Caterpillar, Under Armor and other stocks that haven’t joined the rally — yet
The stock market has risen this year, but there are a number of stocks that have not joined the party. Some of them look like potential pickups.
Russell 1000 Index
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which tracks the 1,000 largest US companies by market capitalization, has gained just over 6% this year. The main driver has been the market’s expectation that the Federal Reserve will soon halt its interest rate hikes, as the rate of inflation continues to decline.
For those who haven’t joined the rally, there are still plenty of stocks that haven’t exactly risen. The Invesco Russell 1000 Equal Weight Exchange-Traded Fund ( EQAL ) is up less than 3% for the year. This fund weights every stock in the index equally, removing the effect of large market cap stocks like Apple (AAPL) and Microsoft (MSFT), which have posted double-digit gains this year. The bottom line is that many stocks have not had fantastic years ̵[ads1]1; and those that show strong fundamentals are the ones to consider.
That’s why strategists at investment bank Evercore looked for stocks that haven’t risen much and are potential buys. They looked for stocks on the Russell 1000 index that have underperformed the standard weighted market-cap index, but have seen analysts raise their 2023 per-share estimates upward this year, even as the index has seen its overall EPS forecast cut down by a few. percent. The stocks on display must also have short interest, or the percentage of their outstanding shares that are currently shorted, in the top third percentile of their ranges since the start of 2022. Stocks with high short interest often see the short sellers buy back shares on any sign of strength .
One of the stocks on their screen is Caterpillar (CAT). That’s down about 7% this year, but analysts have revised their 2023 EPS estimates up by just over 4% this year. Its short interest is in the 80th percentile of the range since the start of 2022.
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Several drivers are responsible for the fairly positive earnings outlook. The company has been able to raise prices on its machinery enough to offset higher costs, keep profit margins steady and profit dollars grow. The company’s gross margin remained roughly 30% last year, unchanged from 2021, according to FactSet. For this year, the turnover of 63 billion dollars will be up approx. 6% from last year. The company said strong pricing is helping sales, but even if prices are moderating along with broader inflation, the company mentioned in a March call with Goldman Sachs that backlogs in commercial real estate construction and solar turbines should support the volume of products sold. This year, the sales growth will contribute to the operating margin expanding to around 16% from just over 13% last year.
Under Armor (UAA) is another example. It is down just over 9% this year, but analysts have revised EPS estimates up by approx. 3.2%. Short interest is in its 75th percentile of its recent rage.
The earnings picture has started to stabilise. Analyst 2023 EPS estimates fell more than 40% from highs last year to bottoms early this year. The company, which has struggled to compete against other athletic brands such as Nike ( NKE ), has had to cut prices on products, which has eroded margins. Analysts expect sales to rise moderately this year to around $6 billion, with gross margins steady at around 46%.
Halliburton
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(HAL) is also on the screen. The stock has fallen almost 15% this year, but EPS estimates are up approx. 2.8% and the short-term interest rate is in the 100th percentile.
The Albemarle (ALB) share is down approx. 5% for the year, but EPS forecasts are up approx. 2.6% and the short-term interest rate is in the 100th percentile.
Take a look at these stocks.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
