So much for the October Effect.
Stocks have a reputation for declining in October, and no wonder: Some of the market's darkest days, including 1929's Black Tuesday/Thursday and 1987's Black Monday--occurred during that month.
But this October, the market did just fine. In fact, the S&P 500 hit record highs and, despite a pullback at month's end, finished October in the black.
A lot of stocks didn't fare as well, though. In fact, today we're taking a look at several stocks that endured double-digit losses in October. What should investors do about these names: Pull the trigger, stay the course, or maybe just back up the truck?
Overused investing clichés aside, selling is an individual decision that involves weighing tax considerations, portfolio balance ramifications, and so on. However, investors can use our Morningstar Ratings for stocks–-which are based on our fair value estimates, adjusted for uncertainty--as a guide to making the right decision for them. Our fair value estimates keep you focused on fundamentals, not where the herd is headed. As my colleague and behavioral economist Sarah Newcomb says, our fair value estimate represents "what one share of stock should sell for if no emotions or headlines or hype from talking heads were involved."
Stocks touting 4- or 5-star ratings are undervalued; 3 stars suggest shares are fairly valued; 2- and 1-star stocks are overvalued.
Beyond Meat (BYND)
Morningstar Rating (as of Nov. 5): 2 stars
We brought the provider of plant-based "meats" under coverage last week with a Morningstar Economic Moat Rating of none, positive moat trend, high uncertainty, and a US$62 fair value estimate.
Analyst Rebecca Scheuneman notes that the company is certainly poised for robust growth. We expect the global plant-based meat market to expand from US$5 billion in 2018 to US$48 billion by 2029. Plant-based meats have clear environmental benefits, and Beyond's products fare well in taste tests with meat eaters.
"We think the products offer consumers a convenient way to live out their sustainability values," she remarks.
And although Beyond is a pioneer in this market, competition is heating up in the next year, notes Scheuneman, as Nestle, Kellogg, Conagra, Tyson, Hormel and others introduce new meatlike offerings. Because we're unsure yet about Beyond's brand strength in the face of competition, we've assigned it a no-moat rating, she says.
The stock endured a significant sell-off in October, losing more than 40% as the firm's lock-up expired and 80% of the company's shares could be sold for the first time since the May 2019 IPO. Yet we think shares are significantly overvalued, trading 29% above our fair value estimate as of this writing.
Prognosis: With its high uncertainty rating and inflated price, this is one for the sell pile.
Baxter International (BAX)
Morningstar Rating (as of Nov. 5): 2 stars
The narrow-moat medical products maker reported decent third-quarter results last month. But the stock slid more than 10% as the firm announced an internal investigation into its reporting of foreign-currency-related items, says senior analyst Julie Utterback. We think the result of the inquiry will be manageable, she explains, given the limited number of transactions being investigated. We didn't change our US$69 fair value estimate on the news.
Baxter's new management team (in place since 2015) has focused on increasing efficiencies and innovating in medical products, which has led to improved profitability and cash flow generation ever since. The firm's narrow moat stems from its dialysis and injectable therapies, says Utterback--and we think that moat is stable.
Prognosis: Shares are currently trading about 13% above our fair value estimate, meaning they're slightly overvalued. Given that this is a medium uncertainty stock (suggesting that we're pretty confident about our fair value estimate) it could be a sell or a hold at these prices--but definitely not a buy.
Twitter (TWTR)
Morningstar Rating (as of Nov. 5): 3 stars
The social media maven reported decent user growth in the third quarter, but unexpected technology issues drove away some advertisers--and investors, who dropped the stock like a hot potato. The stock finished October down more than 25%. Senior analyst Ali Mogharabi thinks that while the bugs may be able to be fixed quickly, restoring confidence among advertisers could take more time.
"In our view, this is another example of various difficulties the firm faces as it attempts to develop a two-sided network effect moat source and compete more effectively with online advertising and social network behemoth Facebook," he notes.
Prognosis: The stock is trading a couple of dollars below our fair value estimate as of this writing. Given the very high uncertainty rating on this stock, its no-moat status, and its negative moat trend, we wouldn't back up the truck on this name after its tough October. We'd hold, at best.
Owens-Illinois (OI)
Morningstar Rating (as of Nov. 5): 5 stars
The stock of the world's largest maker of glass bottles tumbled more than 12% in October as the company faced volume headwinds during the third quarter that nicked profits--again. The Americas segment was the hardest hit, reports analyst Charles Gross.
"Not only is beer consumption declining in the U.S., but beer volumes are also shifting toward aluminum cans," explains Gross. "Even though we don't think beer consumption or glass bottles are in secular decline, this medium-term headwind is forcing capacity reductions to manage cost. As capacity better matches demand, we think operating leverage will widen segment margins."
Given these persistent volume struggles, we've raised our fair value uncertainty to very high from high and shaved a couple of dollars off our fair value estimate in October. We left our narrow moat rating unchanged.
Prognosis: Though the stock carries very high uncertainty, it's significantly undervalued, trading 53% below our fair value estimate. For those long-term investors willing to endure some bumps along the way, it's a buy at today's price.
Hasbro (HAS)
Morningstar Rating (as of Nov. 5): 3 stars
The toymaker's stock slipped more than 16% last month, after it announced that it struggled to generate positive top-line growth during the third quarter.
"While total results were less sanguine than we anticipated (forecasting high-single-digit sales growth), we don't believe the final quarter is likely to follow suit," argues senior analyst Jaime Katz. "In fact, we expect the holiday season to remain promising for Hasbro, thanks to partner-brand demand stoked by the launches of Frozen 2 and Star Wars: The Rise of Skywalker."
Indeed, Hasbro has maintained a leadership position in the industry and has earned a narrow moat, thanks in part to its differentiated niche in the entertainment industry, adds Katz. Granted, Hasbro will need to continuously improve its business and innovate to remain a contender, and that may lead to higher product development costs. That said, we don't expect cash flow to suffer, Katz concludes.
Prognosis: The stock carries medium uncertainty and is fairly valued by our measures today. Plus, it boasts an attractive 2.78% forward dividend yield that we think is secure. It's a hold.
