Suppose you're hunting for stock market bargains. For me, three companies stand out: Keysight Technologies (KEYS 1.89%), GXO Logistics (GXO 0.90%), and UPS (UPS 0.37%). All are down significantly in 2024, but are all set to recover. So let's delve into why these stocks are a smart choice for your investment.
Keysight Technologies' best days lie ahead
This company offers a comprehensive range of hardware, software, and services to cater to customers' research and development needs and, to a lesser extent, their manufacturing and operations. It boasts a diverse clientele spanning various industries, including communications, computing, and electronics. Notably, it counts industry giants like Cisco, Nvidia, Boeing, Taiwan Semiconductor, and Tesla among its blue chip customers.
Investing in Keysight Technologies is a double-edged sword. On the one hand, the long-term trend toward IT and electronics being a more significant part of a good's volume suggests a promising future for the company. However, it's important to note that economic slowdowns can lead to customers cutting back on developing new products, hurting the company's performance.
That's what's happened during the past year or so.
KEYS Revenue (TTM) data by YCharts
Still, there are signs that Keysight's end markets are bottoming in 2024. For example, on the second-quarter earnings call in May, management noted that it beat revenue and earnings expectations in the quarter and that "orders of $1.2 billion were in line with the prior quarter. We saw pockets of growth and stability across multiple end markets even as customer spending remained constrained."
As such, this may be a trough year for the company. If so, based on the current stock price, Keysight stock trades at 22.4 times estimated 2024 earnings. That's an excellent trough earnings valuation for a company operating in end markets, which management expects to grow by 4% to 6% over the long term. Management believes it will outgrow its end markets in generating 5% to 7% revenue growth. In combination with margin expansion, this should increase earnings at a double-digit annual percentage rate over the long term.
GXO Logistics
Just as Keysight suffered as relatively high interest curbed investment, contract logistics provider GXO Logistics saw its organic growth rate slow to just 2% in 2023 from 15.4% in 2022.
The change reflects a slowing economy and a natural correction from torrid growth rates in previous years.
It's no secret that the lockdowns created a boom in online spending, encouraging many companies to invest in their e-commerce capabilities, including e-commerce warehousing. However, with many future investments already pulled into the present and a slowing economy in place, the past 12 months have been challenging for the warehouse automation and logistics industry.
Still, this is likely a temporary slowdown, and GXO is well placed to take advantage of a recovery. Not only is e-commerce continuing to grow as a share of retail sales, but the increasing technological sophistication of warehousing (automation, robotic, analytical software) means it makes more sense for blue chip customers to outsource it to companies like GXO Logistics.
In addition, the new technologies are only increasing the value of GXO's solutions.
UPS looks set for recovery
Last year wasn't a great one for UPS. A protracted labor dispute drove customers to divert delivery traffic to other companies in fear of a strike at UPS. In addition, the ultimate agreement with the Teamsters Union sent UPS's costs higher at a time when delivery volumes and revenue went the other way. Furthermore, management overestimated the strength of delivery volumes for the year and they missed the company's initial full-year forecast.
As a result, the stock is down 21% since the start of 2023. Still, UPS is already on the road to recovery. It's winning back lost customers, and management expects delivery volumes to start growing again sometime in the second quarter. Moreover, the cost increase due to the new contract will drop out of comparisons in the second half of 2024, and UPS is eliminating 12,000 jobs this year, resulting in $1 billion in cost cuts.
Meanwhile, management continues to focus on expanding its higher-margin healthcare and deliveries for small and medium-sized businesses while investing in technology (automation and smart facilities) to increase productivity and profit margins.
Image source: Getty Images.
Stocks to buy?
All three companies have excellent long-term prospects but face some near-term risks. The electronics recovery (Keysight) is still tentative as consumer spending remains pressured by relatively high interest rates. The e-commerce warehousing market (GXO Logistics) is bouncing along the bottom right now, and the package delivery market currently has too much capacity (UPS).
It makes sense to invest a small amount in each of these exciting companies and monitor their recoveries in 2024 with a view to allocating more when they start reporting improvement.
