FICS Editors' note

On May 5, 2021, APA Corp. reported first-quarter adjusted income of $346 million, or $0.91 per share, and revenue of $2.1 billion.

7 value stocks to put your faith in if rough times are ahead

Pivot into value as growth stocks slow.

  • By Alex Sirois,
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Now is a great time to consider placing capital into value stocks. There’s an argument that that’s always true. However, we’re nearing the light at the end of the tunnel in the pandemic. Hopefully, that means there will be less Reddit investing, and more value investing.

If that turns out to be true, investors will be seeking stocks like the seven listed below, which trade lower than their intrinsic value. The beauty of these stocks is that they have not only a reasonable investment narrative but also fundamental financial strengths.

In the markets, everything is cyclical. That means there will be a time when investment capital returns to more fundamental, quantitative-based bets en masse. A lot of the risky betting occurring now is a product of a sense of a lack of control. As things normalize in the coming year, a sense of relief should lead to more rational investing.

That will be a strong catalyst for these value plays.

General Motors

I’ll start this out by saying that GM stock (GM) is a value play that is based on growth stock catalysts. The company carries a price-to-earnings (P/E) ratio of 13.06 as I write this. That’s clearly in value stock territory. That same P/E ratio puts GM in the 80th percentile of automotive peers. That means only 20% of automotive stocks are going to give you, the investor, more earnings at a lower price.

However, at the same time, an investment in GM is a vote of confidence in the company’s strategic pivot toward electric vehicles (EVs). That’s why I think so many investors are interested in the company now, and why I think it is a worthwhile value stock to put your faith in.

GM has introduced its Ultium Platform, its modular unit that will underpin the company’s EV aspirations. The platform is estimated to provide roughly 400 miles of range and will provide a base around which GM can build its flagship brand EV models. GM’s Hummer EV is garnering lots of attention as one example.

But it’s also important to understand that there are currently a few factors pushing and pulling on GM stock share prices. Although there is a lot of excitement around GM and its EV pivot, there is a strong headwind. The semiconductor shortage continues to worry markets. On April 29, Ford (F) released better-than-anticipated earnings, and yet stock prices declined by a few percentage points.

The upside here though is that the semiconductor shortage didn’t cause more damage than anticipated. In my mind, that means GM investors shouldn’t worry excessively. GM stock remains a smart value pick.

Walmart

To a degree, Walmart (WMT) remains a company that people love to hate. The company is associated with lots of less-than-desirable traits. But I would caution any potential investors to ignore that and simply focus on the strength of WMT stock and the company at large. Simply put, there’s a lot to like.

Consumers probably associate the retail sector most closely with Amazon (AMZN) these days. Personally, it’s more top-of-mind for me. I’d also venture to guess that’s true of many readers. The point I want to make here, though, is that Walmart is the biggest retailer. This National Retail Federation report drives home the revenue gap between the two mega retailers.

So, it likely remains true that Walmart’s sheer size makes it a worthwhile value stock to consider. I mentioned Amazon not only because the two companies are the preeminent retailers but also to note that Walmart’s ecommerce strategy is working. Back in February, at Walmart’s fiscal year end, online sales had grown by 79% year-over-year. Sure, that is in part due to demand factors from the pandemic. But the company is improving its ecommerce presence regardless.

The stock is simply a smart and safe play in uncertain times.

Berkshire Hathaway

What better place to consider a value stock investment than in Berkshire Hathaway (BRK/B). Warren Buffett and Charlie Munger are two of the most well-known names associated with the fundamentals-heavy style of investing. Of course, BRK-B stock represents the company run by the two.

Berkshire Hathaway’s business touches on many important sectors of the economy at large. It comprises insurance, utilities, freight and railroad, finance, retail, and manufacturing as well. The Berkshire Hathaway team carefully vets their holdings based on value principles Buffett instilled in the firm after sharpening them under the tutelage of Benjamin Graham. Graham’s seminal book, The Intelligent Investor, remains a must-read for true value seekers.

More to the point, BRK-B stock is a smart bet for value seekers. The stock is up 52% over the last year, partially due to the dip following the pandemic trough. However, BRK-B has risen 21% above pre-pandemic prices. There’s little to suggest Buffett’s time-tested strategy is slowing down anytime soon.

APA Corp.

APA Corp. (APA) is an energy company in the exploration area for oil and natural gas. APA stock carries a forward P/E ratio in the 75th percentile of peers. This truth is the fundamental one underpinning the argument for it being a worthwhile value stock investment.

The company will release earnings on May 5, which will help investors learn more about the positives analysts expect from the company. APA’s strategy has been to direct a higher percentage of developmental capital toward international projects with higher returns and a lower cost structure. Its biggest project related thereto is in Suriname. The company has been working to develop the exploratory program and prove reserves.

The results look promising, and as a result, APA earnings predictions increased from 24 cents on April 1, to 68 cents by April 26.

The company’s stock by no means provides blue-chip stability. However, the tailwinds are quite strong, and oil stocks aren’t without catalysts of their own.

IBM

IBM (IBM) is, simply put, an aging tech stock. While that may sound like an insult, it’s actually a reason for the company’s valuation relative to its peers. IBM stock’s forward P/E ratio is better than more than 9 out of 10 of its competitors, simply because it doesn’t have the cache that other tech companies do. It isn’t trendy or sexy, essentially.

That’s a positive from a value investor’s perspective. There’s little chance of IBM becoming overbought anytime soon and every chance that it can rise again.

IBM posted reasonably strong earnings in Q1. Overall cloud revenues hit $6.5 billion, up 21% quarter-over-quarter. Cloud revenues hit $26.3 billion over the last 12 months, up 19%.

Red Hat revenues rose by 17%. All of these things point to an improving cloud strategy within the company. IBM is pivoting and divesting slower growing businesses while directing its attention to sector-specific clouds like that for fintech.

Cleveland-Cliffs

Cleveland-Cliffs (CLF) is a steel company that is value-priced and low-cost. The company’s value price is evidenced by its forward P/E ratio better than 90% of the steel industry. And CLF stock can still be had for under $20 per share.

Cleveland-Cliffs is a lesser-known name in the steel industry, but the stock’s performance has outpaced its competition over the last few years. On a share price basis, Cleveland-Cliffs has outpaced the growth of competitors like ArcelorMittal (MT), Nucor (NUE) and Steel Dynamics (STLD) over each of the last five-year, three-year and one-year periods.

President Joe Biden’s infrastructure and jobs plan heavily favors steel companies like Cleveland-Cliffs as they’ll provide the raw materials with which the work will be done.

In the first three months of 2020, Cleveland-Cliffs realized revenues of $359 million, leading to a net loss of $52 million. In the same period in 2021, Cleveland-Cliffs recorded $4.049 billion in revenue and a net income of $41 million. Earnings per share (EPS) moved from the negative territory of -18 cents to 7 cents in the period. All of this indicates investors might want to pay attention now rather than later.

ConocoPhillips

Rounding out this list of value stocks in COP (COP). It’s no secret that energy stocks have had a tough run over the past year. Price wars, a gutting of demand due to the pandemic and an ongoing push for greener energy sources at large. All of these factors conspired to punish prices industry wide.

However, these days there is hope that oil demand will increase in lock step with an economic opening. That reopening is largely correlated to Covid-19 vaccination rates. The U.S. is now 32% fully vaccinated, and 44.4% of the population has received at least one dose according to the Centers for Disease Control and Prevention (CDC). All of this ties back into the reasoning to consider investing in ConocoPhillips right now.

I mentioned that analyst earnings predictions had risen over the past month for APA Corp., another energy company. The same is true of ConocoPhillips. Roughly a month ago, EPS estimates stood at 46 cents. Since then they’ve risen to 53 cents. This is part of the larger reason that analysts nearly rate COP stock as a unanimous buy right now.

On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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