It’s a rocky market out there, and there hasn’t been a clear winning strategy for investors in 2022—other than buying energy stocks.
Value stocks beat growth in the first half of the year, then growth shares roared ahead in the market bounce since mid-June, before stumbling harder in the post-Jackson Hole dip. Momentum has turned on a dime several times this year.
And there’s no shortage of uncertainty and differing opinions about what the rest of the year has in store. So rather than betting on one strategy or factor to rule them all, why not look for stocks that exhibit characteristics of all three common approaches?
Barron’s screened the Russell 1000 index (.RUI) for stocks often sought out by growth, value, and momentum investors. They’re cheaper than average, have a record of growing earnings that analysts forecast will continue, and they have beaten the market this year and more recently.
The screen started with stocks in the Russell 1000 index that are up so far this year and over the past month. The index itself is down 18% in 2022 and off 5% since early August. That yielded 137 names.
Next, the companies must be trading for less than the Russell 1000’s average price to earnings over the coming year of 17.0 times and price to forward cash flow of 11.2 times. That means they’re cheaper than the average stock in the index on two important metrics, despite their recent gains. That cut the list to 60 stocks.
Finally, the companies must have grown their earnings per share over the past five years and must be expected to continue growing over the next three—as far as most analyst estimates tend to go. (Barron’s made some adjustments to calculations involving negative numbers.) That final pair of past-and-future growth criteria reduced the screen to just 13 stocks, with numerous industries and sectors represented.
As with any screen, it’s just a starting point for further analysis. Here’s the list:
Perhaps unsurprisingly, several oil and gas energy companies make the list: Marathon Petroleum (MPC), Valero Energy (VLO), Oneok (OKE), and Coterra Energy (CTRA). The sector has led the market this year, as the price of the underlying commodities have soared. Sales and earnings have climbed as well, and many stocks remain cheap. And the transition to renewable energy won’t happen overnight—many analysts are forecasting continued high oil and gas prices in the coming years. Many companies are choosing to direct cash flow toward dividends and stock buybacks, helping to keep earnings per share growing.
Grocer Kroger (KR) has seen its sales continue to rise this year as inflation has lifted selling prices of its products—although profit margins have come under pressure as costs have climbed even faster. Sky-high inflation won’t be an issue forever, however, and analysts expect the nation’s third-largest supermarket chain to post earnings per share growth over the coming years. We’ll hear more from Kroger on Friday morning, when the company reports its fiscal second quarter results.
M&T Bank (MTB) is fresh off its acquisition of People’s United Bank, which management and analysts believe should deliver cost savings and faster growth in the years to come. AutoNation (AN) operates a chain of used-car dealerships, primarily in the Sunbelt. A promising strategy under a new CEO and loads of pent-up demand from consumers should keep earnings growing, while a still-cheap valuation could make for an attractive entry point.
Unum Group (UNM) and Principal Financial Group (PFG) also pass the screen. Both are in the insurance business, with Principal also active in retirement planning and benefits. Companies in those industries tend to trade for cheap valuations, and both actually trade at premiums to peers despite their discounts to the broader market. Investors who missed their recent rallies may be too late. Same goes for drug distributor AmerisourceBergen (ABC).
Cigna (CI) is a major health insurer whose shares are up 26% this year. Analysts are bullish on its growth in Medicare Advantage plans and profit margin expansion in the coming years.
Finally, Graphic Packaging Holding (GPK) and Silgan Holdings (SLGN) also made the list. Both are in the packaging business—Graphic in paper, Silgan in metal and plastic. CPG companies’ demand for more sustainable packaging and a relatively concentrated industry should be tailwinds to long-term growth, despite near-term concerns about a postpandemic hangover (with people eating out more instead of going to the grocery store) weighing on present valuations.
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