Last year's stock market break put a number of expensive stocks on sale. Value investors say the fourth quarter opened some opportunities to buy companies that normally were too expensive to consider, says Colin McWey, vice president and portfolio manager at Heartland Advisors. "With traditional value investing, it's always about the price-quality trade-off and sometimes the better companies are just too expensive," he says. Here are a dozen stocks and sectors that investors should consider when it comes to buying value stocks.
The merger of both Dow and DuPont created the chemical behemoth more than 17 months ago, and since then shares have been down by more than 20 percent. The company is now set to spin off into three separate stand-alone businesses: Dow, DuPont and Corveta. Richard Mathes, president of investment advisory firm The Mathes Co. in New York, says investors are still cautious after the big merger and may remain wary as the global economy weakness. He still calls DowDuPont (DWDP) one of the biggest and best chemical companies in the business. "If you get a chance to get them at a relatively low price, over time it should do well. It's been unjustly punished," he says.
East West Bancorp
Christopher Beck, an executive director at Macquarie Investment Management, an operational business of Macquarie Group in Philadelphia, says banks are good value, even as the Federal Reserve pauses rate hikes. East West Bancorp (EWBC) trades at about 10 times the price-to-earnings ratio and is significantly under the broader market's P/E ratio. The bank, which caters to the Asian-American community, has extremely strong credit and a low dividend payout ratio. EWBC also has very strong loan growth.
Oil prices have been falling, and airlines can benefit from cheaper fuel, which is one of the top operational costs. Olivia Engel, a senior managing director at State Street Global Advisors, says Asian-based airlines are showing good values in both top-tier and mid-tier flight operators, and that Asian airlines' earnings are improving. When picking a stock, investors should focus on the quality of the company, such as its return on equity. Quality helps sort out which companies are cheap because of poor performance compared with those that are buying opportunities, she says.
Another bank Beck recommends is Hancock Whitney (HWC). It's trading at about 10 times earnings and has transitioned from its merger between Hancock Holding Co. and Whitney Holding. It has a dividend yield of 2.5 percent, and HWC says it would like to increase its payout ratio in the next few years, he says. In the meantime, the bank is building up its capital reserves, rather than buying back stock, which may happen down the road, he adds.
In the financial sector, insurance companies are a defensive play and are fairly cheap right now, Engel says. In the current economic environment, insurers might be a better value rather than banks, she adds. Risk attributes are favorable to the insurance sector, given the recent stock market volatility. Engel says having defensive exposures "is a really important balancing act to play." Insurers should be able to hold up better in a shaky stock market, and the current prices offer some value.
Johnson & Johnson
Johnson & Johnson (JNJ) has fought lawsuits related to talcum powder for many years and recently lost a bid to overturn a $4.7 billion verdict to a woman who said her ovarian cancer was tied to the company's product. Mathes says the verdict hit Johnson & Johnson's share price heavily. But he still believes the company will rebound and that it's a good time to buy on stock weakness. "I think it is one of those one-off things (that) will be settled and will not blow up or break up the company," he says.
Small-cap technology firms are often overlooked, and the recent stock market break has made companies, such as American defense company Leidos (LDOS), better value, says Michelle Stevens, senior portfolio manager at Baird Equity Asset Management. Leidos has long-term government defense contracts and doesn't have the same economic exposure as large-cap tech stocks, she says, making it a "nontech, tech stock." Baird is more bullish on the stock than the consensus estimates because of the firm's long-term contracts and increased government defense spending.
McWey calls ManpowerGroup (MAN) a best-in-class operator, which was not affordable to the value investor a year ago. It's one of the world's leading professional staffing company's and its heavy European exposure is a big part of its business. It has greatly reduced its cost structure and improved its mix of higher margin businesses, including consulting services and staffing in the information technology, engineering and finance sectors. If an economic downturn happens, the firm's earnings power should be able to hold up because of its recent structural changes. "Longer term, ManpowerGroup benefits from a continued trend toward companies preferring more flexible labor forces," he says.
MasTec (MTZ) is an American multinational infrastructure engineering and construction with strong free cash flow and exposure to utility and energy industries, Beck says. MasTec has a backlog of $7.8 billion, which it expects to bill within 18 months. MTZ trades at about 10 times earnings and has a price-to-sales ratio of 0.5. In 2018, the Florida-based company used its excess capital to buy back shares. Beck says, "The company is using some of their balance sheet to enhance shareholder's capital returns, which we like."
Small-cap stock Stamps.com (STMP) not only provides postage solutions, but it takes care of other senders' shipping needs. The firm supplies shipping solutions to small business, wholesalers, third-party sellers on Amazon (AMZN) and other e-commerce businesses. Many publicly traded e-commerce companies are large-cap stocks, but Stamps.com is a way to "play on the theme by owning the movement of all those parcels," Stevens says.
Quest Diagnostics (DGX) became attractive in the recent market break after being out of reach for value investors, McWey says. It's had some quarterly earnings shortfalls, but he says the long-term outlook for the lab testing company is on track. "The problem in health care today is the cost of delivery, and what Quest provides is the lowest cost form of conducting lab services," he says. DGX trades at 13 times earnings.
Qurate Retail (QRTEA) has a few well-known names including QVC and HSN broadcast networks and online retailer Zulily. McWey says investors overlook the company because most of the revenue is in QVC, which is treated like a challenged TV retailer. But QVC's digital sales are growing and more than half of its revenue comes from digital sales, mostly mobile. Qurate also receives little credit for the faster-growth dynamics of Zulily, which reports revenue growth in the low to mid-teens.
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