These depressed stocks could shine soon.
After a 23% gain for the S&P 500 in 2019, many investors are rightfully cautious about more upside for stocks in 2020. However, Goldman Sachs analyst David Kostin recently said the recent outperformance of cyclical stocks relative to defensive stocks suggests the market is pricing in U.S. economic growth acceleration in 2020. Kostin says investors who want to improve their risk-reward profile heading into the end of the year can focus on stocks with high economic sensitivity and depressed valuations. Here are seven stocks to buy that Goldman says could outperform in 2020.
Acuity Brands (ticker: AYI)
Acuity provides lighting and building management solutions and services. Last quarter, Acuity reported an 11.6% decline in sales and a 16% drop in volumes. Trade war uncertainty and pricing pressures from Chinese competitors have been weighing on margins. Acuity shares are down 49% overall in the past five years, but the stock's conservative valuation relative to its peer group suggests significant upside in the event of a cyclical recovery in the lighting market. AYI stock offers an attractive valuation, trading at a 39% discount to its five-year average forward earnings multiple.
Tapestry is a global leader in affordable luxury handbags and is the parent company of Coach, Kate Spade and Stuart Weitzman. U.S. handbag sales have been pressured for years, including a 20% drop in the first eight months of 2019, according to NPD. However, Coach sales have been solid, up 1% last quarter. Despite the pressures, Coach remains a market share leader in a highly profitable business and generates roughly 70% gross margins. TPR stock recently traded at around a 39% discount to its five-year average forward earnings multiple.
CBS Corp. (CBS)
In August, CBS and Viacom (VIA, VIAB) announced they will once again join forces after the two companies separated in 2006. Since the merger announcement, CBS stock is down 17%, creating a potential buying opportunity for long-term investors. The traditional TV business remains challenged, but CBS revenue was up 1% last quarter on the strength of direct-to-consumer CBS All Access and Showtime Now subscription growth. CBS's TV ratings are also holding up well relative to peers. CBS stock trades at around 7 times forward earnings estimates, roughly a 39% discount to its five-year average.
CommScope Holding Co. (COMM)
CommScope is a leader in antennas, cabling and other connectivity equipment for enterprise customers. CommScope shares are down 23% in the past six months, and the company's most recent earnings report revealed another 15% drop in revenue. The company's network and cloud segment revenue was particularly weak, down 29.2%. Despite the cyclical headwinds and trade war pressures, CommScope generated $497 million in free cash flow in the third quarter, and hyperscale sales doubled compared to a year ago. COMM stock is currently trading at roughly a 38% discount to its five-year forward earnings multiple average.
American Airlines Group (AAL)
American Airlines shares have been grounded in the past year, falling more than 20%. However, a booming 2020 economy could be good news for American. After investing heavily in modernizing its fleet in recent quarters, management recently said the update is nearly complete. The younger fleet should help American reduce maintenance and fuel costs, boost margins and devote more cash flow to paying down debt. With a forward earnings multiple of around 6, AAL stock has the lowest valuation of all the stocks on this list and is trading at a 22% discount to its five-year average.
Global motorcycle brand Harley-Davidson had a difficult few years. Shares are down 48% in the past five years due to sales declines and the company's inability to connect to younger consumers. Harley has also said trade war tariffs may force production overseas. Harley is on track for its fifth consecutive year of unit sales declines in 2019. Fortunately, international retail sales were up 2.7% and emerging market sales were up 5% last quarter. HOG stock is trading at about a 14% discount to its five-year average forward earnings multiple.
Urban Outfitters (URBN)
Mall retailers have been under pressure from e-commerce competitors for years, and Urban Outfitters is no exception. Urban Outfitters shares are down 29% in the past year and gross margins dropped 2.1% last quarter. Fortunately for investors, the company has aggressively been building its online presence, and roughly 40% of the company's sales are now generated online. In addition, about half of the company's sales come from exclusive brands and sourcing, which differentiates it from other retailers. URBN stock is trading at a 14% discount to its five-year average forward earnings multiple.
Top underperforming stocks to buy now:
-- Acuity Brands (AYI)
-- Tapestry (TPR)
-- CBS Corp. (CBS)
-- CommScope Holding Co. (COMM)
-- American Airlines Group (AAL)
-- Harley-Davidson (HOG)
-- Urban Outfitters (URBN)