the oil equipment and services company did outperform the market in 2022, but it also significantly underperformed its peers like Halliburton and Schlumberger. The reason comes from a combination of less-than-optimal execution, charges taken upon exiting Russia, and surging raw material and supply chain costs.
Still, the good news is all these three headwinds can turn into tailwinds in 2023. First, the loss of work in Russia is now in the numbers, making easier comparisons to beat in 2023. Second, management is taking action to improve execution. The company already plans to reduce complexity and annual costs by $150 million by shifting to two reporting segments rather than four and streamlining its operations in the process.
Third, like many industrial companies, Baker Hughes has a margin expansion opportunity coming from a moderation in raw material and supply chain costs caused by higher interest rates.
Underpinning all of this is the fact that, despite plenty of talk of recession and a stock market correction, the price of oil is still above $80 a barrel, making end market conditions favorable for oil capital spending and, ultimately, oil equipment and services companies.
NASDAQ: BKR
Key Data Points
Fuel your passive income stream with Phillips 66
Scott Levine (Phillips 66): Soaring 44% in 2022, shares of Phillips 66 handily beat the market. The midstream company and refineries operator strongly benefited from rising energy prices as investors rushed to power their portfolios with oil and gas stocks. That wasn't the only catalyst, however. The company beat expectations during its third-quarter 2022 earnings report and continued its streak of raising the dividend. Even with the stock's impressive outperformance last year, though, the stock still has room to run, giving investors good reason to scoop it up along with its attractive forward dividend yield of 3.7%.
Despite the stock's strong performance last year, shares are still steeply undervalued. Trading at 6.6 times operating cash flow, shares are trading at a discount to their five-year average cash flow multiple of 9. Using the forward earnings multiple to assess the price tag, investors will find the stock still looks inexpensive. Whereas shares of Phillips 66 have a five-year average forward earnings multiple of 16.4, they're currently valued at only 7.5 times forward earnings.
Phillips 66 has demonstrated a strong commitment to rewarding shareholders in the past. Over the past five years, the company has raised its dividend at a compound annual rate of 12.5%. Management will likely continue to return an increasing amount of capital to shareholders in the future. One way that will help the company to do this without jeopardizing its financial well-being is through acquisitions. Most recently, for example, Phillips 66 announced that it had entered into a definitive agreement to acquire the outstanding units of DCP Midstream -- a deal that will fortify its midstream natural gas business. Moreover, management expects the transaction will provide $1 billion in adjusted earnings before interest, taxes, depreciation, and amortization.
NYSE: PSX
Key Data Points
Deere stock deserves to be near an all-time high
Daniel Foelber (Deere): Given its size and industry-leading position in precision agriculture, you would think that Deere stock's monster outperformance would have caught more headlines. But oftentimes, the best stocks are the ones that make the least amount of noise. Deere's subtle success can be attributed to margin growth, a surge in sales, and, most importantly, the ability to raise prices without crushing demand. Over the last three years, Deere stock has surged 143% compared to just a 21.8% gain for the S&P 500 and a 20.4% gain for the industrial sector.
NYSE: DE
Key Data Points
Blue chip industrial stocks of Deere's size rarely post that degree of outperformance in such a small amount of time. But in the case of Deere, everything seems to be clicking because the stock's surge is backed by fundamentals.
DE Revenue (TTM) data by YCharts
Deere's revenue and net income are at all-time highs. Its operating margin is also near an all-time high thanks to effective price increases. Deere's short-term performance is still heavily dependent on the market cycle, commodity prices, and the traditional industries it serves. But the most exciting aspect for long-term investors is the company's smart industrial strategy, which is centered around investments in automation, hardware, and software to boost crop yield, sustainability, forestry, construction, and more. All told, the investments are meant to widen Deere's gap over the competition, as well as extend the lifecycle of the customer by keeping them involved with services even after the initial purchase.
In this vein, Deere could end up becoming the Apple of agriculture as it builds out an ecosystem for its customers and makes its products more sticky.
Deere stock only has a dividend yield of 1.2%. But that is mainly because the company spends so much of its free cash flow reinvesting in the business, as well as buying back its own stock. Deere doesn't pack the same passive income punch as higher-yielding industrial companies. But what it lacks in the dividend it more than makes up for with its growth potential. After crushing the market over the past few years, Deere is still poised to outperform the market over the next three to five years, making the stock a worthy investment now.
