“Price is what you pay, value is what you get.” That famous quote from Warren Buffett could serve as the overall moniker for the market right now. With stocks rising over the last decade or so, prices are a bit expensive. That’s a problem considering the slowing data and poor economic health currently facing the world. As a result, investors are abandoning many momentum names and plowing some big bucks into value stocks. In fact, the S&P 500 Value Index (.SPX) has more than doubled the return of its “growthier” sister over the last three months.
With their lower valuations, higher yields and bigger margins of safety, it’s easy to see why investors have been drawn to value stocks over the last few months. There’s just too much to unpack in the current environment and investors want more from their portfolios. The best part is, the trend toward value stocks could continue.
Nothing about the new year removes any of the uncertainty facing the economy. The trade war is still there. Growth is slowing and there’s now plenty of political pressures to deal with. And because of that, investors should continue to move towards value to play any of the potential upside left.
For investors, that means making the shift today is paramount to get the most bang for your buck. With that, here are five value stocks that could be great buys in the new year.
Forward Price-to-Earnings Ratio: 13
After being left for dead during the financial crisis, the big banks continue to trade for big discounts to the broader market. That could be a win for investors looking at JPMorgan Chase (JPM). JPM continues to execute at its low valuation.
Last quarter, JPM faced a pretty tough environment. Thanks to the Federal Reserve and its rate cuts, net interest rate margins have been declining across the board. However, JPM continues to make the best from its other operations. Average deposits have continued to grow, while home, auto and consumer credit operations have worked well at the bank. Meanwhile, the generally positive business environment has helped its commercial assets do well.
At the same time, JPM has continued to boost margins and lower costs across its operations. Thanks to a variety of key tech investments, artificial intelligence upgrades and other innovations, the bank is getting “lean and mean” for its huge size. Add in its strong tier 1 ratios and capital requirements and you have a real healthy financial institution.
It’s so strong that regulators have been blessing JPM to start really returning excess cash back to shareholders. At the end of 2018, it was able to boost its dividend by 43% and a few months ago, it boosted that payout by another 12.5%. Given its trajectory, 2020 could see more dividend bumps.
And yet, you can snag JPM for a dirt-cheap forward price-to-earnings ratio of 13. That could make it one of the best value stocks and biggest bargains around.
Forward Price-to-Earnings Ratio: 12.3
Chipzilla has been sort of an embarrassment over the last year or so. Intel (INTC) has been forced to deal with a variety of issues including smaller rival Advanced Micro Devices (AMD) starting to eat its lunch in a variety of key market segments. In that, INTC has seen its valuation shrink to a forward P/E of just over 12.
But thanks to INTC’s shifting strategy, that cheap price could make it a major buy.
For one thing, as fellow InvestorPlace contributor Josh Enomoto points out, Intel is starting a price war with AMD and is now offering tremendous value in its lower-priced chips. With more computing power for less, INTC should be able to once again regain its crown with original equipment manufacturers. Where Intel will be able to make up the difference comes from its specialty portfolio of semis. Here, INTC has continued to dive head first into the internet of things, automation and data centers to drive future cash flows and profits. It’s latest buyout of AI startup of Habana Labs is a prime example of where Intel is going for the future.
At the same time, Intel continues to be very profitable and reward investors. Back in October, the firm announced a whopping $20 billion increase to its buyback program based on its continued improving results and high cash flows. INTC hasn’t been stingy on the dividend front either.
With its shift in pricing and future focus on very advanced chips, INTC should be able to keep the growth going. And right now, investors are paying nothing for that potential.
Forward Price-to-Earnings Ratio: 10.5
Investors combing the market for bargains don’t have to look far in the energy sector. The entire sector is basically just full of value stocks. However, there are plenty of value traps as well. It takes a certain kind of energy stock with real cash flows to justify its value. Refining giant Phillips 66 (PSX) is just such a stock.
PSX continues to execute on its diversified model. That includes refining, chemicals, midstream and downstream assets. Thanks to this mix, the firm is relatively immune from the effects of lower oil prices. When one segment is performing poorly, another can help lighten the load. That’s just what is happening. Last quarter, Phillips reported better-than-expected earnings and very strong levels of free cash flow driven by its diversified model.
The best part is that PSX continues to use that cash to reward investors.
Management at the refiner has been pretty disciplined at using cash for investments only when it meets high returns. As a result, its been using that excess cash to boost its dividend and conduct a huge buyback program. The firm already had authorized a huge $15 billion buyback, but management thinks shares are so cheap they added an extra $3 billion in purchases to that endeavor. Meanwhile, PSX has several new projects in the works that will continue to boost cash flows further.
In the end, this is another situation where actual results do not match the share price. And investors should pounce accordingly.
Forward Price-to-Earnings Ratio: 9
Some value stocks trade for peanuts thanks to pessimism. That could sum up what’s going on at biotech giant Biogen (BIIB). The biotech has suffered on a few fronts and investors have basically abandoned the stock. But its long-term potential makes it a huge bargain given its forward P/E of just 9.
For starters, BIIB has been hit hard on the general pessimism surrounding healthcare stocks and the current political environment. As a maker of expensive neuroscience drugs, BIIB is in the crosshairs of potential pricing regulation. Adding in the mishap with a stage 3 clinical trial for its Alzheimer’s treatment, aducanumab, and you have a reason why shares have gone nowhere in 2019.
But there is plenty of value to be had in the biotech giant.
For one thing, BIIB might have a winner after all with aducanumab. After combing through data, the firm and the U.S. Food and Drug Administration have breathed new life into the drug and its potential as blockbuster. Meanwhile, the rest of its late-stage pipeline is starting to bear fruit.
At the same time, its current portfolio of drugs, including blockbusters such Tysabri and Spinraza, is seeing real growth. Spinraza sales alone jumped 17% last quarter and Biogen’s total product revenue was $3.6 billion. Those are some big numbers and don’t justify the firm’s extreme pessimism and low valuation.
In the end, Biogen is just too cheap given its potential.
iShares Russell 1000 Value ETF
Given the undeniable trend towards value stocks, perhaps the best bet is to just own them all. Luckily, exchange-traded funds make that very easy to do. With the iShares Russell 1000 Value ETF (IWD), investors get access to the theme with one ticker.
IWD tracks all the value stocks in the Russell 1000 — a measure of large- and mid-cap U.S. stocks. The ETF’s holdings are screened for various value metrics including low P/Es, low price-to-book values and others. What investors get is a basket of 760-plus top-notch value stocks. Top holdings include JPM as well as medical device firm Medtronic (MDT).
Investors get some decent value as well. The $41.5 billion fund features a current P/E of 18 and a market-beating yield of 2.3%. Moreover, there’s value in the cost of ownership as well. As a low-cost iShares ETF, expenses of IWD clock in at just 0.19% or $19 per $10,000 invested. That makes it a great “buy and hold” choice of investors looking for the long term.
Add in the ETF’s strong 10-year average annual return of 11.3% and the potential for more gains in the new year, and you have a recipe for value stocks success. For investors looking for simplicity, IWD is a great choice for the theme.
At the time of writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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