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Wall Street is a fickle place that far too often gets caught up in short-term stories. That appears to be the case these days with Clorox (NYSE: CLX) and Stanley Black & Decker (NYSE: SWK). The two iconic companies face material headwinds. However, Wall Street treats them as if their businesses fundamentally changed for the worse, which just doesn’t seem to be the case. That makes now a potentially good time to add these two stocks to a long-term portfolio.
1. Clorox: A complicated story
Consumer staples manufacturer Clorox was a huge beneficiary when consumers upped their cleaning efforts early in the coronavirus pandemic. That led the company to boost production by contracting outside manufacturing companies. Demand eventually cooled, and the company was left with high-priced manufacturing contracts just as it was selling fewer products. This temporarily elevated costs and the market reacted by selling the stock. Clorox stock is off around 41% from its mid-2020 peak.
Image source: Getty Images.
Now Clorox is also dealing with the impact of inflation across the rest of its business, which put further pressure on margins. And the top line is weak because of the drop-off in sales of cleaning products as it continues to work through tough year-over-year comparisons. So results look pretty ugly, even though management is doing the right things to get back on track. For example, it exited the high-cost manufacturing contracts it used to temporarily boost production. It is working on cutting costs throughout the business and pushing through price hikes. This is a process, not a light switch that will work its magic overnight.
The thing is, Clorox is no upstart. It traces its history back to 1913. It has increased its dividend annually for 45 consecutive years, making it a Dividend Aristocrat. It has been through difficult periods before, survived, and continued to reward investors well throughout the process. Yes, times are tough today, but given the history here, long-term dividend investors should strongly consider giving the company the benefit of the doubt. It seems highly likely it will muddle through this period just fine, a stance bolstered by the logical steps it is taking.
2. Stanley Black & Decker: Quick to fall
Industrial icon Stanley Black & Decker, best known as a tool manufacturer, is seeing sales sag in the face of an economic slowdown. That’s not exactly shocking, given that industrial stocks are inherently cyclical. However, the company has material exposure to consumers, a group that tends to pull back more quickly than business customers. Because of this, the company’s business is said to have material short-cycle exposure. On top of that, inflation is pushing up costs. All in, results are dismal today, and the stock lost around two-thirds of its value since early 2021.
There’s no easy fix. Stanley Black & Decker has to cut costs and raise prices, a process that will take some time. The company is already working on a three-year $2 billion cost reduction effort. Long lead times in the production process, meanwhile, left the company slowing its manufacturing pace to both reduce inventory and work off higher-cost inventory. These moves will increase costs in the short term but should help reduce costs over the long term. Basically, management seems to be making good decisions, but ones that require some near-term pain to complete.
Meanwhile, Stanley Black & Decker was started in 1843. It increased its dividend annually for 55 consecutive years, making it a Dividend King. It clearly survived hard times before. While there are some concerns about the strength of the company’s balance sheet, it is using non-core asset sales to reduce leverage. In other words, the company knows about the issue and is working on it. All in, like Clorox, long-term investors should probably give the company the benefit of the doubt.
The best piece of the story
When Wall Street gets so deeply negative about a company with a great dividend history, a huge stock drop often opens up the chance to buy the stock with a fat dividend yield. That’s the case today for both Clorox and Stanley Black & Decker, which yield 3.3% and 4.2%, respectively. Both are at the high end of their historical yield ranges. If you can stomach making a contrarian call, now is the time to dig into these two deeply out-of-favor stocks.
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Reuben Gregg Brewer has positions in Clorox and Stanley Black & Decker. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Image and article originally from www.nasdaq.com. Read the original article here.