Most companies see their profits decline overall when the going gets tough for the global economy. As countries seek to slow the spread of the novel coronavirus (Covid-19) by shutting down non-essential businesses and encouraging social distancing, the S&P 500 is down approximately 16% year to date as of April 7.
With few exceptions, such as grocery stores, consumer defensive and other companies that provide essential products and services, most businesses will see lower demand until markets begin to recover. However, while investing in stocks that are undervalued due to setbacks can often be riskier than investing in companies with steadier profits, they also provide some of the best opportunities for future returns, especially if they have the financial strength to weather the storm and take advantage of recovering economic conditions.
As Warren Buffett (Trades, Portfolio) once said, “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” When prices plummet, it can sometimes seem like there is no bottom in sight, but there is no reason to be afraid of investing in companies with good long-term prospects as long as you are sure of your investing thesis and buy at undervalued levels.
One way to screen for undervalued opportunities is through GuruFocus’ Peter Lynch Screener. This screener was created based on some of Peter Lynch’s most famously effective criteria, including a price-earnings ratio below 15, high earnings yield, high return on capital and business predictability.
According to the Peter Lynch Screener as of April 7, the following three companies meet all of the above criteria for investing. They have already warned investors that their earnings will not meet expectations due to issues related to Covid-19 and the resulting economic slowdown, but their high financial strength and wide moats greatly increase their chances of avoiding bankruptcy and growing their earnings once the economy recovers.
Robert Half International
Robert Half International Inc. (RHI, Financial) is a global staffing agency headquartered in Menlo Park, California. Founded in 1948, it is the world’s first and largest specialized staffing agency, focusing on matching skilled applicants with administrative, executive, legal, financial, marketing and technology positions.
On April 7, shares of Robert Half traded around $40.45 for a market cap of $4.72 billion, an earnings yield of 13.26% and a return on capital of 82.21%. The price-earnings ratio is 10.42, making the stock undervalued according to the Peter Lynch chart.
GuruFocus gives the company a financial strength rating of 6 out of 10, a profitability rating of 8 out of 10 and a business predictability rating of 1 out of 5 stars. Both revenue and net income have steadily grown since the global economy began recovering from the financial crisis of 2008. Shares have declined 39% year to date and 35% since the U.S. stock market peaked in mid-February.
According to the U.S. Bureau of Labor Statistics, as much as 24% of working adults did some or all of their work from home as of mid-2019, before the Covid-19 epidemic hit. The virus is testing the limits of how many people can switch to fully working at home, though no concrete numbers have been released yet. Though most of the people that Robert Half places do not work in businesses most affected by record-breaking U.S. layoffs, such as those in the travel and leisure industries, few employers are looking for new talent in a tanking economy. However, once jobs return, Robert Half’s strong brand name and international reputation will make it a go-to staffing agency once again.
Miller Industries
Tennessee-based Miller Industries Inc. (MLR, Financial) is the world’s largest provider of towing and recovery equipment. Its brand profile includes Vulcan, Century, Chevron and Holmes.
On April 7, shares of Miller Industries traded around $27.61 for a market cap of $313.44 million, an earnings yield of 18.03% and a return on capital of 23.65%. The price-earnings ratio is 7.99, making the stock undervalued according to the Peter Lynch chart.
Miller Industries has a GuruFocus financial strength rating of 8 out of 10, a profitability rating of 8 out of 10 and a business predictability rating of 3.5 out of 5 stars. Revenue and net income have increased in recent years, matched by a steady increase in the stock price. Shares are down 18% year to date and 25% since U.S. markets peaked in mid-February.
Since Miller Industries is in the business of towing and recovery vehicles, and thus earns portions of its income through government contracts, it will most likely see reduced income as buyers, particularly the U.S. and local governments, allocate fewer funds to updating their tech in this field. Like the 2008 financial crisis, though, profits will pick back up within a couple of years after the economy begins to recover from the current crisis.
Sony
Sony Corp. (SNE, Financial) is a multinational conglomerate that operates mainly in technology and entertainment, though it also has a financial services arm. It is famous mainly for its consumer electronics products, which include PlayStation, and for losing money on many of the cheaper devices it sells. The company makes most of its profits from Hollywood movie production, video games and music licensing.
On April 7, Sony shares traded around $60.67 for a market cap of $74.32 billion, an earnings yield of 12.26% and a return on capital of 92.62%. The price-earnings ratio of 12.57 makes the company undervalued according to the Peter Lynch chart.
GuruFocus gives Sony a financial strength rating of 6 out of 10, a profitability rating of 5 out of 10 and a business predictability rating of 1 out of 5 stars. Net income has been increasing in recent years, though revenue has hovered around the same levels. The stock is down 9% year to date and 10% since U.S. markets peaked in mid-February.
“Sony is also striving to answer the needs of society and its customers to the best of its ability, and to minimize the impact of the virus on its business,” wrote the company in a statement released on March 27. Since then, the company has retracted its original optimistic estimates for 2020 as movie theaters remain closed and delays in music production continue, though the upcoming release of PlayStation 5 at the end of 2020 may help lessen the blow.
The company has also announced a $100 million coronavirus relief fund. “Through this fund, Sony will provide support in three areas: assistance for those individuals engaged in frontline medical and first responder efforts to fight the virus, support for children and educators who must now work remotely, and support for members of the creative community in the entertainment industry, which has been greatly impacted by the spread of the virus,” reads the official company statement. Although the Altman Z-Score is in the distress zone at 0.92, the company’s strong reputation, cash-debt ratio of 1.57 and ability to potentially divest some of its assets in dire circumstances mean it is in a good position to avoid bankruptcy.
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research or consult registered investment advisors before taking action in the stock market.
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