SKYW - Black Friday Deals: 5 Best Value Stocks

2023-11-21 05:00:00 ET

Summary

• Black Friday sales are in full swing, and discounted stocks can offer tremendous upside for the gift-giving season and New Year.
• Shopping for the best deals can include identifying mispriced stocks that offer extraordinary values and are on sale relative to their sectors. However, there’s a difference between “cheap” and “value.”.
• The Fed’s stance on inflation has resulted in ‘pain’ for investor portfolios, and economic uncertainty has resulted in many stocks not trading in line with their investment fundamentals.
• So, I selected 5 Top Value plays using SA’s Quant Rating system. The 5 value stocks featured here come at steep discounts, have solid growth, excellent profitability, strong fundamentals, and offer a great way to diversify a portfolio.
• I am Steven Cress, Head of Quantitative Strategies at Seeking Alpha. I also head Alpha Picks, which uses a data-driven process to identify the top picks from Seeking Alpha Premium’s ‘Strong Buy’ quant ratings. The below does not constitute any recommendation or advice, nor reflect the views of Seeking Alpha as a whole.

‘Tis the season for deals and discounts, but have you considered shopping for the deal-of-all-deals: value stocks?

Growth stocks with tailwinds from the Magnificent 7 have led the charge in 2023, with the MSCI World Growth Index ((USD)) +18% YTD versus the MSCI World Value Index ((USD)), down 0.79% YTD. However, the valuations of many growth stocks are highly stretched. Both forward growth estimates and profits for many Mega-Tech stocks have fallen relative to their historical 5-year averages, making them less than ideal for portfolios.

As a more dovish Fed pauses interest-rate hikes and the labor market cools, value stocks tend to thrive in economic recoveries. Less susceptible to rising interest when discounting future earnings, value stocks offer a favorable alternative to overvalued growth stocks, especially when you’re looking for discounts. Black Friday marks the start of the Christmas shopping season, where sales abound and opportunity awaits. Avoid the crowds! Based on Quant Ratings, consider adding five cheap stocks to your cart – portfolio.

Value Stocks vs. Growth Stocks

Growth and tech stocks were the biggest losers of 2022, resulting in a volatile ride for investors. Factors like monetary policy uncertainty and slowing economic growth impact companies’ earnings and profits, and as recession fears swirled, many companies suffered some of their biggest declines.

Fast-forward to 2023, and Big Tech has rallied back a big winner year-to-date. Where many investors were keen on buying the beaten-down growth stocks of 2022. However, it’s crucial to consider the underlying metrics and long-term outlook when assessing a stock. Where time in the market can beat timing the market, growth, and tech stocks can be sensitive to pricing pressures. Discounted future earnings coupled with high interest rates can result in less growth and profitability. Despite the massive rally this year, many growth and Mega-Tech stocks show signs of vulnerability in growth and profitability relative to historical averages. Where growth stocks currently outperform value stocks, if you’re looking for sales – discounts this Black Friday, value investing from a fundamental perspective defines the premise of buying low and selling high.

S&P 500 Growth appears overvalued compared to the S&P 500 Value and S&P 500.

Many growth stocks are extremely overvalued, in my view, trading at peaks not seen since the 2020 pandemic and the 2000 dot-com bubble. The chart above illustrates the forward price-to-earnings of the S&P 500 Growth’s overvaluation of 21.1x versus the S&P 500 Value at 16.6x and the S&P 500 at 18.6x. Growth stocks with high valuations can offer above-average returns and earnings growth, but they come with greater risk and a premium price tag. Value stocks capitalize on inexpensive price-to-earnings ratios, price-to-book, yield, and other metrics. Why pay a premium when you can buy cheap stocks and build a portfolio trading well below fair value for potential upside? Value stocks are cheap and offer the deals you want this Black Friday with room for upside to give you the bang for your buck that you’re looking for.

Black Friday Deals 2023: Value Stocks

U.S. GDP expanded at 4.9%, the Fed paused on rate hikes, and severely discounted stocks could benefit as economies strengthen. So, in this article, I’m focusing on value stocks with strong fundamentals that tend to be resilient during market volatility and major drawdowns. With the prospect of interest rates staying on hold and the chance of monetary policy easing in 2024, Black Friday could be a great time to consider five value stocks based on our quant ratings.

1. M/I Homes, Inc. ( MHO )

• Market Capitalization: $2.87B

• Quant Rating: Strong Buy

• Quant Sector Ranking (as of 11/17/23): 6 out of 539

• Quant Industry Ranking (as of 11/17/23): 1 out of 24

Home-sweet-homes! One of my top 10 stocks for the second half of 2023, M/I Homes Inc. ((MHO)) is the #1 industry-ranked Quant performer, leading single-family homebuilders in the U.S. Despite 30-year mortgage rates reaching 8%, heights not seen in 23 years, MHO maintains significant financial strength and consecutive earnings beats, spans across diverse geographies, and is focused on building SmartSeries affordable communities, appealing to Millennials and comprises ~55% of total company sales.

Despite a modest slowdown in October – reflected in a Q3 revenue miss – revenues still increased 3% to a record $1B, and EPS of $4.82 beat by $0.55. MHO experiences strong demand and capitalizes on inventory backlog and new contracts, contributing to another $100M increase in share repurchases . Sequentially, MHO has seen a 27% jump in gross margins and year-over-year record revenues, and it’s the second-best performing stock in our Alpha Picks Portfolio, +184% since its selection on October 3, 2022.

MHO Stock Valuation

I think MHO is extremely discounted. Despite its surging price performance of 122% YTD and 143% over the last year, underlying valuation metrics indicate that this stock, at 52-week highs, has room to run.

As housing demand persists despite shortages, MHO provides a solid case for buying at its current price – a cheap level. Possessing an ‘A’ overall valuation grade , its forward P/E ratio of 5.89x versus the sector's 14.71x is nearly a 60% difference. Strong cash flow, EV/Sales trading at -36% difference to the sector, and EV/EBIT more than 63% difference, if you’re looking for value this Black Friday, consider M/I Homes for the holidays or my next pick, an industrial REIT.

2. Innovative Industrial Properties, Inc. ( IIPR )

• Market Capitalization: $2.19B

• Quant Rating: Strong Buy

• Quant Sector Ranking (as of 11/17/23): 4 out of 175

• Quant Industry Ranking (as of 11/17/23): 2 out of 12

If you’re seeking value and stock to hedge against inflation, taking a bite out of portfolios, Innovative Industrial Properties, Inc. ((IIPR)) not only offers value, but it’s one of my Top 14 Dividend Stocks to Buy . IIPR’s dividend scorecard is extremely attractive.

IIPR Stock Dividend Scorecard

Offering a 9.21% forward dividend yield, five years of consecutive dividend payments, and a 5-year dividend growth rate of 45.61%. Where many stocks this year have cut dividends amid rising interest rates, debt, and missed earnings, IIPR offers significant dividend growth rates and is collectively strong on value, growth, profitability, earnings revisions, and momentum.

An industrial REIT focused on state-licensed operators of cannabis facilities, IIPR’s YTD and one-year declines offer an opportunity to buy the dip. Six consecutive earnings beats led to the latest Q3 results , generating total revenues of $78M. With 97% of rent collection and $2.2M of security deposit applied to revenues, IIPR recorded a 10% total revenue increase from the previous year. AFFO of $64.8M increased nearly 8%, and with minimal debt and overhead, IIPR’s continued expansion makes the upside potential very appealing. Analyst Julian Lin writes :

"IIPR deserves to trade at a premium or at least in line with NNN REIT peers, which trade at around 12x to 14x FFO and at 5% to 6% dividend yields. That implies around 25% potential upside just to trade in-line with traditional net lease peers, but the stronger long-term growth rate arguably demands a sizable premium."

IIPR Stock Valuation

Trading near a 52-week low, offering a strong dividend, attractive metrics, and diversification, IIPR is also significantly undervalued. Showcasing a forward P/AFFO of 8.66x versus the sector’s 13.40x, IIPR is a 35% difference from its peers. Its compelling Total Debt/Capital ((TTM)) of 13.42% is more than a 72% difference to the sector. With little debt, exceptional growth prospects, and a portfolio concentrated in industrial properties with little overhead to help keep costs low, IIPR is a value stock ready to take flight, like my next pick.

3. SkyWest, Inc. ( SKYW )

• Market Capitalization: $1.90B

• Quant Rating: Strong Buy

• Quant Sector Ranking (as of 11/17/23): 4 out of 655

• Quant Industry Ranking (as of 11/17/23): 1 out of 27

The holidays are upon us, and with them comes frequent travel. What better airline than SkyWest, Inc. ((SKYW)), the affiliate to the biggest U.S. airline carriers. Offering over 40 million passengers service to over 250 North American destinations, SkyWest’s purchase agreements with affiliate companies offer stability in the sense that the carrier has a set block of flights, helping prevent substantial fluctuation in revenues from these sources, making for stable earnings until contract expiration. Although airline stocks took a beating during and post-pandemic, many have rebounded despite caution from some analysts and Bank of America .

"We see few reasons for airline multiples to move much ahead of the midpoint of historical valuation levels: cash on balance sheets largely came from PSP funds in the pandemic, commodity prices have created meaningful earnings volatility this year, and pricing power could weaken as the recovery normalizes and capacity comes back online. As a result, our new earnings estimates result in lower price objectives across the group, albeit our target multiples move modestly higher given the fuel volatility with most target multiples near the midpoints of historical valuation ranges."

SkyWest maintains a strong financial position. The U.S. economy remains resilient despite elevated costs and inflation. As a big proponent of quantitative investing, SkyWest’s discounted valuation and strong fundamentals make it a Top Industrial worth considering for portfolios.

Q2 proved positive for the industrial sector as pent-up demand for travel increased . In addition, SkyWest’s three consecutive earnings beats have resulted in four analyst upward revisions over the last 90 days. The Strong Buy-rated stock soared nearly 10% after reporting top-and-bottom-line Q3 results, a quarter that included the repurchase of 1.2M shares of common stock. SkyWest reported a net income of $23M, with an EPS of $0.55 that beat by $0.13. Although year-over-year revenue of $766.17M was down 2.95%, it beat by $9.90M. With strong free cash flow from operations, SKYW repaid more than $330M in debt and repurchased +$244M in stock through September 30th. With tremendous momentum and an ‘A’ overall valuation grade , let’s dive into the stock as a discount buy.

SkyWest Stock Valuation

Year-to-date, SkyWest is up 182% and over the last year, +167%. SKYW’s momentum significantly outperforms the sector medium. Although the stock trades at its 52-week high, its valuation comes at a severe discount.

SKYW Stock Momentum Grades

Forward PEG is an excellent metric because it combines the stock's earnings growth rate with a core valuation metric. SkyWest’s forward PEG of 1.53x is undervalued compared to the sector. Complemented by a forward Price/Sales of 0.64x vs. the sector’s 1.33x and forward Price/Cash Flow that’s nearly a 50% discount, SKYW trades below its sector, offering a great value play for Black Friday.

4. Perdoceo Education Corporation ( PRDO )

• Market Capitalization: $1.19B

• Quant Rating: Strong Buy

• Quant Sector Ranking (as of 11/17/23): 17 out of 539

• Quant Industry Ranking (as of 11/17/23): 3 out of 27

Switching gears towards the Education Services industry, Perdoceo Education Corporation offers accredited post-secondary education, primarily online, as well as campus-based and hybrid learning. Catering to a diverse student population, this stock also offers portfolio diversification.

PRDO Stock Revisions and EPS

Consecutive earnings beats resulted in analysts revising estimates up, and return on invested capital ((ROIC)). With tremendous margin expansion, including Net Income Margin ((TTM)) of 19.83% vs. the sector’s 4.40% and Gross Profit Margin ((TTM)) that’s 134% difference to the sector; and Return on Total Assets ((TTM)) a 270% difference to the sector, the stock has provided great returns to shareholders while being undervalued. With a Q3 2023 EPS of $0.64, beating by $0.15, and revenue of $179.92M beating by $12.35M, results highlighted by PRDO President & CEO Andrew Hurst :

“Student retention and engagement has continued to improve at our academic institutions. An increasing percentage of our enrollments are benefiting from the operational adjustments we've implemented to refine our student enrollment and marketing procedures…We continued to experience further growth in our corporate partnership program as our teams support organizations around the country to provide debt-free education and training.”

Online education in the United States is expected to reach $73.81B IN 2023, with a 13.08% CAGR anticipated for 2023-2027.

Online Learning Surges

In addition to exceptional profitability and strong growth grades, PRDO maintains bullish momentum and is attractively valued.

PRDO Stock Valuation

Perdoceo Education Corporation looks extremely undervalued. With a forward P/E ratio of 8.77x compared to the sector median of 14.71x, it trades at a -40.37% difference. Its forward PEG of 0.58x is an excellent metric because it combines the stock's earnings growth rate with a core valuation metric. It is one of my favorite valuation metrics and showcases that PRDO is severely discounted at -60.68% below its sector peers. As we explore my fifth and final pick, I’d be remiss not offering something the kids can enjoy!

5. JAKKS Pacific, Inc. ( JAKK )

• Market Capitalization: $276.61M

• Quant Rating: Strong Buy

• Quant Sector Ranking (as of 11/17/23): 7 out of 539

• Quant Industry Ranking (as of 11/17/23): 1 out of 28

JAKKS Pacific, Inc. ((JAKK)) is a global player in designing, developing, and marketing toys and products for children and adults. Through licensing agreements and strategic acquisitions, JAKKS Pacific has built a proven growth strategy through propriety brands. Despite being a small-cap stock, the company is rapidly expanding, having crushed third-quarter earnings expectations and inking a long-term agreement with Authentic Brands Group. Authentic’s portfolio includes iconic brands such as Forever 21, Juicy Couture, Roxy, and Quiksilver. The announcement prompted the stock’s 25% surge in early trading on November 2nd.

Year-to-date, JAKK is up 65%. As evidenced by the momentum grades, the stock is bullish, on the heels of a Q3 EPS of $4.75 that beat by $1.37 and revenue of $309.74M that beat by $26.49M.

Building a strong balance sheet, partnering with Asian manufacturers for best pricing, and developing innovative products are helping drive results. Chairman & CEO Stephen Berman said :

“Q3 is always the highest shipping quarter for JAKKS. I'm proud to say we feel very confident in how we're lined up to finish the year as well as some of the initiatives the teams are working on for 2024 and beyond.

We do at the beginning of the year that repeating 2022 revenue levels would be impossible feat without a total unexpected breakout hit as we had last year. With that sales outlook, we made gross margin improvement a major focus as it is extremely important to our blueprint for enhancing overall margin.”

With its strongest gross margin (32.5%) since 2011, JAKK was able to make up for increases in some expenses. Retailer The Gap, Inc.’s (GPS) 30% surge boosted other retailers into the holidays, offering positive momentum for top consumer discretionaries like JAKK, which comes at an extreme discount.

JAKK Stock Valuation Grade

Highlighted by an A+ valuation grade , JAKK’s forward P/E ratio is nearly a 65% difference to the sector. JAKK’s trailing PEG ratio of 0.05x compared to the sector’s 0.57x is more than a 90% difference. With a potential turnaround for economies on the horizon and better-than-expected CPI figures for October, consider my top value plays that also offer growth prospects for the long term. As industries begin to stabilize and investor sentiment becomes more optimistic, each of the five stocks with bullish momentum could achieve greater traction and growth heading into the new year.

Black Friday Deals: Top Value Stocks

The Fed, monetary policy, and inflation concerns are still at the forefront of volatility and earnings seasons. Premium price tags are not just on retail items and the price of goods and services. Many companies behind Black Friday's purchases come with a premium price, so screening for stocks with good fundamentals, significant margins, valuations that aren’t stretched, and a strong earnings track record is crucial.

Value stocks typically come at great price points. My five picks, MHO, SKYW, PRDO, IIPR, and JAKK, trade well below their peers, have tailwinds through the holidays and into the new year, and were identified by my Quant System as low-cost stocks with growth attributes. Consider these discounts for the shopping season. Conversely, we have Top Growth Stocks if you're not into Top Value Stocks . Whatever your investing preference, Quant aims to help you identify stocks with solid fundamentals. The stocks featured here may help to diversify your portfolio, or if you prefer a list of monthly best of the best strong buy quant stocks, consider Alpha Picks . The key is to make well-informed investment decisions, using tools that help take the emotion and fear out of investing.

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