It's human nature to experience fear of missing out every once in a while. But that fear has become a reality for many investors this year.
A major sell-off sent stocks tumbling last year due to recession fears, inflation, slowing growth, geopolitical concerns, and a medley of other issues. But the S&P 500 is up nearly 20% year to date, indicating that investors are feeling much more optimistic that companies can persevere through challenges instead of suffering a lasting impact.
Watching the growth stock party boats sail down the river can be demoralizing. But instead of comparing your portfolio to whatever is happening in the stock market in the short term, a better approach is to build a strategy that can compound returns over time while also taking on the amount of risk that you and your family are comfortable with. One way to do that is to not get caught up in the market's noise and focus on overlooked opportunities.
Here's why Brookfield Renewable (BEPC -0.70%) (BEP -0.26%), United Parcel Service (UPS -0.20%), and Freeport-McMoRan (FCX -0.84%) are three excellent companies that look like great values now.
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Brookfield Renewable will excite value and income investors alike
Scott Levine (Brookfield Renewable): Soaring in lockstep with the 18.9% gain of the S&P 500 in 2023, shares of Brookfield Renewable have climbed 16.9%.
Even with the impressive year-to-date gain, however, Brookfield Renewable's stock is hanging on the discount rack. Currently, shares are valued at 3.4 times operating cash flow and 3.9 times trailing earnings. But wait, there's more. It's not only the attractive valuation that makes the stock so alluring, it's also the hefty dividend, which now represents a forward yield of 4.4%.
Managing one of the largest green energy portfolios worldwide, Brookfield Renewable will also attract those looking to benefit from the growing adoption of lower-carbon energy options. And the company has considerable growth opportunities available. As of the end of the first quarter 2023, Brookfield Renewable's portfolio included $77 billion in power assets -- solar, wind, hydropower, and energy storage -- that had an operating capacity of 25.7 gigawatts. Moreover, it had a development pipeline representing 126 gigawatts of operating capacity. With these assets, Brookfield Renewable inks long-term power purchase agreements that generate stable cash flows -- helping to provide management with insight into future capital allocation plans.
Brookfield Renewable's interest is not a recent phenomenon. If the company achieves its goal of returning $1.35 per unit to investors, it will mean the company has increased its distribution at a 6% compound annual growth rate since its inception in 1999. Looking ahead, management has targeted a 5% to 9% annual increase to its dividend -- a goal that seems attainable considering the company's previous achievement.
UPS is committed to its dividend
Daniel Foelber (UPS): UPS stock has gone nowhere over the last year, and is up about 7% year to date.
The company is facing a slowdown in growth, but that's mainly because UPS put up such impeccable results over the last few years. UPS is a victim of its own success, and the tough comps have only gotten tougher.
UPS Revenue (TTM) data by YCharts
The best way to approach UPS isn't to look at its current growth rate, but rather the real numbers. This is a company that generates tons of profit and gobs of free cash flow (FCF) from an incredibly reliable business model. That FCF boosts shareholder value through dividends and stock repurchases.
UPS dividend raises have been meaningful in recent years. Despite the stock price increase, UPS has made the necessary raises to keep the yield at an impressive 3.4% despite UPS stock's over-55% gain over the last three years.
Usually, when a stock stages a major gain, the dividend yield compresses because a company isn't able to match the dividend growth rate to the stock price growth rate. Vice versa, a dividend yield goes up when a stock price goes down, even if the company isn't making a dividend raise.
Now looks like a great time to take advantage of UPS stock's stagnation. UPS is the industry leader in ground delivery, has an attractive dividend yield, and has a low valuation, with a price-to-earnings ratio of just 15.1 and a price to FCF of 22.7.
Freeport-McMoRan has a compelling valuation
Lee Samaha (Freeport-McMoRan): Highly cyclical stocks like miners tend to be very difficult to evaluate. On the one hand, their valuations (based on trailing earnings) tend to look very cheap, just as their earnings are about to slump as the price of the metal falls. On the other hand, their valuations often look extremely expensive (again, based on trailing earnings) just as their earnings are set to soar with an increase in the metal's price.
It's not an easy endeavor, and nor is it easy to predict where commodity prices are heading. As such, many investors prefer to be agnostic and price stocks based on the current metal price. In the case of Freeport-McMoRan, management usually gives a range of earnings before interest, taxation, depreciation, and amortization (EBITDA) forecasts based on an assumption for the price of copper per pound. Management's latest forecast calls for an EBITDA of $10.5 billion in 2024/2025 based on copper at $4 per pound. That's a pretty helpful assumption given that the miner's average price realization for copper was $4.11 per pound in the first quarter. Based on the current enterprise value, or EV (market cap plus net debt) of $61 billion, a price of $4 per pound for copper would put the stock on an EV of less than six times EBITDA in 2024/2025.
It's a reasonable valuation if you are agnostic on the copper price, but it's excellent if you buy the bullish case for copper. It's a case based on the idea that supply is being constrained by increasing regulatory and environmental concerns, making it hard for miners to acquire permits. At the same time, demand is seen as rising as part of the "electrification of everything" trend driven by growth in electric vehicles (EVs), renewable energy, and technologies such as automation, smart buildings/infrastructure, and 5G technology. It adds up to make Freeport-McMoRan a good value stock for investors.
