Use the Pullback to Invest in Stocks with Long-Term Potential

The easiest way to make money in the stock market is to buy cheap and sell when prices rise. But because it’s so hard to guess a bottom or a height, people make mistakes. And it is true that we all make mistakes, from the most experienced to the novice.

One of the biggest mistakes we can make is worrying about the bloodbath in today’s market. Everything experts and market watchers are saying points to a higher chance of a successful soft landing. Commodity prices are pulling back, inventory is piling up in certain areas which is driving prices down, the housing market is weakening with enough demand in the background to ensure there won’t be a crash, and what more importantly, we have a relatively strong consumer.

The labor market contraction is easing a bit and we are continually adding more jobs. Even if the Fed continues to warn us, this is a positive scenario. It just doesn’t look like we’re moving into a prolonged period of weakness. Even if we do slip into a recession next year, it’s likely to be short-lived.

So going back to the market, if prices are going down, that’s a good thing. It is becoming a buyer’s market. Although the market seems to be pricing in all of the impending negativity (and then some), it could go a bit lower. That is always a possibility. But since it’s virtually impossible to second-guess a bottom, we can still buy some good stocks based on their outlook, the outlook of the industry they belong to, and analysts’ optimism about their long-term potential. That’s the theory behind these picks:

Taiwan Semiconductor Manufacturing Company Ltd. TSM

Taiwan Semiconductor manufactures, packages, tests, and sells integrated circuits and other semiconductor devices in Taiwan, China, Europe, the Middle East, Africa, Japan, and the US. Integrated Memory and Frequency Semiconductors.

Zacks Rank #1 stock is part of the Semiconductor – Circuit Foundry industry, which is in the top 1% of industries ranked by Zacks. Our research shows that historically, the top 50% of Zacks-ranked industries outperform the bottom 50% by a factor of 2 to 1. And that’s not all. When a stock with a rank of #1 belongs to such an industry, it has a very good chance of appreciation in the short term. So these two factors alone make stocks attractive. But if you are not convinced, we can also look at the numbers.

Currently, analysts are quite bullish on Taiwan Semiconductor. Their revenue and profit estimates for the year represent growth of 36.9% and 52.9%, respectively. In addition, the growth is expected to continue the following year with revenue increasing another 14.4%, while earnings rise another 3.5%. In the long term, they are looking for earnings growth of 24.2%.

The 6.1% price drop does not seem to make sense given the above. And valued on a price-to-earnings (P/E) basis, the shares are trading at a multiple of 12.4X, near the low point of 12.38X over the past year. Therefore, it makes sense to accumulate the shares.

Haynes International, Inc. HAYN

Haynes International, Inc. develops, manufactures, markets and distributes nickel and cobalt-based alloys in sheet, coil and plate in the US, Europe and Asia.

The stock has a Zacks #1 rank and belongs to Steel Industry – Specialties, which is in the top 1% of Zacks ranked industries.

Analysts currently expect its 2022 revenue (through September) to grow 44.1% and its 2023 revenue to grow 13.8%. They expect their earnings to grow 602.8% and 20.0%, respectively. They have increased their estimate for 2022 by 32.2% and their estimate for 2023 by 12.6% in the last 60 days. Long-term growth is pegged at 20.0%.

Taking all these positives into account, the 7.1% drop in prices over the last 4 weeks could be seen as a buying opportunity. Particularly as the valuation multiple of 9.2X earnings is really low and close to its lowest point over the last year.

United Rentals, Inc. URI

United Rentals offers various types of industrial equipment for rent to construction and industrial companies involved in infrastructure and other projects, manufacturers, utilities, municipalities, homeowners and government entities. Its two operating segments are General and Special Rentals.

United Rentals stock is Zacks #1 ranked and belongs to the attractive Building Products Industry – Miscellaneous (up 26%). This combination is indicative of stock price appreciation.

The numbers look good too. With expected revenue growth of 19.2% and 7.6% in 2022 and 2023, respectively, and expected earnings growth of 43.8% and 10.8%, United Rentals stock should have had a run upward. Especially since revisions to recent estimates point to an improving trend: The Zacks Consensus Estimate for 2022 is up 6.9%, while for 2023 it’s up 4.7% over the last 60 days.

However, despite the positive trend and a long-term growth estimate of 17.6%, the stock traded down 8.7% in the last 4 weeks. They are currently trading at 8.7X earnings, which is close to their lowest point over the past year. This definitely looks like a buying opportunity.

InterContinental Hotels Group plc IHG

InterContinental Hotels Group plc owns, manages, franchises and leases hotels in the Americas, Europe, Asia, the Middle East, Africa and Greater China. As of December 31, 2021, InterContinental operated 5,991 hotels and 880,327 rooms in approximately 100 countries under Six Senses, Regent, InterContinental Hotels & Resorts, Vignette Collection, Kimpton Hotels & Restaurants, Hotel Indigo, EVEN Hotels, HUALUXE, Holiday Inn, Holiday Brands Inn Express, Holiday Inn Club Vacations, avid, Staybridge Suites, Atwell Suites, Candlewood Suites, voco and Crowne Plaza.

Zacks Rank #1 stock belongs to the hotel and motel industry (up 37%).

InterContinental is expected to grow revenue by 21.7% in 2022, followed by another 16.6% in 2023. Earnings are also expected to grow in both years, by 88.4% and 23.8% respectively. Its estimate for 2022 has increased by 9.1% in the last 30 days, while the estimate for 2023 increased by 5.5%.

Despite these positives and analyst expectations of 16.9% long-term earnings growth, the company’s shares have fallen 10.0% in the last 4 weeks. The 17.0X earnings multiple is relatively close to the S&P 500’s 16.9X and also its lowest level of 16.6X over the past year. So this could also be considered a buying opportunity.

conclusion

The market seems to be pricing in the expected slowdown in the economy, so it’s relatively easy to find good undervalued stocks at the moment. Given the high level of volatility, we cannot rule out the possibility of a further drop in the immediate future. But the possibility of a greater advantage thereafter seems stronger.

One month price performance


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Intercontinental Hotels Group (IHG): Free Stock Research Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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