Stocks have made a remarkable (and remarkably rapid) recovery from the 2020 bear market. Indeed, the Nasdaq and S&P 500 have recaptured and reset their all-time highs.
But stocks have become incredibly frothy once more. The S&P 500 trades at 27 times analysts' earnings estimates. The Nasdaq is even loftier, at a 34 forward price-to-earnings (P/E) ratio. Stocks are simply expensive again, making it difficult to find great value stocks.
The way to start, of course, is to focus on companies that have been overlooked by investors because of temporary challenges but nonetheless remain well-positioned to deliver superior returns over the longer-term.
In hopes of identifying the best value stocks right now, especially for buy-and-hold investors, we looked for:
- Companies trading at forward price-to-earnings (P/E) or price-to-cashflow multiples that are below peer levels and/or the company's historical norm
- Dividend payers with modest payouts and steady (but mostly rising) dividends
- Businesses generating reliably strong cash flows
- Stocks with consensus "Buy" ratings from Wall Street's analyst community
Here are 11 of the best value stocks to buy in this overpriced market. Some might remain against the ropes until America's economic recovery picks up the pace. But patient investors could reap big rewards from buying now and holding through the recovery.
Data is as of Sept. 1. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price.
- Market value: $162.8 billion
- Dividend yield: 5.1%
Drug developer AbbVie (ABBV (opens in new tab), $92.24), which was spun off from Abbott Laboratories (ABT (opens in new tab)) seven years ago, owns blockbuster drugs including Humira and Rinvoq for arthritis, Skyrizi for psoriasis and Imbruvica for leukemia and lymphoma. The recent acquisition of Allergan adds cosmetic drug Botox and other drugs representing $16 billion in sales to AbbVie's portfolio.
The company also has more than 30 early-stage drug candidates being developed in-house and new drug candidates in eyecare and migraine prevention acquired with the Allergan purchase.
AbbVie's biggest challenge is patent expirations on its blockbuster drug Humira, which is already competing with biosimilars in Europe and losing U.S. patent protection in 2023. Humira accounted for nearly 58% of the company's 2019 sales. However, a new rheumatoid arthritis drug candidate AbbVie is developing, ABBV-3373, performed well in Phase 2 trials and could soon replace Humira. That would help the company preserve its market leadership and competitive advantage in this space.
In its oncology product line, AbbVie recently partnered with Genmab (GMAB) to develop and market three new antibody-based cancer drugs.
AbbVie has been a strong performer that has delivered 29% annual profit growth, not to mention a Dividend Aristocrat that has bolstered its payout by more than 18% annually on average over the past half-decade. Most recently, June-quarter revenues rose 26% due to Allergan's contribution, but more importantly, adjusted EPS grew 4%. ABBV also upped its full-year guidance and anticipates 11% EPS accretion this year from the Allergen acquisition.
Despite all this, AbbVie is one of the best value stocks in the blue-chip space based on traditional metrics. ABBV shares trade at just 9 times next year's earnings estimates, which is 20% below its own five-year average and a third of the average health care stock's forward P/E.
"Given the strength of the portfolio and the breadth of the combined ABBV-AGN pipeline, we believe the post-merger company has multiple growth drivers and that the stock is favorably valued at current levels," writes Argus Research, which has ABBV rated at Buy.
- Market value: $5.4 billion
- Dividend yield: 3.2%
Ingredion (INGR (opens in new tab), $80.02) produces and sells sweeteners, starches, nutrition ingredients and biomaterials that are used in foods, beverages, pharmaceuticals and personal care items. The company operates worldwide, sells to more than 18,000 customers in 120 countries, and generates more than $6 billion in annual sales.
INGR's growth plan focuses on introducing new products that leverage sustainability and health-and-wellness trends, as well as expanding its line of plant-based proteins, starch-based texturizers, specialty sweeteners and clean and simple ingredients.
Ingredion has generated 13% annual adjusted earnings-per-share (EPS) growth over 10 years, but 2020 results have been hurt by the pandemic. Its profits fell 33% year-over-year during the June quarter, for instance.
However, analysts still like the company's long-term growth prospects and forecast 10% annual EPS gains over the next three to five years. If that's the case, Ingredion should be able to keep up its 8% annual dividend-growth pace of the past five years while maintaining a prudent 40% payout ratio.
And INGR stands out among value stocks in the consumer staples group. A forward P/E of 14 is about 30% below the sector median, and slightly below its own historical forward P/E of 15.
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- Market value: $24.4 billion
- Dividend yield: 1.1%
McKesson (MCK (opens in new tab), $150.22) distributes pharmaceuticals and medical supplies worldwide. The company accounts for one-third of all pharmaceuticals distributed in the U.S., serves 17,000 US pharmacies and operates the nation's fourth-largest pharmacy chain overall. McKesson generated $231 billion of revenues last year and ranked seventh on the list of Fortune 500 companies.
Its profit trend has been heading in the wrong direction (generally) over the past five years, but it appears to be turning things around. MCK has beat analyst EPS estimates for nine consecutive quarters, delivered 16% adjusted EPS growth during Q2 and recently upped its full-year profit guidance by 5%. Analysts are looking for at least 7% average annual profit growth going forward.
McKesson plans to drive growth by raising prices on its branded, generic and specialty drugs, offering more services to drug manufacturer and pharmacy customers, and cutting $400 million to $500 million from annual costs. And in August, "MCK and the White House announced an expanded relationship with the CDC that would make MCK the centralized distributor of COVID-19 vaccines and supplies to point-of-care sites across the US," writes UBS – a deal the analyst firm believes could be worth an extra $2 per share in earnings.
Over the long-term, the company will also benefit from increased use of generic drugs and America's aging population requiring more prescriptions.
McKesson is a clear value stock at 10 times forward-looking earnings estimates. That's less than half the median forward P/E multiple for the health care sector, and slightly below MCK's own historical average. It's a safe dividend stock, too, that has averaged 8%-plus distribution growth over the past half-decade and only pays out 11% of profit estimates as a dividend.
- Market value: $17.1 billion
- Dividend yield: 3.5%
Entertainment giant ViacomCBS (VIAC (opens in new tab), $27.70) owns one of the media industry's largest libraries of TV and film titles. Its major properties include CBS, Showtime, Paramount Pictures, Nickelodeon, MTV, Comedy Central, BET and Pluto TV, as well as the Simon & Schuster publishing company. The company's flagship CBS broadcast station has a dominant share of the U.S. television market and a global footprint reaching over 4.3 billion subscribers.
The company's traditional sources of revenues (movie releases and live sporting events) have been hit by the pandemic. But ViacomCBS is delivering strong growth in streaming services (Pluto TV, CBS All Access, BET Plus and Showtime) as it continues to add content. The company ultimately plans to stream more than 30,000 TV episodes, 1,000 movies, and new original content like its popular Star Trek: Picard TV series.
ViacomCBS's strategy is different than Netflix (NFLX (opens in new tab)) in that, rather than one service like Netflix, the media conglomerate offers four streaming packages that target different audiences and price points.
Earnings took a 16% hit during the June quarter, but domestic streaming and digital video sales improved 25% year-over-year, suggesting revenues are likely to rebound when the pandemic fades and advertising and theatrical sales pick up. Moreover, strong free cash flow (at $14.9 billion annualized) gives VIAC flexibility to grow its content library, raise dividends and pay down debt. Indeed, ViacomCBS hiked its dividend 33% last year, and its current payout still only accounts for 21% of next year's forecast earnings.
The price is right, too, at just 7 times forward-looking earnings estimates. That's less than half the 19 forward P/E of the relatively new communication services sector.
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- Market value: $15.1 billion
- Dividend yield: 3.2%
Magna International (MGA (opens in new tab), $50.51) designs, engineers and manufactures automotive components for the big automakers and is the world's third largest automotive supplier by sales. The company has industry-leading capabilities in vehicle weight reduction, powertrain and electrical systems, Advanced Driver Assistance Systems (ADAS), seating and mechatronics.
COVID-related automaker shutdowns caused Magna to record a net loss during the June quarter, with $1.2 billion of loss directly attributable to the COVID-19 effect. However, the worst appears over for Magna; original equipment manufacturer (OEM) carmakers in China have already resumed production, Europe OEMs are restarting and North American OEMs resumed production in June.
"We continue to see MGA as a defensive supplier, well positioned to capitalize on a recovery in global auto industry volume," write Credit Suisse analysts, who rate the stock at Outperform (equivalent of Buy). "We believe its unique business structure (decentralized ops, diverse product exposure) yielded key benefits during the depths of the COVID crisis in 2Q, limiting decremental margin. And with restructuring benefit and a favorable outlook for industry recovery in 2H and '21, the set-up is favorable for MGA, and we see upside to '21 estimates."
Longer-term the company appears well-positioned for growth thanks to new initiatives in electric, lightweight, autonomous and smart vehicles.
MGA isn't as clear-cut a bargain as these other value stocks. On a forward-looking price-to-earnings basis, a P/E of 26 is fairly close to the broader-market average. But zooming in on cash, shares' price at 10 times forward-looking cash flow is well below the average 17x ratio of its consumer discretionary peers. MGA also offers up a respectable 3.2% in dividends on a payout that has shot nearly 13% higher annually over the past five years.
- Market value: $19.3 billion
- Dividend yield: 1.8%
AmerisourceBergen (ABC (opens in new tab), $94.30) is a global distributor of pharmaceuticals, health care products, home health care supplies and related services. The company generates more than $175 billion of annual sales, operates 150 locations globally and ranks tenth on the Fortune 500 list.
Growth has been through a combination of organic and acquisitions. Back in May, the company reportedly was in discussions with Walgreens Boots Alliance (WBA (opens in new tab)) regarding the purchase of its pharmaceutical wholesaling division. The company's strategies for organic growth include building on ABC's leadership position in oncology and other physician-administered products, enhancing its generic drug private-label program and adding value with services such as drug product launches for manufacturers and merchandising programs for independent pharmacies.
The company generated 5% adjusted EPS gains during the June quarter and is guiding for mid- to high-single-digit 2020 income growth, fueled by mid-single-digit sales growth.
"We see solid long-term growth opportunities for ABC," Argus Research analysts recently wrote, reaffirming their Buy rating. "We believe that more moderate generic price deflation will aid profit margins going forward, and continue to have a favorable view of the company's underlying growth profile and solid business execution."
AmerisourceBergen has grown dividends 15 years in a row, including at a nice 7.7% rate over the past five years. That included a more modest 4% bump last year as the company focused more on reducing debt. Meanwhile, ABC shares trade at 13 times earnings estimates, which is half the health care sector's P/E and just a hair below its historical average 14 forward P/E.
Science Applications International
- Market value: $4.8 billion
- Dividend yield: 1.8%
Science Applications International (SAIC (opens in new tab), $82.80) provides technical support and a variety of IT services to the U.S. military. And if you haven't heard of it, you're not alone – it's one of several tech stocks that seldom appear on investors' radar.
This steady operator has delivered 12% yearly income growth over the past five years, and it has rewarded investors with an average annual 4% dividend hike in the same time frame.
The company says the COVID-19 impact on its business has been modest; during the May quarter, sales grew 9% year-over-year, adjusted EPS rose 1% and free cash flow soared 112%.
Science Applications has secured major new military contracts in recent months. These include a $950 million contract with the Air Force in August for advanced management systems, an $89 million Army contract for IT support in July, and a $630 million Air Force contract for modernizing critical hardware and software systems in June. The company also greatly expanded its military IT capabilities recently through the $1.2 billion acquisition of IT services provider Unisys Federal.
Companies like SAIC simply don't stand out in the tech sector the way Apple (AAPL (opens in new tab)) and Microsoft (MSFT (opens in new tab)) do. But if you overlook SAIC, you overlook one of the best value stocks in tech. The company's shares trade at 14 times next year's earnings estimates, which is half that of the technology sector, and well below its historical average forward P/E of 18.
- Market value: $7.1 billion
- Dividend yield: 3.9%
UGI Corp. (UGI (opens in new tab), $34.24), which ranks among our 20 dividend stocks for 20 years of retirement, distributes and markets energy products and services. The company operates natural gas and electric utilities in Pennsylvania, distributes LPG (liquid propane) both domestically and internationally and owns midstream energy assets in the Northeast. It's a geographically diverse firm that boasts operations in 11 states, France, Belgium, the Netherlands and the U.K.
UGI reported a 38% to adjusted net income during its fiscal third quarter as a result of lower volume in its propane, international and mid-stream energy businesses. That was partially offset by higher sales in the utilities business. However, UGI is still enjoying a strong year and even increased full-year EPS guidance to reflect recent cost saving initiatives in its LPG business, a base rate increase for the utility business, and business acquisitions and divestitures.
More good news came in August when UGI's PennEast pipeline project received a favorable FREC environmental review, clearing the way for work on the pipeline to resume.
UGI has produced the slow but steady growth typical of utilities, with average EPS growth of 8% over the past five years, 4% over the past 10. But the company has an impressive 33-year track record of dividend hikes, including roughly 8% annual payout growth over the past five years.
Despite the upward revision in earnings guidance, UGI shares trade at just 14 times forward adjusted earnings. That's well below both the company's five-year average forward P/E of 19, and the 18 forward P/E of the utilities sector.
Janney analysts like what they see. "Looking forward, our investment thesis on UGI shares remains bullish; the asset mix just gets better and better, and even an average winter heating season in FY21 should drive the shares higher given the leverage in the business model," they write.
- Market value: $2.4 billion
- Dividend yield: 2.8%
GATX Corp. (GATX (opens in new tab), $68.00) owns, leases and a fleet of approximately 118,000 railcars across the U.S., Europe and Asia. The manages company also owns more than 600 locomotives and has one of the world's largest lease portfolios of spare aircraft engines through its joint venture with Rolls-Royce.
Railcar utilization rates remained high during the June quarter, at 98.4%, and lease renewal rates were strong at 71.8%. However, GATX felt the pandemic effects of lease rates coming under pressure as customers downsized railcar fleets. The net effect was a 40% decline in the company's EPS.
The bad news? Analysts say earnings per share will drop 10% this year. The good news? Those same prose see EPS rebounding 13.5% annually on average over the next three to five years. That's because GATX should benefit from customer upgrades to railcar fleets in Europe, a shift in modal traffic from road to rail, and an aircraft spare engine replacement market expected to grow to $30 billion over five years.
GATX, which has paid dividends for more than a century, has boosted its payout for a decade straight, and at a modest 5% pace over the past five years. It's also among the value stocks to be found in the industrial sector, with GATX boasting a forward P/E of 17 versus 23 for the sector. It also trades at 1.2 times its book value, which is below its five-year average of 1.5.
- Market value: $68.9 billion
- Dividend yield: 1.4%
Next among these top value stocks is Anthem (ANTM (opens in new tab), $273.08), a well-known health care insurance provider serving more than 106 million customers across the U.S. The company operates Blue Cross and Blue Shield health plans in 14 states and offers a variety of HMO, PPO, hybrid and specialty products, network-based dental products and health plan services for employer groups and individual members.
The company launched its own pharmacy benefit management business, IngenioRX, in 2019, and that arm is expected to contribute $800 million to 2020 operating profits. During the first quarter, Anthem acquired third-party plan administrator AmeriBen, which added 452,000 members to commercial and specialty business enrollments. It also picked up Medicaid members in Missouri and Nebraska during the March quarter, boosting its government business enrollment by 849,000.
Medical enrollments grew 3.9% during the June quarter, revenues rose 15.9% and adjusted EPS gained 98.2%, fueled by income contributions from IngenioRX and profit increases in Anthem's commercial, specialty and government businesses due to reduced health care benefit utilization during the pandemic. The company also significantly raised its full-year EPS guidance.
Anthem's profits have swollen by nearly 18% annually on average over the past five years, and it has beaten analyst expectations in 13 of the past 14 quarters. Dividends haven't grown quite as fast, but still briskly at nearly 9% annually. A modest 15% payout ratio leaves all sorts of room for growth on that front, however.
Despite an excellent first half 2020 financial performance, ANTM shares are valued at only 12 times earnings estimates. That's below its historical median of 14, and well below the health care sector.
UBS analysts are more blunt: "We continue to see ANTM's valuation as overly harsh vs. peers and see ANTM's diversified book under-appreciated by investors. Buy."
Universal Health Services
- Market value: $9.4 billion
- Dividend yield: N/A
Universal Health Services (UHS, $110.57) owns and operates 26 acute care hospitals, 41 outpatient facilities and 330 behavioral health clinics across 37 states, Puerto Rico and the U.K. And through its subsidiaries, UHS also offers health insurance, a physician network and related services.
Elective medical procedures were postponed during the pandemic, and that adversely impacted UHS's first-half 2020 performance, resulting in an 11% decline in adjusted EPS. Still, the company's latest results were better than expected.
"Reported revs/EBITDA/EPS materially exceeded cons by 12%, 89% and 302% w/ upside partially driven by CARES Act," write UBS analysts, who rate the stock at Buy. "UHS more than doubled our EBITDA less CARES Act forecasts."
For the full year, the pros are expecting profits will drop 9% this year, but rebound with nearly 14% growth in 2021. They also expect 13% annual EPS gains on average over the next half-decade.
At a forward P/E of just 12, UHS shares trade at a 20% discount to their own five-year average, and a roughly 60% discount to the broader health care sector.
Universal Health Services is the one exception on this list, however, in that it doesn’t currently pay a dividend. While it doubled its payout in 2019, it suspended its dividend and buybacks this year amid its COVID-related difficulties. UHS could, however, resume payouts once the economy normalizes.
Lisa currently serves as an equity research analyst for Singular Research covering small-cap healthcare, medical device and broadcast media stocks.
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