All we seem to hear about from the talking heads is how "narrow" this stock market rally has been. Undoubtedly, the tech leadership is undeniable. The boom in artificial intelligence and other moves made have investors increasingly optimistic over big tech's ability to offset some of the recession headwinds to weigh on earnings growth.
Indeed, it is never a good idea to bet against big tech companies as they tend to find ways to keep earnings and growth prospects alive. That said, there is growing concern that the run in "what's working" (think growth stocks) could end with some sort of pullback. Undoubtedly, valuation multiples have increased drastically in recent month. Although some of the rapid multiple expansion may be more than warranted, I am always a tad concerned when people start justifying higher multiples with shallow theses.
In this discussion, we will rotate back to a neglected value name I think could be in a spot to outpace the biggest winners of the first half. Though it is never easy to time when the beginning of a growth-to-value rotation occurs, I believe investors who stick by the fundamentals of value investing can steer clear of overvaluation in today's bull market.
Deep value and a nice moat
The good news is market breadth has subtly improved in recent months. And with that, investors may strongly wish to give beaten-down names like U-Haul Holding Co. (UHAL, Financial) a second look. Over the next 12 to 18 months, I see a few catalysts that could help propel the stock higher. Not only do I view shares as considerably undervalued, but these catalysts could help the stock retest its highs of around $76 per share.
The Reno, Nevada-based moving company offers truck rentals and pretty much anything one needs to move into a new home, whether it be down the street or across the country.
During the early days of the pandemic, U-Haul benefited from the mass move to the suburbs, sparked in part by the rise of remote work. A lot of people rented a U-Haul and bought packing supplies to get the move done. Following the surge to the suburbs, the number of moves has more or less normalized. Indeed, the pandemic surge in moving was not meant to be sustainable.
The stock is now down around 30% from its 2021 peak. As some companies are asking their employees to return to the office, people may begin moving back from the suburbs to urban areas. Indeed, U-Haul is an under-the-radar name that is not really exciting. The market cap of $9.6 billion makes it a mid-cap gem.
Too cheap to ignore as affordability could spark an uptick in moves
At the time of writing, the stock traded for just 9.8 times trailing price-earnings or about 1.7 times price-sales. That is absurdly low and may discount future growth as people start moving again.
Further, surging rents may also cause many renters to explore cheaper options. Many cash-strapped mortgage holders may also be inclined to downsize as their monthly mortgage payments become that much heavier with every interest rate hike.
All things considered, U-Haul has low expectations and considerable upside as it looks to offer services for what could be another upswing in the rate of moves.
Now, U-Haul may not have AI by its side. That said, it does have a rather wide economic moat. Its fleet of trucks and the brand which is synonymous with moving makes it a huge beneficiary of a younger generation that may be inclined to move homes just as much as they move employers.
When will the stock finally take a U-turn?
As economic growth heads south with every rate hike, a recession will surely weigh on one's ability to rent a truck and hire a few movers. Moving is not only stressful, but it can be quite pricey for cash-strapped consumers that have felt the painful hit of elevated levels of inflation. That said, even if a recession rears its ugly head at some point over the coming months, I view the costs of moving (especially costs paid to U-Haul) as being dwarfed by the potential savings from a move to a cheaper, smaller home.
Indeed, it is not hard to imagine many folks biting off more than they can chew with mortgages back when rates were at more manageable levels.
Final thoughts for value hunters
You do not need to look very far in this market for deep value. U-Haul is one of the names I believe has sunk to levels below my estimate of its intrinsic value. Sure, the early pandemic moving boom is over. But the stock already reflects such, and may be discounting the potential for another mini-boom as renters and mortgage holders look to explore options in today's inflationary, high-rate environment.
