Don't Give Up on These Q3 Losers

Key Points

• Adobe Inc. gapped down in September, paving the way for a 25% third quarter decline.
• AT&T Inc. finished 27% down in Q3.
• Alcoa Corp. has experienced a 26% third-quarter drop.

The major U.S. stock indices got clobbered on September 30, closing out one of the worst months and quarters in recent history. 

Much of the finger-pointing has been directed toward the Fed. In an effort to cool stubbornly high inflation, Chairman Powell's aggressive rate hikes appear to be cooling the economy as well.

Corporate profit warnings from FedEx and Nike have confirmed that consumer demand has slowed, an ominous sign with the key holiday shopping period underway. Gloomy outlooks from companies like Carnival further suggest we may be in for a tough winter.

For the optimistic investor, there is a silver lining. The third quarter’s retreat to fresh 2022 lows made most stocks cheaper than they’ve been in a long time. Approximately 350 S&P 500 members finished the quarter lower. FedEx was the second-worst performer, upstaged only by media group Charter Communication’s 35.3% plunge. 

Within the list of top losing stocks in Q3 are a bunch of fundamentally sound companies that look like bargains.

Why Did Adobe Stock Fall?

Adobe Inc. (NASDAQ:ADBE) gapped down in heavy volume on September 15, paving the way for a 25% third quarter decline. The company behind Acrobat, Flash Player, Photoshop and other creative tools adds itself to a growing list of tech names that have returned to early pandemic levels.

What caused the September drop?

The market was completely caught off-guard by news that Adobe agreed to acquire design collaboration start-up Figma. Although the takeover makes strategic sense, investors felt that the $20 billion price tag was steep. 

The premium price may be forgotten because Adobe likely considers Figma to be a valuable strategic asset worth paying for. Management obviously found it paramount to get the fast-growing Figma under its wing to bolster its market leadership in the wake of emerging competition. It already boasts an industry-leading lineup of content creation tools but lacks a collaboration platform. Figma’s popular collaborative web and mobile apps will certainly fill the void.

As the work-from-home and hybrid workforce trends expected to persist, Adobe identified and addressed a weak spot, albeit at a hefty cost. But with the global digital transformation still in its early stages, Adobe just strengthened its position as the leading video and advertising software provider. The company has a solid track record of value-added acquisitions. Over time, the market may see that the Figma purchase was worth every penny. 

Is AT&T Stock Undervalued?

AT&T Inc. (NYSE:T) finished 27% down in Q3, perpetuating an ugly four-month skid. The old-school telecom service provider is showing its age, currently trading at its lowest level since 2003.

Is it now deep value or a deep value trap?

At around $16, AT&T may actually be worth a shot. Absent a compelling growth catalyst, the dividend is the main attraction. That may be enough to reel in income-focused investors. A low-risk P/E ratio doesn’t hurt, either.

Even with a reduced $1.11 forward dividend, AT&T now offers a whopping 7% yield. Corporate bond yields are more appealing, but at these levels AT&T equity may be the better deal. For a long-term portfolio, a position could serve as a bond substitute with the added bonus of bottom-feeding upside.

Of course, AT&T’s share price could continue to slide and wash away the income benefits. The company has shown signs of life, most notably in the wireless mobility business. Recent performances in the segment have been encouraging and management is right to make this its core focus. In the current market environment, AT&T just may be the ideal defensive income play.

Will Alcoa Stock Recover?

When Alcoa Corporation (NYSE:AA) reports Q3 earnings on October 19, the bar will be set low. The stock’s 26% third-quarter drop says it all.

The aluminum producer’s abrupt fall from grace (the stock almost hit $100 in March 2022) relates to a sharp reversal in aluminum prices that began in early March. Aluminum futures have been nearly halved since concerns of a recession-driven manufacturing slowdown and the strong dollar. The metal has shown signs of recovery in recent days because of talks of banning new supplies from Russia.

Where do aluminum and Alcoa go from here? As Chinese demand slowly comes back online and the potential for tighter supply conditions increases, the recent recovery could continue into Q4. Escalating recession fears stand to send aluminum prices to new lows.

Most importantly, Alcoa has a strong track record of surviving the ups and downs of the commodity cycle. Over the long haul, it will play a key role in electric vehicle manufacturing. It may be as good a time as any to mold Alcoa into a long-term value portfolio.