At the end of 2022, consumer cyclical stocks traded at a 21% discount to Morningstar’s estimated fair value.
With the S&P 500 having tumbled 14% over the past 12 months, investors are looking for buying opportunities in the stock market.
One industry to consider is consumer cyclicals. At the end of 2022, the sector’s stocks traded at a 21% discount to fair value, as estimated by Morningstar analysts.
Economic uncertainty is hurting the stocks, Morningstar analyst Erin Lash said in a commentary. Apparel and travel-and-leisure constitute the most undervalued segments of the sector, Morningstar said.
Here are its top picks among undervalued consumer cyclical stocks in alphabetical order.
Carnival, the cruise line
Morningstar analyst Jaime Katz assigns the company no moat (durable competitive advantage) and puts fair value for the stock at $22. That’s more than twice recent trades at $10.20.
“Carnival remains the largest company in the cruise industry, with nine global brands and more than 90 ships,” she wrote in a commentary. “The global cruise market has historically been underpenetrated, offering cruise companies a long-term demand opportunity.”
Also, “prior to the pandemic, the repositioning and deployment of ships to faster-growing and underrepresented regions like Asia-Pacific had helped balance the supply in high-capacity regions like the Caribbean and Mediterranean, aiding pricing,” Katz said.
“However, international travel has lacked consistency as a result of covid, which could spark longer-term secular shifts in consumer behavior, challenging the economic performance of Carnival over an extended horizon.”
Hanesbrands, the apparel company
Morningstar analyst David Swartz gives the company a narrow moat and puts fair value for the stock at $22. It recently traded at $8, less than half the fair-value call.
“Hanesbrands is the market leader in basic innerwear (60% of its 2021 sales) in multiple countries,” he wrote in a commentary. “Its key innerwear brands like Hanes and Bonds (in Australia) achieve premium pricing.”
Further, “while the firm faces challenges from inflation, the strong U.S. dollar, lower inventory levels at retailers, and covid, we think Hanes’ share leadership in replenishment apparel categories puts it in better shape than some competitors,” Goldstein said.
“In May 2021, the firm unveiled its Full Potential plan to expand global Champion, bring growth back to innerwear, improve connections to consumers (through greater marketing and enhanced e-commerce, for example), and streamline its portfolio.”
VF, an apparel company
Swartz assigns the company a narrow moat and puts fair value for the stock at $61, about twice recent trades at $30.80.
Noting that the stock has traded above his fair value for the past five years, Swartz said, “investors are focused on recent problems and are overlooking its history of successful portfolio management and brand development.”
They’re also overlooking “its potential for sales growth and margin improvement in the medium term,” he said.
“The firm recently held an analyst event at which it outlined a strategic plan based on operating more efficiently, investing in its highest-potential opportunities, using data and analytics to meet consumer demand, and offering new products. We believe it can meet these objectives.”
The author of this story owns shares of Hanesbrands.