Clorox has 'found a bottom,' Morgan Stanley's Aaron Dunn says

Aaron Dunn of Morgan Stanley Investment Management highlights Clorox and Steel Dynamics as compelling investment opportunities. Clorox, despite a 24% YTD decline and revised profit outlook, is viewed as an inexpensive, defensive consumer staple with innovation and supply chain improvements, likely having found a bottom amidst the sector's lowest S&P 500 weighting since the tech bubble. Steel Dynamics is favored as a low-cost steel producer poised for demand reacceleration from infrastructure growth, supported by Section 232 tariffs and aggressive share buybacks, making it well-positioned for a construction recovery.

Analysis

Based on insights from Morgan Stanley Investment Management's Aaron Dunn, two stocks, Clorox (CLX) and Steel Dynamics (STLD), are presented as compelling value opportunities. Clorox is positioned as a contrarian play within the underperforming consumer staples sector, which has seen its S&P 500 weighting fall to its lowest level since the tech bubble. Despite a 24% year-to-date decline and a downward revision to its annual sales and profit forecast, the bullish thesis rests on its defensive characteristics, strong innovation, and a multi-year supply chain and inventory management overhaul initiated in fiscal 2022. The stock is viewed as relatively inexpensive and insulated from food deflation pressures affecting peers, suggesting limited downside with potential for outperformance. Conversely, Steel Dynamics is framed as a cyclical growth investment poised to benefit from a potential reacceleration in steel demand driven by infrastructure spending and a construction recovery, supported by Section 232 tariffs. The company's operational efficiency as a low-cost variable producer and its aggressive capital return strategy, highlighted by the repurchase of 25% of its outstanding shares over the last four years, are key components of its investment appeal.

Key Decisions for Investors

• Investors seeking defensive assets with turnaround potential should consider Clorox, as its significant stock price decline of over 24% this year and ongoing operational improvements may present a favorable entry point.
• For those with a positive outlook on U.S. industrial and infrastructure activity, Steel Dynamics offers exposure to a potential cyclical upswing, reinforced by its status as a low-cost producer and a strong record of returning capital to shareholders through buybacks.
• Monitor the consumer staples sector's weighting in the S&P 500 and leading construction indicators, as sustained weakness or strength in these areas, respectively, will be critical to validating the theses for Clorox and Steel Dynamics.