Welcome back to this weekly series on the market and finding undervalued dividend growth stocks to research.
One word – Inflation. How is it going to affect purchasing decisions? Will it continue to stay as high as it has been? What can the Federal Reserve do to tame it? That is what the market is thinking about. The market was positive for most of the week until Jerome Powell, Head of the Federal Reserve, spoke on Thursday. In his speech, he stated “Inflation is much too high and the Fed will take ‘necessary steps’” to address it. This statement sent the market in a tailspin on Friday with the Dow down almost 1000 points (2.82%) in one of the worst drops of the year.
There is now a general consensus from the market that a .50% increase in the Fed Funds Rate at the May meeting is a given. Analysts are also projecting that the Fed will increase rates again by .75% in both June and July, which would increase the rate up to 2.25%. This is a very rapid acceleration given that the rate was .25% just earlier this year. Higher rates of course make all borrowing more expensive, effectively cooling off demand to halt the inflationary pressures that we have seen recently. The concern is that the demand will retract too quickly and it could cause a recession.
Investors got spooked by these statements and we experienced a wide sell-off across most stocks. Very few companies were immune on Friday.
This past week was going well but Friday’s sell off left the Dow down 1.86% for the week, S&P 500 was down 2.75%, and the NASDAQ led the group down 3.83%. For the year the markets are now down 6.95%, 10.37%, and 17.93% (last week the figures were 5.19%, 7.84%, and 14.66% respectively).
Even though we had these selloffs, the earnings season is actually coming out relatively positive, with 79% of S&P 500 companies having a positive EPS surprise. (Factset.com).
This has been a very tough year for investors, especially when comparing 2020 and 2021. It just goes to show that the market is nearly impossible to predict in the short run. Over long periods of time the market goes up in about 8 out of 10 years, so stick with it! One positive factor of this downturn is that the valuations of companies are getting more attractive. This chart from Yardeni Research (https://www.yardeni.com/pub/stockmktperatio.pdf) shows the average forward P/E ratios for major groups of stocks. As you can see, the forward P/E ratios for Mid and Small Cap stocks are at very attractive valuations compared to the historical figures, and Large Cap stocks are becoming closer to the historical average. It is impossible to know if prices will continue to come down but it is clear that we are getting much better value today than we have recently.
This week’s results of the valuation screening shows 26 companies on my tracker are now undervalued based on my 5 criteria.
Here are the quality dividend growth stocks that are appearing undervalued based on all 5 of my valuation methods:
- Discount to Analyst Price Target
- 5% or more off the 52-week high
- Discounted Cash Flow (DCF)
- P/E Mean Reversion
- Dividend Yield Theory (DYT)
For more information on how to calculate these metrics, check out my valuation post.
New on the list this week: AOS, BLK, INTC, SMG, TD, TXN
APD, BAC, BR, CMI, FNF, HBI, HD, IIPR, JPM, LEG, MDT, MMM, MSM, SBUX, SWK, TROW, TSCO, UGI, V, and WBA continue from last week to look undervalued.
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!