What to Buy After the Stock Market Selloff

There are 10 companies in the S&P 500 that are down at least 40% in 2018 through Thursday and are trading at less than 11 times free-cash flow estimates for next year, according to FactSet data.


Photo:

Richard Drew/Associated Press

The year is ending badly for stocks, which has investors averting their eyes. But there are deals to be had for those who can bear to look.

After the 15% decline since September, there are plenty of ways to look for stocks that have gotten too cheap. One is by looking for beaten-down names that will generate lots of free-cash flow, which is often a better measure of a company’s business than earnings.

There are 10 companies in the S&P 500 that are down at least 40% in 2018 through Thursday and are trading at less than 11 times free-cash flow estimates for next year, according to FactSet data. That is a significant discount to the market’s average valuation.

The diverse list includes fashion retailer L Brands, flooring company

Mohawk Industries
,

consumer health company

Perrigo
,

chip maker

Western Digital
,

food makers

Conagra Brands


CAG -3.90%

and Kraft Heinz, and biotechnology company

Celgene
.

These stocks are all down for good reasons beyond the market selloff and probably won’t rebound quickly. Celgene fell sharply after the Food and Drug Administration refused to review a new drug application. Perrigo has changed CEOs twice this year and recently disclosed a potentially crippling surprise tax bill.

Stocks on Sale

These stocks have sold off at least 40% and trade at a discount.

price/free cash flow ratio

SHARE-PRICE PERFORMANCE

-66.0% year to date

Mohawk Industries

Western Digital

Fortune Brands

Conagra Brands

Kraft Heinz

price/free cash flow ratio

SHARE-PRICE PERFORMANCE

-66.0% year to date

Mohawk Industries

Western Digital

Fortune Brands

Conagra Brands

Kraft Heinz

price/free cash flow ratio

SHARE-PRICE PERFORMANCE

-66.0% year to date

Mohawk Industries

Western Digital

Fortune Brands

Conagra Brands

Kraft Heinz

SHARE-PRICE

PERFORMANCE,

YEAR TO DATE

price/free

cash flow

ratio

Mohawk

Industries

Western

Digital

Fortune

Brands

Conagra

Brands

Kraft

Heinz

Conagra had a disappointing update on the integration of its Pinnacle Foods acquisition last week. Falling memory prices have weighed on Western Digital. And stocks like Mohawk aren’t likely to perform well if housing markets weaken meaningfully. Analysts have lately lowered earnings estimates for most companies in the basket.

The problems these companies face are real. Still, investors should remember that a pleasant back story forms the basis for stocks to sell at high prices. Bad news can be an investor’s friend when paired with a long time horizon.

Celgene, for instance, trades at six times forward earnings estimates, according to FactSet, in a business that isn’t particularly sensitive to the economy. That figure was about 12 times to start the year and as high as 25 times in the frothy health-care market of 2015. As a bonus, earnings estimates for next year have trended higher since June.

Any investor who can wait out the weak market stands to profit handsomely in the longer term.

After starting well, 2018 turned out to be a horrible year for markets. Will 2019 be any better? WSJ’s James Mackintosh and Riva Gold chart the outlook.

Write to Charley Grant at charles.grant@wsj.com