August has been a great month for investors looking for bargain stocks to buy on the dip. The S&P 500, Dow Jones Industrial Average, and the Nasdaq 100 were down 2,1%, 2.0%, and 2.4%, respectively, for the week of Aug. 14-18. Barron’s believes that September could be worse. If the past week is any indication, they could be on to something.
Fundstrat analyst Tom Lee thinks August has been its typical mercurial self where gains are hard to come by and that the good times should return soon. Baron’s reported Lee’s comments from his Aug. 18 note to clients:
“[T]he month’s declines haven’t shaken Lee’s core bullish thesis. ‘We see this more as ‘it’s August’ rather than the start of a larger rout…we are not in the camp this spills over into a wider selloff. That could happen, but more bad things need to emerge. In fact, there are some signs that we could see the stocks begin to stabilize soon.’”
So, if you’re a risk-averse investor, you might want to wait a couple of weeks to see if the markets bottom.
In the meantime, a quick screen of S&P 500 stocks down more than 20% over the past month gives bargain-hunting investors 14 stocks to choose from. Here are three undervalued due to their 20%, including one name from three different sectors.
Sealed Air (SEE)
Sealed Air (NYSE:SEE) represents the materials sector. Its stock is down 25% for the past month and 31% year-to-date.
Analysts are moderately optimistic about the stock, with 7 of the 15 rating it as Overweight or an outright Buy. It’s target price is $45 which is 31% higher than its current share price.
One of the things that I use to assess value is free cash flow yield. If it’s over 8%, it’s definitely value. Between 4% and 8%, it’s reasonable value, if not dirt cheap. In the trailing 12 months ended June 30, its free cash flow was $152 million. Based on an enterprise value of $9.78 billion, it has a free cash flow yield of 1.6%, which suggests it’s not cheap.
Before you toss the company best known for bubble wrap packaging overboard, consider its historical FCF yield. In 2020, it had a free cash flow of $556 million. Based on an enterprise value of $10.6 billion. At first glance, it appears Sealed Air’s business has deteriorated.
And to a certain extent, it has, which is why it’s moving forwqard with SEE 2.0. This revitalization plan should deliver $150 million in annual cost savings by the end of 2025 and a return to its historical earnings and sales growth in 2024.
Its stock hasn’t been this low since June 2020. Get ready for a revival in the waning months of 2023 and into 2024.
Keysight Technologies (KEYS)
Keysight Technologies (NYSE:KEYS) represents the tech sector. Its stock is down 23% for the past month and 24% year-to-date. Like Sealed Air, it hasn’t traded this low since 2020.
Keysight is a relatively new company by S&P 500 standards, incorporated in 2013. However, its history dates back to 1939 and Hewlett-Packard’s founding by Bill Hewlett and Dave Packard. Their first product was an audio oscillator. Electronic measurement was their business.
In 1999, Agilent Technologies (NYSE:A) was formed to operate HP’s Medical Products and Instrument Group. In 2013, Agilent was split into two pure-play electronic measurement companies. Keysight was the one of the two, going public on November 1, 2014 after separating from Agilent. Agilent shareholders got one share of Keysight for two held by the parent.
KEYS stock is up 335% since it began trading in November 2014. Agilent is up 191% over the same period.
Shares have lost their mojo recently because the company reported Q3 2023 results on August 18th that included a downward revision of its guidance. It now expects fourth-quarter sales and earnings to decline by 10% and 13%, respectively.
Currently trading at 4.16x sales — less than its five-year average of 5.1x — its enterprise value of $22.5 billion is 12.87x its earnings before interest, taxes, depreciation and amortization (EBITDA). That’s lower than it’s been since 2016.
ResMed (NYSE:RMD) represents the healthcare sector. Its stock is down 25% for the past month and 21% year-to-date. Like the other two, it hasn’t traded this low since 2020.
Interestingly, ResMed’s business is probably doing the best in terms of top-line growth among the trio, up 23% in Q4 2023 and 18% for all of 2023 to $4.2 billion. However, investors began to abandon the stock after hearing its gross margin (56.5%) and operating margin (29.0%) dropped for the year.
All of its stock losses in 2023 are post-earnings. Investors have rightly or wrongly decided that the contraction of its margins in light of double-digit revenue growth suggests the quality of the sales increase for the maker of sleep apnea equipment is suspect.
ResMed CEO Mick Farrell is very confident about the future. He stated in the Q4 2023 conference call:
“Patient demand continues to drive increased adoption and utilization of our mask resupply programs, augmenting a steady cadence of new patient setups. We continue to see strong growth in both the U.S. business where provider resupply programs have augmented growth and in our markets outside the U.S. where our consumer outreach and subscription programs are also driving mass replenishment directly with those end user patients.”
Of the 24 analysts covering the stock, 18 rate it Overweight or an outright Buy with a $240 median price, 45% higher than its current share price.
I see ResMed as the best long-term hold of the trio, although all three should make you money over 3-5 years.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.