Rising concerns about the spread of the COVID-19 omicron variant and potential monetary policy tightening in the near term are expected to keep the stock market volatile for at least the time being. Therefore, we think it could be wise to bet on fundamentally sound stocks Olin Corporation (OLN) and Gates Industrial Corporation (GTES). These names look undervalued at their current price levels. So, let’s discuss.
Wall Street had a rough start to 2022, as bond rates climbed on strong expectations of Fed interest rate hikes and the conviction that the omicron infections will peak in the coming weeks. In addition, the Fed signaled it could taper its easy monetary policy more aggressively than expected, which might foster increased market volatility.
So, ahead of the interest rate hike or hikes, we think it may be risky to invest in high-flying stocks that have reached valuations that are not in sync with their growth prospects. But it could be an opportune time to bet on quality stocks trading at reasonable valuations because value stocks tend to outperform during market volatility. And investors’ interest in value stocks is evident in the SPDR Portfolio S&P 500 Value ETF’s (SPYV) 20.6% returns over the past year.
Olin Corporation (OLN) and Gates Industrial Corporation plc (GTES) look undervalued at their current price levels. They have a Value grade of B in our proprietary rating system. So, we think these stocks could be solid bets now.
Olin Corporation (OLN)
OLN in Clayton, Miss., manufactures and sells chemical products throughout the United States, Europe, and worldwide. Chlor Alkali Products and Vinyls; Epoxy; and Winchester are the company’s three operational segments. It sells its goods through its sales team and directly to different industrial clients, mass merchants, retailers, wholesalers, and other distributors.
In November, OLN’s board of directors approved a new $1 billion share repurchase program. Under the Share Repurchase Program, shares of the company’s common stock will be repurchased periodically, including in the open market, or privately negotiated transactions.
For the third quarter, ended Sept. 30, 2021, OLN’s revenue increased 62.8% from its year-ago value to $2.34 billion. Its operating income came in at $549 million, versus a $683.8 million operating loss in the prior-year quarter. The company reported $390.7 million in net income, compared to a $736.8 million net loss in the third quarter of 2020. Its EPS amounted to $2.38, compared to a $4.67 loss per share in the prior-year period.
Analysts expect its EPS to increase 870.3% year-over-year to $8.55 in its fiscal 2021. An $8.8 billion consensus revenue estimate in fiscal 2021 represents a 52.9% increase from the same period last year. The stock has gained 98.5% in price over the past year and 37.8% over the past nine months.
In terms of forward non-GAAP P/E, OLN’s 6.35x is 58.2% lower than the 15.2x industry average. In addition, its 6.09x forward EV/EBIT is 52.8% lower than the 12.9x industry average.
OLN’s POWR Ratings reflect this promising outlook. The company has an overall A rating, which translates to Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 distinct factors, each with its own weighting.
OLN has also rated B for Value, Growth, and Sentiment. Within the A-rated Chemicals industry, it is ranked #9 of 89 stocks. To see additional POWR Ratings for Momentum, Quality, and Stability for OLN, click here.
Note that OLN is one of the few stocks handpicked currently in the Reitmeister Total Return portfolio. Learn more here.
Gates Industrial Corporation plc (GTES)
GTES manufactures and distributes specialized power transmission and fluid power systems. The Denver, Colo.-based company’s products are utilized in construction, agricultural, energy, automotive, transportation, general industrial, and consumer industries, among other end sectors.
In November, GTES‘ board of directors authorized a share buyback program of up to $200 million of the company’s ordinary shares. The authorization will be valid until Dec. 31, 2022. This move exhibits the company’s robust financials and cash flow generating capabilities.
For the third quarter, ended Oct. 2, 2021, GTES‘ net sales increased 21.1% from the year-ago value to $862.4 million. Its operating income grew 104.2% year-over-year to $10.5 million. The company’s net income surged 67.5% from the prior-year quarter to $70.2 million, while its EPS rose 64.3% year-over-year to $0.23.
The consensus EPS estimate of $1.28 in fiscal 2021 represents an 82.9% increase year-over-year. The $3.49 billion consensus revenue estimate in fiscal 2021 represents a 24.9% increase from the same period last year. The stock has gained 18.9% over the past year.
In terms of forward Price/Book, GTES’s 1.59x is 45.6% lower than the 2.93x industry average. In addition, its 12.84x forward non-GAAP P/E is 38.8% lower than the 20.99x industry average.
It is no surprise that GTES has an overall B rating, which equates to Buy in our POWR Ratings system. The stock also has a B grade for Growth, Quality, and Value. In the Auto Parts industry, it is ranked #6 of 65 stocks.
Beyond the POWR Ratings grades I have just highlighted, one can view the GTES ratings for Momentum, Stability, and Sentiment.
OLN shares were trading at $52.77 per share on Monday morning, down $1.13 (-2.10%). Year-to-date, OLN has declined -8.26%, versus a -3.43% rise in the benchmark S&P 500 index during the same period.
About the Author: Pragya Pandey
Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.