Stocks have continued to rebound from the coronavirus-driven sell-offs that rocked the market in March, and the S&P 500 index is now roughly flat on the year. The index has climbed about 5% in July so far, although not all of its components have benefited from the momentum.
FirstEnergy (NYSE: FE), Intel (NASDAQ: INTC), and Mohawk Industries (NYSE: MHK) have each sank by double digits despite the broader rally and are the S&P 500's biggest losers this month. Should investors bet on rebound potential with these beaten-down stocks or seek out companies that are already thriving and have more promising outlooks?
Why are these companies struggling?
Buying quality companies that are experiencing temporary setbacks can dramatically improve your long-term returns, but you also have to be mindful of dangers that come with this move. It's important to look at each company individually, instead of simply investing in stocks that have recently suffered big sell-offs.
Here's why FirstEnergy, Intel, and Mohawk sank in July, with a look at their current valuations.
FirstEnergy put out a press release on July 21 announcing that it was being investigated in connection with a potential corruption and racketeering scheme in Ohio. The Justice Department's affidavit alleges that Speaker of the Ohio House Larry Householder, other state officials, and lobbyists took bribes in exchange for promoting legislation that resulted in consumer energy rate increases and bailout funds for two struggling nuclear power plants operated by one of FirstEnergy's former subsidiaries.
FirstEnergy, the company's political action committee, and its former subsidiary have all been served subpoenas in connection with the investigation. No criminal charges have been filed against individuals at these organizations at this point, but investors are concerned that the situation could become increasingly complicated.
Even before news of the investigation hit, FirstEnergy was facing problems created by the coronavirus pandemic and recessionary economic environment. The energy company's share price is down roughly 42% year to date, and it trades at roughly 11.5 times this year's expected earnings and pays a forward dividend yielding 5.4%.
Despite delivering a second-quarter sales and earnings report on July 23 that topped the market's expectations, Intel paired the results with weak guidance and a concerning change to its product road map. The semiconductor giant announced that its first 7-nanometer (nm) chipsets would not be ready until 2022 at the earliest, at least six months later than previously anticipated. The company's 7nm central processing units (CPUs) were previously set for release in 2022 but will now debut in 2023, according to management.
The new round of delays, combined with uninspiring guidance for the rest of the year, suggests that Intel is heading for a rough stretch and could cede important ground to competitors. The upcoming 7nm CPUs are central to the company's competition with AMD in the data center space, and the project falling behind bodes well for its rival.
Intel's share price is down roughly 20% year to date, and the stock now trades at just 10 times this year's expected earnings and sports a dividend that yields 2.7%.
Mohawk Industries' valuation slid with news of renewed interest around allegations that the company had been falsely inflating its reported revenue since 2017. The flooring and carpeting company revealed in an 8-K filing published July 13 that it was being sued in civil court and investigated by the Securities and Exchange Commission and the U.S. Attorney's Office for the Northern District of Georgia.
The uncertain economic environment has also been challenging for Mohawk, with consumers and enterprises being less inclined to pursue home and business renovation projects. The stock is down around 37% year to date, and the company is now valued at just 0.7 times this year's expected sales and roughly 20 times expected earnings.
Bet on good companies over "cheap" stocks
FirstEnergy, Intel, and Mohawk operate in three very different industries, but each of their outlooks is presently defined by high levels of uncertainty. Big sell-offs in July have these companies looking cheap by some metrics, but investors have to view their respective valuations and stocks in the context of the challenges in front of the underlying businesses.
FirstEnergy and Mohawk are facing serious legal matters that could involve long-running proceedings and lead to substantial expenses and penalties. Meanwhile, one of Intel's potential growth catalysts is now even further away -- and the delay suggests the potential impact of its 7nm CPUs may be diminished when they finally arrive.
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