Bull markets make everyone feel like they have the Midas Touch as most everything goes up. However, as stocks another historic high at 4,000 the bull rally may grind to a halt for a while. Thus, it is incumbent upon us to dig a little deeper to find stocks likely to outperform. Such is the case with Berry Global (BERY).
Berry offers a rare combination of value and growth. Pretty impressive a company in the “not so exciting” industrial packaging group. However, they do offer more than 100,000 different packages and items for companies in various sectors including consumer goods, special materials, and medical products.
The stock is attractive due to its competitive advantage of being a low-cost producer of custom-made packages for thousands of customers in addition to its strong management team. A major catalyst is an improving outlook for the industrial sector which should translate into increased pricing power and earnings growth.
A stock with these characteristics could outperform in any market but read on to find out why it’s the ideal stock for this particular environment.
Turnaround plays are attractive because they bring the combination of earnings growth and multiple expansion which is the key to unlocking big gains in stock prices.
BERY is in the midst of such a turnaround. Its latest earnings report showed year-over-year earnings growth of 38% and revenue growth of 11%. Over the last few months, analysts have hiked earnings estimates for 2021 by 21% and 2022 by 15%. However, most investors haven’t yet caught on as evidenced by its low multiples.
The major factor in BERY’s impressive earnings and revenue growth is the strong rebound in the industrial sector. We are seeing new multi-year highs for the prices of many industrial commodities like iron ore, copper, and aluminum. Economic data, like the recent January ISM report, shows a strong expansion with even more constructive readings in forward-looking indicators like Inventories and New Orders.
The industrial economy is going to remain strong well into 2022. Due to the coronavirus, inventories are at low levels which suggests a typical inventory restocking cycle. On top of this, we have trillions in fiscal stimulus that is being pumped into the economy by countries all over the world, and pent-up demand being unleashed as the global economy gets over the coronavirus.
The market still hasn’t sniffed out BERY’s rapidly improving fortunes. This is clear from the stock’s PE of 12.5 which is significantly below the S&P 500’s average PE level. This type of multiple is appropriate for a boring, low-growth company like a railroad or a utility. Not a company like BERY seeing double-digit earnings and sales growth.
Currently, Wall Street analysts have an average price target of $70.6 on the stock which implies a 19.5% upside. Some analysts are even more bullish on the stock such as Jeffrey Zekauskas of JPMorgan who gives it a $77 target or Credit Suisse’s Lars Kjellberg with a $78 price target.
Another attractive part of BERY is its strong management team. It beat earnings expectations for six straight quarters. Yet, BERY’s recent turnaround is even more impressive.
The company hit a rough patch in 2018 as it took on debt to make acquisitions just as the industrial sector started to slow. This is the major reason for its low multiples which makes it such a good opportunity at the moment. While the stock price remains below its 2018 high, EPS is already 22% above these levels.
Of course, the weakness in the industrial sector over the past couple of years affected nearly every industrial packaging company. BERY as one of the largest and lowest-cost producers is well-positioned to gain more market share.
The POWR Ratings are also bullish on the Industrial-Packaging sector as it has an Industry Grade of B. This is consistent with recent economic data and forward-looking indicators like commodity prices and shipping rates indicating tight supply and strong demand.
It’s also not surprising that BERY has a Value grade of B. Value grades are determined by 31 different value factors – each with its own weight. BERY’s strong value grade is consistent with its forward PE of 9.9. This is less than half of the S&P 500’s forward PE of 25.3. The great thing about value in this market is that it provides a cushion during the inevitable pullbacks of a frothy market. Additionally, value stocks tend to outperform during periods of accelerating economic growth which is likely in the second half of 2021.
Putting It All Together
Part 1 of a turnaround is the company starts beating earnings expectations and increasing earnings. This is where we are at now. BERY’s stock has had some nice gains, but it’s been in-line with earnings growth.
Part 2 is when investors start to get excited about the earnings growth which leads to multiple expansion. This part can bring the most explosive gains. Given that BERY’s PE is well below the market average and its peers, this is another significant catalyst.
Overall, BERY is cheaper than most stocks, yet growing earnings and revenue at a faster rate than most stocks. In recent days, the stock has stalled at the $60 level, digesting recent gains. I believe this is a good entry point with targets as high as $78. And that’s why I have selected it as my Stock of the Week.
Discover More Stocks Like Berry Global Group
BERY is just one of 14 picks in my Reitmeister Total Return portfolio. That is where I put 40 years of investing experience to work for investors including:
- Market Outlook
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BERY shares . Year-to-date, BERY has gained 3.49%, versus a 4.93% rise in the benchmark S&P 500 index during the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks. More...
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