10 quality stocks ready to bounce back from the September sell-off

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Steel producer Nucor has set all-year profit records, but is trading at just four times its profits.

Courtesy of Nucor

The market downturn over the past month, triggered by the Delta variant, rising inflation, the Fed’s cut expectations and Congress’ tug of war over spending provide opportunities for investors to buy high-quality stocks at bargain prices.

Barron looked at S&P 500 stocks which fell more than 10% in September and looked for companies with less leverage, strong earnings prospects and high earnings. Specifically, stocks must have a leverage ratio of less than 30%, estimates of earnings growth over the next 12 months greater than 10%, and a return on equity ratio of greater than 20%.

Ten companies from several sectors responded to our measures: steel producer


Nucor

(ticker: NUE); water heater manufacturer


AO Smith

(SAT) ; residential construction companies PulteGroup (PHM) and


DR Horton

(DHI); software giant


Adobe

(ADBE); industrial manufacturer


Trane Technologies

(TT); swimming pool supplier Swimming pool (POOL); mining company


Freeport-McMoRan

(FCX); manufacturer of analytical instruments


Agilent Technologies

(A); and semiconductor producer


Skyworks Solutions

(SWKS).

name Price change in September Debt to assets Estimated profit growth Return on equity Prize to win
Nucor (NUE) -16.2% 23.4% 125.5% 35.0% 4.3
AO Smith (AOS) -16.0% 4.9% 11.3% 23.2% 20.1
Pulte Group (PHM) -14.7% 20.7% 36.3% 23.9% 5.4
Adobe (ADBE) -13.3% 17.9% 12.8% 39.1% 42.2
Trane Technologies (TT) -13.0% 27.0% 15.4% 22.8% 26.3
DR Horton (DHI) -12.2% 20.4% 29.4% 26.6% 6.5
Swimming pool (POOL) -12.1% 29.2% 14.3% 26.8% 30.4
Freeport-McMoRan (FCX) -10.6% 21.3% 70.7% 26.0% 9.7
Agilent Technologies (A) -10.2% 29.0% 13.1% 25.3% 33.9
Skyworks Solutions (SWKS) -10.2% 22.2% 12.2% 32.1% 15.1

Source: FactSet

While their valuation multiples vary widely from four times forward earnings to 42 times, all of these stocks have gotten cheaper than they were a month ago and appear to be well placed to recoup their losses.

Nucor, for example, has set all-year profit records, but is trading at just four times earnings. The stock has fallen lately due to a weaker outlook for global growth and the uncertain fate of the bipartisan $ 1,000 billion infrastructure bill. If Congress passes the bill, however, the massive spending would be a big tailwind for steel producers like Nucor.

Nucor should be at the top of the list for investors concerned with sustainability and dividends. On the environmental front, the company’s greenhouse gas intensity is less than a third of the global industry average, CEO Leon Topalian said on a conference call this year. In September, Nucor announced plans to build a $ 2.7 billion low-carbon steel plant. For income seekers, the stock has been raising dividends for nearly 50 years in a row.

Adobe, on the other hand, is trading at a high valuation of 42 times earnings even after large market losses. While that sounds expensive, especially compared to Nucor, many on Wall Street expect strong growth from the creative software company to justify the price.

Adobe has already had a series of better-than-expected quarters. The 29 analysts polled by FactSet now expect the company to increase earnings per share by 23% in fiscal 2021 and an additional 14% in fiscal 2022. All but five rate the stock as a Buy or Overweight, with an average target price of $ 710. sharing. The price now is $ 553. CFO John Murphy, who will retire in a few weeks, said Barron that the home work environment has helped accelerate the shift from paper to digital documents.

The future looks bright for Skyworks Solutions as well. The semiconductor maker should take advantage of the switch to 5G for cellular networks. Skyworks chips are used by major smartphone brands – Apple (AAPL) and Chinese Xiaomi are two – which account for more than half of the global market share.

The company saw explosive third-quarter revenue and profit growth along with better-than-expected forecasts, but its shares have fallen 14% since August. The stock is trading at 15x futures earnings, a great buying opportunity.

Write to Evie Liu at [email protected]


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