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The final quarter of the year is usually an exciting one because of the holidays. And every year, we typically don’t have a whole lot of other things disturbing the view. But this year is a little different and there are way too many unknowns at this point. Everything may still turn out great, but there are chances that it won’t be so great either.
So this seems like a good time as any to stretch out the investment horizon and take stock of the longer-term potential. That’s what I’m attempting here with stocks that are great buys today based on their long-term potential.
But first, a brief recap of the current situation-
What Could Go Wrong
Earnings Season: We already know that this earnings season is not going to be as eye-popping as the last (when S&P 500 earnings grew 95.3% on revenue growth of 25.3%!), although they’re expected to be pretty good in their own right. From what we know so far, earnings growth for the S&P 500 is expected to be 26.1% on revenue growth of 13.8%.
What’s more, margins are still expected to be up both sequentially and year over year. But investors have been selling the strong earnings news of late, and we don’t know if they’ll go that way this time as well.
And just in case there are disappointments, which could very well happen, given the extent of the supply chain issues that are impacting both availability and prices of inputs. So there are big ifs and buts to those strong expectations.
Energy Crisis: The second big headwind is the energy crisis. WTI Crude prices are approaching the $80 level, while the Brent usually trades a bit higher is above that mark. If the U.S. doesn’t release some of its strategic reserves (some media outlets are saying that it will while others are saying that it won’t), we will see these prices march higher. Which is going to be bad for inflation and also for the consumer (that has been pretty strong so far, and needs to stay that way in the crucial fourth quarter).
But going by media reports and analyst speak, the energy crunch is partly driven by a secular move away from fossil fuels, i.e. we are curtailing production when we haven’t dealt with the issue of demand that continues to increase. And this year it is exacerbated by the pent-up demand situation created by the pandemic.
Oil’s substitutability is also a factor to consider. Natural gas prices have been soaring this year because of higher consumption at power generation as a result of a hotter summer leading to historically low inventories. Since natural gas prices are particularly high in Asia, some industries are switching to oil.
And of course, Europe is in particular crisis because of lower production from wind. Russia may help alleviate the situation, but again it may not. So until there’s more clarity on that, it’s safe to assume that the pressure on oil remains.
Softer Holiday: The consumer has been relatively strong this year and that’s partly why this holiday season is expected to be a good one. But availability of holiday items could become a major issue because of supply chain problems.
Most companies want the buying to start soon and spread out through the quarter, so there’s better planning and distribution of constrained resources. And promos and discounts in the early days may help this happen to a certain extent.
But not everyone will start early. So some of the year-end rush will definitely be there. Whether the supply chain can handle it, given the way it’s struggling right now, is a big unknown. And this could lead to lost sales.
What Could Go Right
If the above negatives don’t happen, everything could be hunky dory.
Earnings Season: So investors could reverse trends this quarter and buy companies that report solid beats. They could punish the negative surprisers less because demand is not going away but simply getting pushed out because supply can’t keep up.
Energy Crisis: While this won’t go away entirely, the U.S. and Russia could step in to help the situation.
Debt Ceiling: There could be a relief rally when the ceiling is finally raised, possibly close to the Oct 18 deadline. Some experts think that this ritual needs to be done away with completely. But we’ll see in the following days.
Robust Holiday: There’s an equal chance that consumers are wise to the situation this holiday season and that they will start early to grab the discounts. So sales wont be lost and instead, there will be stronger profitability because of lower discounts as we move through the quarter.
There has also been a lot of talk about passing on rising input costs to consumers. This, of course, means that people will be paying more for whatever they buy. This year, they are likely to go along given that household savings remain robust and the desire to indulge is high.
With that backdrop, let’s jump to stocks. I’m seeing that the auto dealers are still worth buying, as are some retailers and transporters.
AutoNation is one of the nation’s largest dealers of new and used vehicles, as well as financing and maintenance and repair services, vehicle parts, extended service contracts, vehicle protection products, and other aftermarket products.
The Zacks Rank #1 (Strong Buy) stock with A grades for Value, Growth and Momentum, has grown its earnings 17.6% over the last five years. Growth in the current year is expected to be 123.5% and in the long term, 19.1%.
With a P/E multiple of 7.2X (the average for our coverage universe is at 16X), a P/S multiple of 0.34X (indicating that the share price is just a fraction of the sales value generated) and a PEG of 0.38 (meaning that its earnings growth potential is not fully valued), the shares look really cheap.
Group 1 is one of the leading automotive retailers of new and used cars, and light trucks in the world, with operations primarily located in the U.S., UK and Brazil. It also offers vehicle financing and insurance, maintenance and repair services, as well as replacement parts and aftermarket automotive products.
The Zacks Rank #1 stock also has Value Growth and Momentum Scores of A. In the last five years, its earnings have growth 26.9% and it is expected to grow 83.5% this year. Its long-term growth is expected to be 13.2%.
It has an attractive valuation with a P/E multiple of 5.7X, P/S multiple of 0.27X and a PEG of 0.43.
One of the leading automotive retailers of new and used vehicles, and related services in the United States, Lithia Motors has the largest online inventory in the country with competitive pricing on vehicles and services. It introduced its e-commerce platform Driveway in July 2020.
Another Zacks Rank #1 stock with a triple A for Value, Growth and Momentum, it has a solid growth profile. It has grown earnings at an average rate of 26.1% in the last five years, it is expected to grow 93.0% this year and 21.9% in the long term.
At 8.8X earnings, 0.52X sales and 0.40X earnings growth, the shares are worth snapping up today.
The company has an automotive and commercial truck dealership business in the United States, Canada and Western Europe through which it offers new and used vehicles, finance, insurance and vehicle service contracts; maintenance repair services; replacement parts and aftermarket automotive products. It also deals in commercial vehicles, diesel engines, gas engines, power systems and related parts and services principally in Australia and New Zealand.
This Zacks Rank #1 stock also has an A for Value and Growth but a B for Momentum. It has grown earnings 14.7% in the last five years. It is currently expected to grow 101.3% in 2021 and 14.8% over the long term.
It is trading at 7.6X earnings, 0.33X sales and 0.51X earnings growth.
Abercrombie & Fitch is a specialty retailer of premium, high-quality casual apparel for men, women, and kids through a network of approximately 850 stores across North America, Europe, Asia and the Middle East.
The Zacks Rank #1 stock has a Value Score of A, Growth Score of A and Momentum Score of C. Its stellar earnings growth in the last five years of 73.9% is expected to be followed up with 702.7% growth this year and 18.0% growth in the long term.
The shares trade at 8.6X earnings, 0.62X sales and 0.48X earnings growth. So they are definitely worth picking up today.
Hibbet has evolved its offerings from sports goods to an athletic-inspired fashion focused assortment, including clothes, shoes and accessories. It also offers products for individual and team sports.
The Zacks Rank #1 stock has Value and Growth Scores of A and a Momentum Score of D. After growing earnings at 28.5% over the last five years, the company is expected to grow 84.6% in 2021. In the long term, it’s expected to grow 22.4%.
Its valuation also supports accumulation of the shares: P/E of 6.6X, P/S of 0.67X and PEG of 0.29.
ArcBest Corporation provides road, air and ocean freight transportation services, integrated warehousing services and supply chain solutions. It also offers premium, expedited services to government and commercial customers.
The Zacks Rank #1 stock has Value and Growth Scores of B and a Momentum Score of A. In the last five years, the company has grown 16.2%. In 2021, its expected growth rate is 113%. Analysts expect it to grow 29.7% over the next five years.
Its current valuation represents a P/E multiple of 13.0X, a P/S multiple of 0.67X and a PEG ratio of 0.44X.
One-Month Price Movement
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7 Long-Term Bets That Are Strong Buys Today
The final quarter of the year is usually an exciting one because of the holidays. And every year, we typically don’t have a whole lot of other things disturbing the view. But this year is a little different and there are way too many unknowns at this point. Everything may still turn out great, but there are chances that it won’t be so great either.
So this seems like a good time as any to stretch out the investment horizon and take stock of the longer-term potential. That’s what I’m attempting here with stocks that are great buys today based on their long-term potential.
But first, a brief recap of the current situation-
What Could Go Wrong
Earnings Season: We already know that this earnings season is not going to be as eye-popping as the last (when S&P 500 earnings grew 95.3% on revenue growth of 25.3%!), although they’re expected to be pretty good in their own right. From what we know so far, earnings growth for the S&P 500 is expected to be 26.1% on revenue growth of 13.8%.
What’s more, margins are still expected to be up both sequentially and year over year. But investors have been selling the strong earnings news of late, and we don’t know if they’ll go that way this time as well.
And just in case there are disappointments, which could very well happen, given the extent of the supply chain issues that are impacting both availability and prices of inputs. So there are big ifs and buts to those strong expectations.
Energy Crisis: The second big headwind is the energy crisis. WTI Crude prices are approaching the $80 level, while the Brent usually trades a bit higher is above that mark. If the U.S. doesn’t release some of its strategic reserves (some media outlets are saying that it will while others are saying that it won’t), we will see these prices march higher. Which is going to be bad for inflation and also for the consumer (that has been pretty strong so far, and needs to stay that way in the crucial fourth quarter).
But going by media reports and analyst speak, the energy crunch is partly driven by a secular move away from fossil fuels, i.e. we are curtailing production when we haven’t dealt with the issue of demand that continues to increase. And this year it is exacerbated by the pent-up demand situation created by the pandemic.
Oil’s substitutability is also a factor to consider. Natural gas prices have been soaring this year because of higher consumption at power generation as a result of a hotter summer leading to historically low inventories. Since natural gas prices are particularly high in Asia, some industries are switching to oil.
And of course, Europe is in particular crisis because of lower production from wind. Russia may help alleviate the situation, but again it may not. So until there’s more clarity on that, it’s safe to assume that the pressure on oil remains.
Softer Holiday: The consumer has been relatively strong this year and that’s partly why this holiday season is expected to be a good one. But availability of holiday items could become a major issue because of supply chain problems.
Most companies want the buying to start soon and spread out through the quarter, so there’s better planning and distribution of constrained resources. And promos and discounts in the early days may help this happen to a certain extent.
But not everyone will start early. So some of the year-end rush will definitely be there. Whether the supply chain can handle it, given the way it’s struggling right now, is a big unknown. And this could lead to lost sales.
What Could Go Right
If the above negatives don’t happen, everything could be hunky dory.
Earnings Season: So investors could reverse trends this quarter and buy companies that report solid beats. They could punish the negative surprisers less because demand is not going away but simply getting pushed out because supply can’t keep up.
Energy Crisis: While this won’t go away entirely, the U.S. and Russia could step in to help the situation.
Debt Ceiling: There could be a relief rally when the ceiling is finally raised, possibly close to the Oct 18 deadline. Some experts think that this ritual needs to be done away with completely. But we’ll see in the following days.
Robust Holiday: There’s an equal chance that consumers are wise to the situation this holiday season and that they will start early to grab the discounts. So sales wont be lost and instead, there will be stronger profitability because of lower discounts as we move through the quarter.
There has also been a lot of talk about passing on rising input costs to consumers. This, of course, means that people will be paying more for whatever they buy. This year, they are likely to go along given that household savings remain robust and the desire to indulge is high.
With that backdrop, let’s jump to stocks. I’m seeing that the auto dealers are still worth buying, as are some retailers and transporters.
AutoNation, Inc. (AN - Free Report)
AutoNation is one of the nation’s largest dealers of new and used vehicles, as well as financing and maintenance and repair services, vehicle parts, extended service contracts, vehicle protection products, and other aftermarket products.
The Zacks Rank #1 (Strong Buy) stock with A grades for Value, Growth and Momentum, has grown its earnings 17.6% over the last five years. Growth in the current year is expected to be 123.5% and in the long term, 19.1%.
With a P/E multiple of 7.2X (the average for our coverage universe is at 16X), a P/S multiple of 0.34X (indicating that the share price is just a fraction of the sales value generated) and a PEG of 0.38 (meaning that its earnings growth potential is not fully valued), the shares look really cheap.
Group 1 Automotive, Inc. (GPI - Free Report)
Group 1 is one of the leading automotive retailers of new and used cars, and light trucks in the world, with operations primarily located in the U.S., UK and Brazil. It also offers vehicle financing and insurance, maintenance and repair services, as well as replacement parts and aftermarket automotive products.
The Zacks Rank #1 stock also has Value Growth and Momentum Scores of A. In the last five years, its earnings have growth 26.9% and it is expected to grow 83.5% this year. Its long-term growth is expected to be 13.2%.
It has an attractive valuation with a P/E multiple of 5.7X, P/S multiple of 0.27X and a PEG of 0.43.
Lithia Motors, Inc. (LAD - Free Report)
One of the leading automotive retailers of new and used vehicles, and related services in the United States, Lithia Motors has the largest online inventory in the country with competitive pricing on vehicles and services. It introduced its e-commerce platform Driveway in July 2020.
Another Zacks Rank #1 stock with a triple A for Value, Growth and Momentum, it has a solid growth profile. It has grown earnings at an average rate of 26.1% in the last five years, it is expected to grow 93.0% this year and 21.9% in the long term.
At 8.8X earnings, 0.52X sales and 0.40X earnings growth, the shares are worth snapping up today.
Penske Automotive Group, Inc. (PAG - Free Report)
The company has an automotive and commercial truck dealership business in the United States, Canada and Western Europe through which it offers new and used vehicles, finance, insurance and vehicle service contracts; maintenance repair services; replacement parts and aftermarket automotive products. It also deals in commercial vehicles, diesel engines, gas engines, power systems and related parts and services principally in Australia and New Zealand.
This Zacks Rank #1 stock also has an A for Value and Growth but a B for Momentum. It has grown earnings 14.7% in the last five years. It is currently expected to grow 101.3% in 2021 and 14.8% over the long term.
It is trading at 7.6X earnings, 0.33X sales and 0.51X earnings growth.
Abercrombie & Fitch Company (ANF - Free Report)
Abercrombie & Fitch is a specialty retailer of premium, high-quality casual apparel for men, women, and kids through a network of approximately 850 stores across North America, Europe, Asia and the Middle East.
The Zacks Rank #1 stock has a Value Score of A, Growth Score of A and Momentum Score of C. Its stellar earnings growth in the last five years of 73.9% is expected to be followed up with 702.7% growth this year and 18.0% growth in the long term.
The shares trade at 8.6X earnings, 0.62X sales and 0.48X earnings growth. So they are definitely worth picking up today.
Hibbett, Inc. (HIBB - Free Report)
Hibbet has evolved its offerings from sports goods to an athletic-inspired fashion focused assortment, including clothes, shoes and accessories. It also offers products for individual and team sports.
The Zacks Rank #1 stock has Value and Growth Scores of A and a Momentum Score of D. After growing earnings at 28.5% over the last five years, the company is expected to grow 84.6% in 2021. In the long term, it’s expected to grow 22.4%.
Its valuation also supports accumulation of the shares: P/E of 6.6X, P/S of 0.67X and PEG of 0.29.
ArcBest Corp. (ARCB - Free Report)
ArcBest Corporation provides road, air and ocean freight transportation services, integrated warehousing services and supply chain solutions. It also offers premium, expedited services to government and commercial customers.
The Zacks Rank #1 stock has Value and Growth Scores of B and a Momentum Score of A. In the last five years, the company has grown 16.2%. In 2021, its expected growth rate is 113%. Analysts expect it to grow 29.7% over the next five years.
Its current valuation represents a P/E multiple of 13.0X, a P/S multiple of 0.67X and a PEG ratio of 0.44X.
One-Month Price Movement