It pays to diversify the stocks in your portfolio. Whirlpool (WHR -0.39%), Devon Energy (DVN 0.19%), and PTC (PTC 0.62%) could hardly be more diverse, but they all have the potential to deliver excellent returns for investors this year and for the next decade. Whirlpool's 6.1% dividend yield will catch the eye of investors looking to play the housing market recovery. Devon Energy's annualized 6.7% yield is similarly eye-catching, and the stock will suit energy investors. Meanwhile, PTC will appeal to investors looking to play the exciting long-term theme of the manufacturing sector digitizing. Here's why all three are highly attractive stocks.
Whirlpool has near-term risk but huge upside potential
There's no doubt Whirlpool's sales growth is under pressure. It's not just that rising interest rates crimp discretionary spending; it matters more how long they stay high. In Whirlpool's case, there's evidence its end markets are slowing. For example, in the third quarter of 2023, the company was forced to pull forward its return to the kind of promotional activity it undertook before the pandemic a couple of quarters earlier than expected.
These pressures will likely continue into 2024, so beware the near-term risk.
That said, there's nothing in its end markets that lower interest rates later in the year won't help, and lower interest rates are expected. In addition, management is cutting costs significantly, and the plan to combine its European business with appliance company Arçelik, creating a new entity in which Whirlpool will own a 25% stake, makes perfect sense. It also will allow Whirlpool to focus on its core North American market.
The reality is that Whirlpool has found it extremely tough to make money in Europe, but its North American business is fine. The following table illustrates the issue. Simply put, management will be freer to focus on improving North American margins to prepandemic levels.
|
Segment |
2019 EBIT Margin |
2019 EBIT |
First 9 Months of 2023 EBIT Margin |
First 9 Months of 2023 EBIT |
|---|---|---|---|---|
|
North America |
13.3% |
$410 million |
10.1% |
$862 million |
|
Europe, Middle East, and Africa |
0.9% |
$11 million |
0.9% |
$23 million |
|
Latin America |
5.3% |
$42 million |
6.0% |
$146 million |
|
Asia |
0.6% |
$2 million |
3.2% |
$25 million |
Data source: Whirlpool. EBIT = earnings before interest and taxation.
Devon Energy will attract income-seeking investors
This stock is for energy bulls and investors looking to diversify their portfolio by buying into the sector. There's no getting around the fact that Devon's earnings and cash flow, and ultimately its dividend payout, depend on movements in the price of oil and gas. (Devon pays a base dividend of $0.20 a quarter and a variable dividend that depends on its cash-flow generation and capital allocation priorities.)
Although Devon's stock fell slightly more than 26% in 2023, there are a few good reasons to believe it could recover in 2024. First, as I have previously said, a big reason for the decline in earnings, cash flow, and, ultimately, dividends in 2023 came down to the dramatic slump in the price of gas. However, it's now stabilized, and the price of oil is still above $70 a barrel. Extrapolating from management's projection on the company's last earnings call, in early November, oil at $70 a barrel could result in a dividend yield of roughly 5% overall based on the current price.
Second, lower interest rates in 2024 (if they come) will make high-yield stocks more attractive, which means more interest in stocks like Devon Energy. Third, it's important to note the price of oil is currently above $70, yet the global economy is already slowing down. This suggests that the efforts of certain oil-producing countries to support the price by restricting supply are working.
While there's no guarantee the price of oil will stay at these levels, Devon's base dividend ($0.20 a quarter) is protected down to a price of $40 a barrel and that indicates a yield of around 2% at the current stock price. That's not bad.
PTC for the new manufacturing world
This industrial software company's solutions lie at the heart of the digitization of the manufacturing sector. Its computer-aided design (CAD) software helps customers digitally create and modify designs. The products that are designed can be digitally analyzed and tested via simulation before they are built. This interface between the physical and digital worlds continues with PTC's product lifecycle management (PLM) software. Meanwhile, its Internet of Things (IoT) software digitally integrates products and assets.
Digital technology is revolutionizing manufacturing and helping reduce product development times while creating so-called "closed loop" manufacturing, whereby data is being constantly analyzed to improve production iteratively, and can even lead to adjustments to the product design.
These are hot concepts in modern manufacturing plants, and PTC is a leader in the field. The company continues to grow its annual run rate revenue, a figure that represents its recurring revenue, at a mid-teens growth rate, and it's likely to drop down into significantly more free-cash-flow generation in the coming years. Wall Street analysts have PTC growing its free cash flow to around $1 billion in 2026, putting the stock at a ratio of 20 times estimated 2026 free cash flow at the current price. That's a good value for a company growing at a mid-teens rate.
