We recently compiled a list of the 7 Cheap New Stocks To Invest In Now. In this article, we are going to take a look at where WK Kellogg Co. (NYSE:KLG) stands against the other cheap new stocks.
Capital Markets Buzz Amid Fed Rate Cuts
In light of the recent Fed decision, there is growing optimism regarding increased capital markets activity. Analysts have expressed growing confidence in a soft landing for the economy despite ongoing market volatility. This perspective suggests that supportive monetary policies could create favorable conditions to enhance valuations and drive investment, making it an opportune time for firms to pursue IPOs and M&A. As borrowing costs decrease, investor interest in tech startups and growth-oriented companies is likely to rise. This trend is particularly relevant given the recent performance of the S&P 500, which has rebounded from earlier declines, indicating resilience in the market.
As we approach the end of the year, the combination of lower interest rates and positive economic data sets the stage for a potential surge in IPOs and increased market engagement. Investors may look to diversify their portfolios by exploring new opportunities in, let’s say, emerging tech firms, which could lead to heightened activity in capital markets as these companies capitalize on the favorable economic backdrop. As the current landscape presents an encouraging scenario for both established and young companies looking to enter the public market or expand through strategic partnerships, we covered Stephanie Link’s sentiments on this scenario in our article about the 10 Best Young Stocks To Buy Now. Link, Chief Investment Strategist and Portfolio Manager at Hightower, highlighted a contrasting perspective amidst market volatility and uncertainty. Here’s an excerpt from the article:
“…She believes that the Fed is skillfully guiding the economy towards a soft landing, even amidst the expected market fluctuations before the elections.
Just 3 weeks ago, the S&P 500 had dropped by 4%. Still, it rebounded by 4% the following week. It rose another 1% last week, reaching new highs, and expressed optimism about buying opportunities during any market weakness, citing better-than-expected economic growth driven by recent data, including improved retail sales and manufacturing figures, as well as a decline in weekly jobless claims to a 4-month low. This positive economic backdrop supports an estimated growth rate of 2.9%, which is expected to benefit corporate earnings.
…Link noted a broadening market trend over the past couple of months, indicating that while tech has taken the lead, other sectors such as financials, industrials, materials, and discretionary stocks are also showing strength. She advised investors to remain selective in their choices amidst ongoing volatility…”
On October 3, Tiffany McGhee, CEO and CIO at Pivotal Advisors highlighted the convergence of macro events that may spark market volatility, emphasizing the concept of “convergence” as her word of the day. She noted that this week is marked by a convergence of significant events that could lead to increased volatility in the short term. With macroeconomic factors at play, including a potential port strike and major job reports scheduled for release, Tiffany highlighted that these elements are creating what she described as a “perfect storm.”
Tiffany pointed out that the ongoing conflict in the Middle East and the recent vice presidential debate are critical factors influencing market reactions. She observed that bond prices experienced a sell-off earlier in the week but stabilized as investors sought safety amid rising geopolitical tensions. As the election approaches, she anticipates further short-term volatility due to these developments.
In terms of strategy, Tiffany encouraged investors to reassess their portfolios, particularly those with a heavy concentration in equities. With the S&P 500 up 20% year-to-date and sectors like technology and consumer discretionary having performed well, she suggested that now is an opportune time to take some profits off the table and consider reallocating those funds into different areas of the market.
Tiffany also discussed her investment pick, the mutual fund with ticker AISGS, which is currently outperforming small-cap companies. She expressed a preference for focusing on size and style rather than specific sectors at this moment. By investing in small and mid-cap stocks through active management, such as with the Aerial Fund (ARGFX), investors can capitalize on opportunities created by lower analyst coverage in these segments. This lack of information allows skilled managers to identify undervalued stocks and consistently outperform indices.
Tiffany’s insights underscore the importance of strategic asset allocation and proactive portfolio management during periods of heightened market volatility. By recognizing the convergence of macroeconomic events and adjusting investment strategies accordingly, investors can better navigate potential market fluctuations while positioning themselves for future opportunities.
Methodology
We used the Finviz stock screener to compile a list of 20 new stocks that went public recently in the past 2 years and have a forward P/E ratio under 20. We then selected the 7 cheap new stocks that were the most popular among elite hedge funds and that analysts were bullish on. The stocks are ranked in ascending order of the number of hedge funds that have stakes in them, as of Q2 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A stack of grocery bags filled with ready-to-eat cereals, frozen waffles, and savory snacks.
WK Kellogg Co. (NYSE:KLG)
Forward Price-to-Earnings Ratio: 9.24
Market Cap as of October 1: $1.47 billion
Number of Hedge Fund Holders: 25
WK Kellogg Co. (NYSE:KLG) is a food manufacturing company, split from Kellogg’s on October 2 in 2023, formed as part of Kellogg’s spin-off of its North American cereal business. It’s one of the world’s largest producers of breakfast cereals, best known for its iconic brands such as Corn Flakes, Frosted Flakes, Rice Krispies, Pop-Tarts, and Special K. It also produces snacks, frozen foods, and beverages among other food varieties.
In the second quarter of 2024, the company experienced a year-over-year decline of 2.7% in net sales, recording a revenue of $672 million. The company’s Core 6 segment accounts for ~70% of these sales.
Despite this drop, the EBITDA margin improved sequentially, reaching 11.6%. Excluding a one-time insurance benefit of $16 million received in Q2 2023, both gross margin and EBITDA margin improved by over 100 basis points year-over-year.
The US cereal category, as measured by Nielsen xAOC, declined 2% in the quarter and 1.1% year-to-date, with volume declining slightly. Consumers are becoming more price-conscious, favoring value-oriented channels, which have shown year-to-date dollar growth.
Most of the portfolio has performed better or in line with the category. 9 of 11 brands are gaining or holding share year-to-date, with Frosted Flakes and Raisin Bran delivering dollar sales growth. The overall performance lags the category, primarily due to challenges with Special K and Bear Naked. Despite these headwinds, the US share remains at 27.6% year-to-date.
Despite challenges, the strong execution and focus on operational efficiency have positioned WK Kellogg Co. (NYSE:KLG) for continued success, with positive expectations from future prospects, including back-to-school initiatives and supply chain improvements.
Merion Road Capital made the following comment about WK Kellogg Co (NYSE:KLG) in its Q3 2023 investor letter:
“Since the quarter ended I have built a small- to mid-sized position in WK Kellogg Co (NYSE:KLG). KLG is the North American business spun-out from the business formerly known as Kellogg. There is a ton of pessimism around this company. Two weeks before the spin the Wall Street Journal put out a scathing article on the cereal industry titled “It’s the Breakfast of Champions No More: Cereal Is in Long-Term Decline.” Unrelated, Ozempic and other GLP-1s have been a topic dejour and deemed to be a massive headwind to any unhealthy food product. Industry issues aside, KLG has recently performed worst amongst the big three (Post and General Mills being the other). In 2021 their production was stymied by a fire at their plant in Memphis and a strike by 1,400 people; production lagged and KLG generally lost share. Add in the fact that the spin accounted for only ~5% of the value of the parent company and it makes sense why most legacy shareholder receiving the stock would prefer to dump it into the market.
KLG owns highly recognizable and established brands like Frosted Flakes, Raisin Bran, Special K, Fruit Loops, and even Kashi for the health-conscious consumer. They have historically generated about $2.8bn in revenue but EBITDA margins were only in the mid- to high-single digits. Part of this can be explained by being a small part of a much larger company. Some brands were run separately from others, geographies were split, and the sales force was responsible for selling not just cereal but the whole arsenal of Kellogg product. By eliminating silos and having a dedicated sales force management hopes to drive margin improvement and regain lost share. More importantly, however, they plan to invest several hundred million into their outdated manufacturing facilities. Management is targeting a 5% margin improvement over the next couple years which would still leave them below Post, which operates in the 15%-20% range. If margins don’t move up much from here earnings are probably in the $0.75 range putting the stock at 13x. Assuming operating margins improve 3% off LTM figures (to account for any incremental depreciation expense) we would get to $1.50 in earnings or less than 7x. This all compares favorably to Post and General Mills multiples in the mid-teens. While there is a lot to dislike about KLG, the risk return seems attractive.”
Overall KLG ranks 7th on our list of the cheap new stocks to invest in. While we acknowledge the potential of KLG as an investment, our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than KLG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.