The way the market has been behaving lately—well, saying it is a minefield would be an understatement. Investors may have gotten—wrongfully—used to the easy money days of 2020-2022, when the Federal Reserve (the Fed) was forced to cut interest rates to near zero as a result of the COVID-19 pandemic.
Low rates and cheap money have made just about any stock a winner in the past couple of years; however, that trend could be about to change. With sticky inflation rates and a disappointing 1.6% gross domestic product (GDP) growth rate in the past quarter, the U.S. could be facing stagflation (low economic growth with high inflation).
A lackluster economy that drags consumer—and business—buying power lower each year makes for a tricky stock market. Because of this, investors should keep two things in mind: above-average return on capital alongside a reasonable discount. Fitting the profile, a list can be made out of Altria Group Inc. (NYSE: MO), Owens Corning (NYSE: OC), and even 3M (NYSE: MMM).
Angels Don’t Fly in The Stock Market
Some investors would not support a company like Altria, as tobacco has more than proven to cause health issues for its consumers. This stance toward stocks is commendable, though each investor must prioritize a sound financial future.
Because of this, Altria’s discount is a potential target today. Compared to the consumer staples sector, the stock’s 9.4x P/E valuation gives investors a 50% discount. Despite this undervaluation, the stock trades at 97% of its 52-week high, signaling a broader adoption of its value proposition and bullish price action.
Wall Street analysts expect to see only 3.7% EPS growth this year. However, the company’s financials suggest this could be a conservative projection. Altria generated a return on invested capital (ROIC) rate of 36% in the past 12 months, and that’s all investors need to keep in mind.
Over a long enough timeframe, annual stock performance tends to match the long-run ROIC rate, which is why investors could bet on an EPS projection adjustment and feel particularly confident in the stock’s stellar 8.7% dividend yield paid out today.
Owens Corning: Bringing Relief to America’s Homeowners
Stock traders aren’t the only ones who get itchy fingers; today’s homeowners in the U.S. housing market may be headed into their own version. Because most mortgages today carry an average interest rate of 3.25%, and the average home price has risen by 32% since the COVID-19 pandemic, there aren’t many incentives to sell out.
At the same time, those looking for a new home won’t feel happy about today’s 7.5% average mortgage rate coupled with all-time high home prices. So, what are these equity-rich homeowners to do if they do not sell? Well, they can upgrade their current home.
This is why analysts at the UBS Group see Owens Corning stock going as high as $192 a share. To prove these projections right, the stock would need to jump by 8.5%, but it could be more.
Compared to its peers in the construction sector, Owens Corning stock trades at a 37.5% discount in its 14.3x P/E, falling under the sector’s richer 22.9x. Like Altria, markets feel pretty bullish about this stock, bidding it up to new 52-week highs recently – which also happen to be all-time highs -.
Price action doesn't reflect this double-digit discount or analysts' projections for only 12.2% EPS growth this year. The company's financials show an average ROIC rate of 25% over the past five years, making it an easy earnings compounder today.
But that’s not all; Owens Corning’s short interest dropped by 10.2% in the past month, and not even bears feel like standing in the way of the stock’s path to another leg higher into all-time highs.
3M’s Divestiture Doesn’t Change the Game
Everyone knows 3M had a blockbuster year during the pandemic, as the company essentially sold out its healthcare products constantly. However, healthcare is back to normal, so management saw no need to keep its healthcare unit around.
Divesting it into what is now Solventum Co. (NYSE: SOLV), 3M raised more than enough cash to pay for its $13 billion of lawsuits regarding two other products. Because of this recent news, investors scared the stock down to a mere 1.7x price-to-sales ratio compared to the conglomerate's sector's 14.9x valuation.
Despite all this, the stock trades near its 52-week high, keeping the market’s bullish vote through price action. Investors can cushion today’s higher inflation rates through a steady 6.1% dividend income.
Those at HSBC think the stock could reach $115 a share, or 16.3% higher than today’s prices. However, the company’s financials uncover an ROIC rate of nearly 40% (save for the past two years of jumpy cash flow due to lawsuits).
These rates of return, plus the multi-year stability of 3M’s dividend, could surprise analysts at the subsequent quarterly earnings, and investors will be waiting to close down the stock’s discount to the sector.
