One of the most fascinating things about the economic situation right now is that there are two distinct economies in the U.S. The business-to-business (B2B) economy is, if not actually in recession, certainly teetering on it, while the consumer-driven economy is holding up well. Big corporations that serve other businesses are cutting back with some eye-popping announcements of job cuts. Meanwhile, those that serve consumers have spent the last six weeks reporting calendar Q3 earnings that have often exceeded expectations, a trend that continued yesterday when the retail giant TJX Companies (TJX) reported a big bottom-line beat.
That has led to a disparity in the performance of stocks in the two areas. B2B companies, which tend to be tech-oriented, have seen precipitous declines, while sectors like retail that are consumer-facing have seen stocks gain in real, not just relative terms. The aforementioned TJX, for example, popped after those results and is now higher than it was a year ago.
That suggests that the “value” in many traditional value sectors like retail has disappeared. Good news is now priced into many of those stocks, and prices are beginning to reflect an assumption that the conditions of the last three months will continue for years to come. Again, using TJX as an example, that stock now trades at a forward P/E of over 21 with a PEG ratio approaching 2. That isn’t value in any sense.
There are, however, some tech stocks that are traditionally looked at as growth-oriented where value is evident. They have been dragged down with others in the sector, even though their numbers and style do not fit the stereotype of companies for whom profitability is some way off and is predicated on growth. Take Concentrix (CNXC), for example.
In many ways, they seem to fit the profile of the kind of company that is being sold off right now. They are a Bay Area corporation that specializes in customer experience (CX) and user experience (UX) solutions for businesses. That description that will probably cause many seekers of traditional value to roll their eyes because it is based on the kinds of business buzzwords that seem to come and go like the wind. If you dismiss CNCX on that basis, though, you are ignoring some basic facts.
First, while CX and UX solutions may sound like buzzwords, they are actually very real needs for every business. It is about how you, as a potential customer, view a business when you go to its website. Most people make that as their first step when exploring a potential purchase. Is that interaction easy for you or does it leave you frustrated? Do you come away with a good opinion of the company? Does your online experience make you want to buy their products? Companies that produce positive answers to those questions aren’t selling buzzwords, they are selling essentials. CNCX is doing that profitably and have been for years.
So, we have a company that is supplying businesses with an essential product, one that they cannot really do without no matter what the economy is doing, and making money doing so. And yet, the one-year chart for the stock looks like this:
That price action has created a situation where, despite their being a non-traditional company in terms of their product, the stock represents good old-fashioned value. The forward and trailing P/Es are 9.3 and 14.2, respectively, both well below the market average, with a PEG ratio, where a value below 1.0 is taken to represent value, of 0.78.
This looks like a case where the baby has been thrown out with the bath water. Despite its tech-y orientation, Concentrix is meeting a basic need of almost every business, and basic needs are generally quite resistant to recessionary pressure. And yet, the stock is off over 40% from its high in February, bringing traditional metrics to a point that scream long-term value. Faced with a choice between that and an overpriced stock in the retail sector, I know which I would choose.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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