As the year comes to a close, investors may be wondering what’s in store for 2021. From the end of March into the fall, tech stocks dominated the news and the market. Then came news of very positive results from multiple vaccine trials. This led to a rotation into cyclical stocks boosting financial and energy shares. Small stocks that underperformed over the spring and summer also rebounded.
With the new stimulus bill signed by President Trump, the market is trading at all-time highs. This, combined with optimism over the vaccine rollout, leads me to believe that the market appears to be heading into a new market cycle. In times like these, I like to consider stocks that are not only exhibiting momentum but are deemed to be undervalued by metrics such as a forward Price to Earnings (P/E) ratio.
I ran a screen to find undervalued momentum stocks with a “Buy” rating or higher in our proprietary POWR Ratings system. I then selected the top three stocks, which I believe have the most potential heading into next year based on their business models and demand in the market. That is why I am highlighting D.R. Horton, Inc. (DHI), Group 1 Automotive, Inc. (GPI), and Westrock Company (WRK).
D.R. Horton, Inc. (DHI)
DHI is a leading homebuilder in the United States with operations in 90 markets across 29 states. The company mainly builds single-family detached homes and offers homes to entry-level, move-up, luxury buyers, and active adults. DHI has been benefiting from a booming housing market and the Fed’s near-zero interest rate policy.
The company is also the most diversified housebuilder in the country, so investors don’t need to be concerned with geographic housing risks. I believe that the strong housing market will continue, and DHI should benefit from its focus on affordable, entry-level homes. This is due to changing consumer preferences as millennials are leaving cities behind for homes in the suburbs.
Analysts have become more bullish on the stock as estimates have been rising for the full year 2020. Out of 22 analysts who cover the stock, 17 recommend it as a “Buy” or “Strong Buy” with an average price target of $89.05. This is 26.5% higher than its current price, which indicates its potential upside. The stock is also considered cheap, with a forward P/E of only 8.
The stock is rated a “Buy” in our POWR Ratings system. It holds a grade of “B” for Trade Grade and Buy & Hold Grade, two of the four components that make up the POWR Ratings. It is also the #7 ranked stock in the Homebuilders industry.
Group 1 Automotive, Inc. (GPI)
GPI owns and operates over 185 automotive dealerships, 242 franchises, and 49 collision service centers in the United States, United Kingdom, and Brazil offering 31 brands of automobiles. If its third-quarter earnings were any indication, which saw earnings triple year over year, the company’s future looks strong.
GPI’s diverse product portfolio and multiple streams of income not only reduce its risk profile but provide a boost to sales as well. The company generates revenue from used and new vehicle sales, finance, insurance, and automotive repair and maintenance. Its Service and Parts segment is the highest contributor to the company’s total gross profit.
Its acquisitions of dealerships and franchises should continue to drive future revenue. GPI has also undertaken various initiatives across its used vehicle and service business to increase same-store growth. For instance, omnichannel efforts to boost sales have served the firm well. In addition, the AcceleRide platform, its online retailing initiative, should increase growth long-term.
Like DHI, GPI is also considered cheap with a forward P/E of 7, and a potential upside of 33.2%, and that’s after a day in which the stock was up 5.9%. The stock is rated a “Buy” in our POWR Ratings system. It holds a grade of “B” in Trade Grade and Buy & Hold Grade. It is also the #7 ranked stock in the Auto Dealers & Rentals industry.
Westrock Company (WRK)
WRK manufactures corrugated packaging and consumer packaging such as folding cartons and paperboard. The company is one of the largest integrated producers of containerboard and high-graphics preprinted linerboard in North America. WRK is also one of the largest paper recyclers in North America.
The company’s consumer segment has been gaining from significant demand in food, food service, and beverage packaging. Its corrugated packaging segment is gaining from increased box shipment and a rise in demand from distribution from industrial and agricultural customers as the economy recovers. It is also poised to gain from recent growth in its e-commerce activities.
Earnings are expected to increase by 8.5% next year and at an average of 16.8% over the next five years. WRK has a stable history of growth through acquisitions, and the company has been consistently profitable, with strong free cash flow. While not as low as DHI or GPI, WRK still sports a low forward P/E of 12.3.
The stock is rated a “Strong Buy” in our POWR Ratings system. It holds a grade of “A” in Trade Grade and Buy & Hold Grade, and a “B” for Peer Grade and Industry Rank. The stock is also ranked #4 in the Industrial – Packaging industry.
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DHI shares were unchanged in after-hours trading Monday. Year-to-date, DHI has gained 35.07%, versus a 17.79% rise in the benchmark S&P 500 index during the same period.
About the Author: David Cohne
David Cohne has 20 years of experience as an investment analyst and writer. He is the Chief Value Strategist for StockNews.com and the editor of POWR Value newsletter. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers. More…
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