Welcome back to this series on the market and finding undervalued dividend growth stocks to research.
Market Commentary:
“When Good News Is Bad”
It was another volatile week in the market, with the broad indexes up Monday and Tuesday, followed by a quiet period on Wednesday and Thursday, and then a big drop on Friday after the employment report was released. This is where the good news turned out to be bad. The U.S. unemployment rate dropped to 3.5% with non-farm payrolls increasing 263,000 in September. This would appear to be good news as it shows the job market is still strong and a recession may be less likely. The problem is that this continued “good” news is showing that inflation is still not weakening. The average wage increase was 5.0%, which will spur more spending, therefore putting continued pressure on inflation.
This jobs report is one of the last reports the Federal Reserve (Fed) will get prior to their next FOMC meeting at the beginning of November. With the jobs numbers staying high and the wage growth continuing to increase, we are all but certain that the Fed will continue their quest of reducing demand to kill this high inflation by raising interest rates another 0.75%, which would be their fourth straight increase of this amount in a row.
This increased rate will continue to cause credit to be more expensive, which will slow down the economy and may cause a recession, or make the recession even more intense. Many in the financial world are wanting the Fed to slow down the increases to see if the current higher rates will bring down the inflation before more hikes are made. Jeremy Siegel, one of the top minds in finance and professor of finance at the Warton School of the University of Pennsylvania, was quoted this week saying “The U.S. Federal Reserve has been raising rates too quickly, and recession risks will be “extremely” high if it continues to do so.” This jobs report killed that hope and the market reacted to this “bad” realization of even higher rates.
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Market Results:
This past week saw mixed results among the sectors of the S&P 500 with Energy the clear winner (+13.58%) on the back of rising oil prices and production cuts from OPEC+, followed by Industrials (+2.80%). The biggest drops occurred in Real Estate (-4.11%) and Utilities (-2.67%).
Broadening the view, this week had positive results across the indices as well, with the Dow up 1.99%, the S&P 500 was up 1.51%, and the Nasdaq was up 0.73%. The rally we saw at the first half of the week turned into a violent downturn towards the end of the week but the indexes were still able to pull out a positive week. The broad indices are now down 19.38%, 23.64%, and 31.91% year to date, respectively, which is a significant bear market across the board.
All this decline throughout 2022 has done one thing for sure, it made stock valuations much more attractive than in 2021 and before. This week’s Forward P/E chart from Yardeni Research shows the valuations are at levels we have not seen in years.
One example is SCHD, one of the most popular dividend ETFs, is currently approaching a yield of 4%, which has only happened once in the past 5 years, and that was at the worst of the Covid decline in March 2020, and only for a few days.
For long term investors, this is becoming what I think is the buying time of the decade. We don’t get opportunities like this often and we should be prudently taking advantage of these times.
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Dividend News This Coming Week:
Earnings season kicks off this week with some big names reporting, including many in the financial sector:
Wednesday:
PepsiCo (PEP), WinMark (WINA)
Thursday:
BlackRock (BLK), Fastenal (FAST), Progressive (PGR), Taiwan Semiconductor (TSM), Walgreens Boots Alliance (WBA), Domino’s Pizza (DPZ)
Friday:
JPMorgan Chase (JPM), Citigroup (C ), PNC (PNC), U.S. Bancorp (USB), UnitedHealth (UNH), Wells Fargo (WFC)
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Upcoming Ex-Dividend Dates:
There are a lot of great companies going Ex-Dividend this week. Note: you must own the stock before the ex-dividend date to receive the payment.
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Undervalued Dividend Stocks:
With the continued downturn in the market, this week’s results of the valuation screening now shows 48 companies on my tracker, 4 new names this week, are now undervalued based on my 5 criteria.
- Discount to Analyst Price Target
- 10% or more off the 52-week high
- Discounted Cash Flow (DCF)
- P/E Mean Reversion
- Dividend Yield Theory (DYT)
For information on how these valuation methods are calculated, please check out my valuation post here.
Here are the quality dividend growth stocks that are appearing undervalued based on all 5 of my valuation methods:
Stocks Listed: ABT, AOS, APD, AVGO, AXP, BAC, BLK, BMO, BNS, BR, CAT, CCI, CCOI, CNI, DLR, DOW, ECL, HBI, HD, IIPR, INTC, IP, JNJ, KR, LEG, LOW, MCD, MDT, MSM, NKE, PFE, SBUX, SPG, SWK, SYY, T, TD, TGT, TSCO, TU, TXN, UGI, UNP, V, VZ, WBA, WSO
This list should be used to begin your research to determine if the stock meets all of your investment goals and criteria. Valuation should only be one of many aspects you look at when deciding to make an investment.
Best of luck, happy investing, and check back next week for more undervalued stock ideas!