If the last couple of months has taught us anything, it is that, in the words of the Bard, one swallow doth not a summer make. There have been many days when stocks have opened significantly higher, bringing hope that we have turned the corner, only to plummet again the next day, or even later in the same day.
That being said, when investors detach themselves from the emotions that volatility cause and think logically about the market, a recovery at some point looks inevitable. Stocks are not going to zero, and while there are plenty of reasons to be fearful, corporate profits and economic data are still strong.
For those looking to buy this dip though, what to buy is a more relevant question than whether to buy, and there are a few things to consider. First, you should avoid stocks that have reasons other than the general sense of malaise for their decline. Second, you should look for things that have a chance of receiving a short-term boost, and third, value matters.
Using all those criteria, one of the best buys for those brave enough to dip their toe back in the water right now may be FedEx (FDX).
One could argue that FDX is not a good choice based on the first consideration, as it has performed worse than the broader market on this drop. However, the reasons for that are really just an exaggerated reaction to the general mood. There was an analyst downgrade recently that accelerated declines but given the outsized expectations earlier this year and the more cautious approach of Wall Street since the drop began, that is no great surprise.
If anything, downgrades help with meeting the second condition. The slide for FedEx started in September when they missed expectations for third quarter EPS, but that number represented year on year earnings growth of around forty percent. The results can therefore be understood as “disappointing” only in the context of overly optimistic forecasts and cutting the forecast for this quarter makes a beat more likely.
Q4 results are expected next week, and while the consensus estimate is for earnings of $3.98 the “whisper number” is around $4.10 so there is a good chance of the short-term boost we are looking for.
From a value perspective, it is hard to see FDX as anything but a bargain. The trailing P/E is just over 10. Which represents a 10 year low for the stock and is substantially below both that of the S&P 500 as a whole at around 20 and the industry at around 15. Just a return to the industry average therefore gives a potential fifty percent upside.
Of course, there are also structural, longer-term reasons for the stock being this cheap. Amazon (AMZN) is increasingly handling its own logistics which puts a dent in expectations, and if the economic slowdown that is feared comes it will hurt the company disproportionately. However, Amazon is not the only place where online retail is booming, and the trade can only be considered if you believe that the fear of a downturn is no more that just that.
So, with the holiday season underway and with oil prices, an important cost factor for FedEx, at their lowest for over a year, there are reasons to believe that the stock has been oversold. In the current market that is no guarantee that we are at the lows, but it should limit further declines. That, coupled with a big upside potential, makes FDX worth buying in front of next week’s earnings.