ISM Reports Boosted Confidence, but Value Investing Still a Good Idea

Sejuti Banerjea
·6-min read

The market may be overheated right now, but positive news continues unabated. This morning, it’s the new manufacturing numbers from ISM.

The numbers say that there was notable expansion in the manufacturing sector to its highest level since Feb 2018. Five of the six biggest manufacturing industries, i.e. Chemical Products; Fabricated Metal Products; Transportation Equipment; Computer & Electronic Products; and Food, Beverage & Tobacco Products grew strongly. 16 out of a total18 manufacturing industries also expanded. Petroleum & Coal Products went the other way.

There haven’t been too many directional changes however: orders and backlog continue to increase, customer inventory remains low, consumption remains strong, supply chain issues and resultant input price escalation persist, which along with labor market challenges, continues to increase costs for manufacturers. Manufacturing employment did increase, but increased absenteeism, factory shutdowns for sanitization and hiring challenges remain.

The encouraging manufacturing report comes on top of a good earnings season. And 482 of the S&P 500 companies (that have reported so far) have put up a pretty good show with their average net income growing 3.5% from the same period last year on 2.9% higher revenues. Moreover, 79.7% of these companies beat EPS estimates while 75.5% beat revenue estimates.

These two reasons would be enough to keep the markets buoyant in normal times. But the times are far from normal right now, so there’s also another stimulus coming in, as well as new special purpose entities that are bringing even more money into the markets and leading to loftier valuations.

That’s what makes me a bit wary and the reason why I’d lean toward value if I were to buy at all. So here are a few stocks that match my criteria of an attractive growth outlook, a bit of dividend and cheap valuation-

Bassett Furniture Industries, Inc. BSET

Through a network of licensed and company-owned stores, Basset sells affordable, custom-built furniture that is ready for delivery in the home within thirty days. Its stores also feature the latest on-trend furniture styles, more than one thousand upholstery fabrics, free in-home design visits and coordinated decorating accessories.

The Zacks Rank #1 (Strong Buy) company has a Value Score B and Growth Score A. However, the industry in which it operates is not favored at the moment because of the ongoing lumbar price escalation and inventory shortage.

Despite these issues, the company is expected to grow revenue and earnings both in 2021 and 2022. The estimates for both years are also trending up.

The company pays a dividend that yields 2.37%.

From a valuation perspective, its forward P/E is 8.63X and P/S is 0.54X, both of which indicate that the stock is undervalued.

Huntsman Corp. HUN

Huntsman is among the world's largest manufacturers of differentiated and commodity chemical products used in aerospace, automotive, construction products, adhesives, personal care and hygiene, durable and nondurable consumer products, digital inks, electronics, medical, packaging, coatings and construction, power generation, refining and textile chemicals markets.

The Zacks Rank #2 (Buy) stock has a Value Score A and Growth Score D. it belongs to the Chemical – Diversified industry, which is in the top 23% of Zacks classified industries.

Analysts are projecting significant growth in revenue and earnings both in this year and in the next. The estimate revision history also looks good.

The company’s dividend yields 2.38%.

The forward P/E and P/S ratios of 12.62X and 1.00X indicates attractive valuation.

M.D.C. Holdings, Inc. MDC

The company is involved in the construction, sale and related financing of residential housing and the acquisition and development of land for use in the Denver, Phoenix, Maryland, Virginia, mid-Atlantic region, Las Vegas, Dallas, California metropolitan areas.

The Zacks Rank #2 company with Value Score B and Growth Score A belongs in the Building Products - Home Builders industry (top 16%).

The company is expected to grow revenue and earnings very strongly in both 2021 and 2022, and its estimate revisions trend is also highly encouraging.

Its dividend yields 2.83%.

It has forward P/E and P/S ratios of 7.52X and 0.94X, respectively. Both indicate cheap valuation.

State Auto Financial Corporation STFC

State Auto is an insurance holding company, which engages, through its subsidiaries, is primarily engaged in the property and casualty insurance business.

The Zacks Rank #2 company with Value Score B and Growth Score A belongs in the Insurance - Property and Casualty industry (bottom 39%).

However, the lone analyst providing estimates sees growth in both revenue and earnings in 2021 and 2022.

Its dividend yields 2.13%.

It has forward P/E and P/S ratios of 13.39X and 0.55X, respectively meaning that the shares are cheap.

Ternium S.A. TX

Ternium is the leading producer of flat and long steel products of Latin America and consolidates the operations of the steel companies Hylsa in Mexico, Siderar in Argentina and Sidor in Venezuela.

The Zacks Rank #1 company has a Value Score A and Growth Score B. The Steel – Producer industry is in the top 21% of Zacks-classified industries.

The company’s revenue and earnings are expected to grow this year but decline in the next. Despite the decline from 2021 levels, 2022 numbers are expected to be a whole lot better than 2020 numbers. The estimate revision trend is extremely attractive.

Its dividend yields 3.91%.

The company has a P/E ratio of 4.58X and a P/S of 0.69X. So valuation is cheap.

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State Auto Financial Corporation (STFC) : Free Stock Analysis Report

Huntsman Corporation (HUN) : Free Stock Analysis Report

Ternium S.A. (TX) : Free Stock Analysis Report

M.D.C. Holdings, Inc. (MDC) : Free Stock Analysis Report

Bassett Furniture Industries, Incorporated (BSET) : Free Stock Analysis Report

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