The S&P 500 Index is close to bear market territory. As a result, most sectors are down for the year.
The plus side of the sell-off is many individual stocks are now trading at double-digit discounts to intrinsic value. In order to differentiate further among this group of stocks, I will examine three names that meet the following criteria:
- GF Value rating of modestly undervalued.
- Price-earnings ratio without nonrecurring items below 20.
- 10-year revenue growth rate of at least 5%.
- Dividend yield of at least 1.6%.
- GF Score of at least 85 out of 100.
Home Depot
First up is the Home Depot Inc. (HD, Financial). Founded in the late 1970s, the company has become the largest home improvement retailer in the world. The company generates annual revenue in excess of $151 billion and is valued at $307 billion. The company has a 10-year revenue growth rate of 11.8%.
As of Friday’s close, Home Depot is trading with a price-earnings ratio without NRI of 18.6. This is below the 20 times earnings that the stock has averaged since 2012, according to Value Line.
The stock is also undervalued when looking at the GF Value chart.
Shares of Home Depot closed the most recent trading session at $299.77. With the GF Value set at $361.72, the stock could return 20.7% if it were to reach this level. Shares earn a rating of modestly undervalued from GuruFocus.
Total return potential would also factor in the stock’s dividend yield. Presently, Home Depot yields 2.5%, which compares favorably to the average yield of 1.6% for the S&P 500 Index. The company has increased its dividend for 13 consecutive years. With a projected payout ratio of 46% for this year, Home Depot’s growth streak looks likely to continue.
Finally, Home Depot has one of the most impressive GF Scores in the market. The GF Score is determined based on growth, profitability, value, financial strength and momentum. Stocks with higher scores are projected to outperform those with lower scores. Home Depot’s GF Score is 97 out of 100.
This score is driven by perfect scores on the categories of profitability, growth and momentum. Home Depot ranks very well on return on assets, operating margin and revenue and earnings growth over the last three years. The company has recorded a profitable year for the past decade as well. Lastly, Home Depot's return on invested capital of 35.5% compared extremely well to its weighted average cost of capital of 6.8%. The company has proven to be very successful at properly allocating its investment dollars.
Packaging Corp. of America
Next up is Packaging Corporation of America (PKG, Financial), the third-largest producer of containerboard and corrugated products in the U.S., with the company shipping close to 63 billion square feet of corrugated products per year. The $13 billion company generated revenue of $7.7 billion in 2021. The 10-year revenue growth rate is 11.4%.
Based on the most recent closing price of $139.58, Packaging Corp. has a price-earnings ratio without NRI of 13. This is below the long-term average of 16.
The GF Value chart shows shares trading at a discount to fair value.
Packaging Corp. has a GF Value of $155.13, giving the stock a price-to-GF Value ratio of 0.90. Investors could see a return of 11.1% from current levels, earning the stock a rating of modestly undervalued.
The company has a dividend yield of 3.6%, more than twice the average yield of the market index. Its dividend growth streak numbers 12 years in length. Packaging Corp. has a reasonable payout ratio expectation of 44% for 2022, meaning the dividend should be considered safe.
The company has a solid GF Score of 85 out of 100, powered by profitability metrics that are ahead of most of its industry group by a wide margin. The operating margin and net margin are ahead of peers, but are also at the high end of the company’s performance over the last decade. Packaging Corp.’s ROIC of 18.1% is more than three times its WACC of 5.8%.
The weaker areas of the company include interest coverage and revenue and earnings growth, both of which are all in the middle of the pack of the competition.
Target
The final name for consideration is Target Corp. (TGT, Financial), which has been in existence for 120 years. Target has more than 1,920 stores throughout the U.S., giving the company a vast reach that is not easily duplicated by competitors. The company sells groceries, apparel, baby products, home goods and beauty products, among others. Target has a market capitalization of $80 billion and produced revenue of $106 billion last year. The 10-year revenue growth rate is 6.9%.
Target’s price-earnings ratio without NRI is just under 20, which is higher than its 10-year average multiple of 15.5 times earnings.
On the other hand, the GF Value chart shows the stock to be trading at a very steep discount to intrinsic value.
Target closed recently at $173.65. With a GF Value of $224.66, shares have a price-to-GF Value ratio of 0.77, meaning the stock could return 29.4%. The stock is rated as modestly undervalued.
The company has an impressive dividend growth streak of 54 years, which qualifies it as a Dividend King, to go along with a market-beating dividend yield of 2.5%. Target is forecasted to have a payout ratio of 53% in 2022, making it likely the company will continue to hold onto its Dividend King status.
Target has a strong GF Score of 90 out of 100. The company’s ROIC of 13.2% compares well to its WACC of 7.3% and is well ahead of most of its industry peers. Return on assets and return on equity have both outperformed the competition as well. Target’s revenue and earnings growth rates have been industry leading over the last three years, though both metrics are projected to be in the middle of peer or below going forward.
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