Inflation eased in October. That’s good news for underperforming stocks that should benefit if prices continue to cool.
In a research note Wednesday, Chris Senyek, chief investment strategist at Wolfe Research, highlighted stocks that are under-earning and trading materially below their historical average, but whose fortunes could change with lower inflation.
Ten companies made their debut on the list:
Home Depot
(ticker: HD),
Carrier Global
(CARR),
Keurig Dr Pepper
(KDP),
Kimberly Clark
(KMB),
Edwards Lifesciences
(EW),
Agilent Tech
(A),
ResMed
(RMD),
Celsius Holdings
(CELH),
Albermarle
(ALB), and
Campbell Soup
(CPB).
This week Home Depot beat earnings expectations in the third quarter but flagged continued pressure on big-ticket items as sales fell 3%.
“Higher input costs, whether it’s wages or oil prices or other types of commodities, has hurt the margins of some companies” Senyek told Barron’s. And one way to think about companies that might benefit in a more disinflationary environment is to look at their margins relative to their history.
“The gist of the screen is that there may be some companies that are under-earning because their margins have been hurt more recently by rising input costs or other costs, and if those costs recede, there might be some margin expansion and, by extension, upside to earnings over the next year or two,” he said.
Data out this week signaled that inflation is headed in the right direction.
The producer price index for final demand fell 0.5% in October from September, the biggest monthly decline since April 2020 when the Covid-19 pandemic caused a sharp economic contraction.
The PPI report came a day after cooler-than-expected consumer price index data. CPI, reported Tuesday by the Bureau of Labor Statistics, climbed 3.2% year over year in October—a slower pace than the 3.7% rate recorded in September and August.
Wolfe Research screened for companies with attractive valuations—that are cheap relative to their five-year historical average based on enterprise value to earnings before interest, taxes, depreciation, and amortization—or EV/Ebitda.
“That’s a little wonky, but that’s a better metric when you’re looking across a lot of companies that may either have lower earnings or differences in their businesses.,” said Senyek. The firm also looked for companies that have margins that are lower than their five-year historical average.
“It’s a relatively simple [screen] of companies that could have upside their earnings if inflationary forces go in a favorable direction,” he said.
Write to Lauren Foster at lauren.foster@barrons.com
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