4 Risky Stocks to Sell and 4 Picks to Buy Instead I October 14, 2024

Summary

The video discusses insights on the consumer defensive and utility sectors, highlighting investment opportunities and overvaluations. Key stocks analyzed include Dollar General and Constellation Brands, with the former positioned as a buy despite challenges from inflation and the latter trading at a significant discount to its fair value. The utility sector features Vistra, identified as overvalued, while Evergy and WEC Energy are noted for their potential amid strong demand growth from data centers. The overall analysis emphasizes careful stock selection based on valuations and market trends, guiding investors toward potentially rewarding opportunities.

Takeaways

• 😀 High valuations for Walmart and Costco raise concerns; Walmart trades at 33 times projected earnings, while Costco trades at 50 times.
• 😀 Despite short-term success, both Walmart and Costco may not justify their high valuations in the long run.
• 😀 Dollar General is rated as a strong buy, trading at a 37% discount to its fair value with a dividend yield of 2.9%.
• 😀 Dollar General primarily serves lower-income consumers, who have been affected by inflation, leading to a shift in spending towards necessities.
• 😀 As inflation stabilizes, spending power among lower-income groups is expected to improve, potentially normalizing consumption patterns.
• 🍺 Constellation Brands is another recommended buy, trading at a 177% discount with a dividend yield of 1.7%, showcasing strong beer performance.
• 🔌 Vistra Energy is deemed overvalued, trading at a 170% premium to fair value, with concerns about overestimating demand driven by artificial intelligence.
• 🏢 Public Service Enterprise Group is also overvalued but not as severely as Vistra, with a 30% premium and a low dividend yield of 2.7%.
• ⚡ Evergy is highlighted as the last four-star rated utility stock, trading at a 9% discount with a dividend yield of 4.3%.
• 🌐 WEC Energy is expected to benefit from increased electricity demand from data centers, but investors may have missed the best entry point.

Q & A

What is the primary concern regarding Walmart and Costco's stock valuations?

The primary concern is that both stocks are considered overvalued, with Walmart trading at 33 times projected earnings for 2024 and Costco at 50 times this year's projected earnings. Analysts believe these valuations are unjustifiable in the long run despite strong short-term fundamentals.

Why is Dollar General considered a better investment compared to Costco and Walmart?

Dollar General is rated as a five-star stock with a 37% discount to its fair value and offers a 2.9% dividend yield. Its customer base primarily consists of lower-income households, which may perform better as inflation stabilizes and wage growth improves, allowing spending patterns to normalize.

What challenges is Dollar General currently facing?

Dollar General's results have been negatively impacted by reduced spending among lower-income consumers, and management has lowered guidance for the rest of the year. Margins have also been squeezed due to a shift in consumer spending from discretionary items to necessities.

How does Constellation Brands' stock perform in comparison to its fair value?

Constellation Brands is rated as a four-star stock, trading at a 177% discount to its fair value. The company has seen solid beer performance with 5% volume growth, though its spirits division underperformed.

What are the main issues with Vistra and Public Service Enterprise Group (PSEG)?

Vistra is significantly overvalued, trading at a 170% premium to its fair value and lacking an economic moat. PSEG, while less overvalued at a 30% premium, has a lower dividend yield (2.7%) compared to the sector average.

What makes Evergy a notable stock in the utility sector?

Evergy is considered the last of the four-star rated stocks in the regulated utility sector, with a 9% discount to fair value and a 4.3% dividend yield. It has potential growth catalysts that could enhance its outlook.

What growth factors are influencing WEC Energy's stock?

WEC Energy is expected to benefit from strong demand growth from data centers, which require significantly more electricity compared to traditional computing. The company combines effective management with growth opportunities in this area.

How has inflation affected consumer spending patterns in lower-income households?

Lower-income households have been particularly impacted by inflation, leading to a shift in spending from discretionary items to necessities. This has resulted in squeezed margins for retailers like Dollar General.

What is Morningstar's general outlook on the utility sector?

Morningstar views the utility sector as generally overvalued, with no outstanding buying opportunities currently available. While some stocks are attractively priced, many are considered too high relative to their fair value.

Why might investors consider Dollar General and Constellation Brands for their portfolios?

Investors might consider Dollar General for its strong positioning in the lower-income market and potential recovery as wage growth improves. Constellation Brands offers a favorable valuation and solid performance in its core beer business, making it attractive despite challenges in its spirits division.