Investors have been waiting for value stocks to catch up to growth stocks for a decade now, and some think they're seeing signs of the long-awaited rotation from pricey stocks to cheap ones.
Value stocks had a heady few days in the second week of November when they trounced some of the biggest growth names in the market. Investors sold the likes of Amazon.com (AMZN (opens in new tab)), Google parent Alphabet (GOOGL (opens in new tab)) and Microsoft (MSFT (opens in new tab)) in favor of some of the market's sleepier names.
Whether the great rotation from growth to value is here to stay or not, it could still continue to affect share prices in the short to medium term. Goldman Sachs, for its part, recently gave clients a heads-up on the potential for rotation.
"The market might be poised for a temporary rotation out of growth stocks into stocks more sensitive to upcoming macroeconomic changes," Goldman Sachs writes. "Rising bond yields and improving economic growth can trigger these rotations, and Goldman expects both of these to occur in the next few months, especially if a vaccine for COVID-19 is announced."
These elevated expectations prompted us to find some of the market's best value stocks. To that end, we screened the Russell 1000 Value Index for stocks with market values of at least $50 billion. In keeping with the value theme, our stocks also had to trade at a discount to the S&P 500 by projected earnings. Lastly, they also had to be Buy-rated or better by the analysts who cover them.
After taking into account analysts' scores, equity research and company fundamentals, we've homed in on seven of the best big value stocks to get ahead of any great rotation.
Data is as of Nov. 11. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price. Analyst rankings from S&P Global Market Intelligence, which surveys analysts' stock ratings and scores them on a five-point scale, where 1.0 equals Strong Buy and 5.0 means Strong Sell. The closer the score gets to 1.0, the stronger the Buy call.
Johnson & Johnson
- Market value: $389.1 billion
- Dividend yield: 2.7%
- Analysts' average recommendation: 1.89
JNJ operates in several different areas of health care, including pharmaceutical products and medical devices. The company is best-known, however, for its over-the-counter consumer brands, which include Listerine mouthwash, Tylenol pain reliever and Johnson's Baby Shampoo.
The diversity of its portfolio is just one of the company's strengths. As CFRA analysts point out about the Buy-rated company: "Illness did not stop during the pandemic and the demand for essential medicines, particularly in the fields of oncology, immunology, and mental health remained strong and have been relatively unaffected by COVID-19."
JNJ's oncology drug Darzalex is just one name in its portfolio of essential therapies.
"These medicines are viewed as critical for certain patients who depend on these drugs to live their daily lives, a trend we expect to remain unchanged through 2021 and beyond" adds CFRA.
Johnson & Johnson also clearly belongs among the best value stocks on offer currently. While JNJ has lagged the broader market in 2020, that has kept the valuation in check. Shares trade at 17.2 times expected earnings, according to S&P Global Market Intelligence. By comparison, the S&P 500 trades at 21.4 times future earnings. The Russell 1000 Value Index has a similar forward price-to-earnings (P/E) ratio, indicating JNJ also is cheaper than its value peers.
- Market value: $91.0 billion
- Dividend yield: 2.9%
- Analysts' average recommendation: 1.79
CVS Health (CVS (opens in new tab), $69.51) holds a unique place in the healthcare sector – one that allows it to benefit from pandemic-induced demand as well as whatever comes next.
And not unlike JNJ, the pharmacy chain, pharmacy benefits manager and health insurance company's stock has lagged in 2020, which has made shares look temptingly inexpensive.
CVS stock is off about 6% for the year-to-date, vs. a gain of more than 10% for the S&P 500. As disappointing as that might be for longer-term shareholders, it also creates a decent entry point for new money.
The benefits of its 2018 acquisition of Aetna and the expected resumption of share buybacks only reinforces the case that the stock is a bargain.
"We think valuation risk/reward remains to the upside, particularly given strong operating cash flow generation and as CVS gets closer to being able to resume share repurchases, likely in 2022," say UBS analysts, who rate the stock at Buy.
Argus Research (Buy) adds that CVS is on schedule with its efforts to pay down debt related to the Aetna acquisition. "We expect EPS growth to improve in 2022, when the company has restored debt ratios to pre-Aetna levels and can once again enhance earnings with share repurchases," Argus's Christopher Graja writes.
The bottom line is that this large-cap value stock is expected to generate average annual earnings growth of almost 5% and trades at a very low 10.2 times expected earnings.
- Market value: $173.3 billion
- Dividend yield: 5.3%
- Analysts' average recommendation: 1.70
AbbVie (ABBV (opens in new tab), $98.15) should be very familiar to long-term dividend investors. That's because the pharmaceutical company is a Dividend Aristocrat, by virtue of having raised its dividend for 48 consecutive years.
Even better, its current dividend yield is one of the highest in the S&P 500, and the company has raised the payout at a 20% rate over the past five years. That includes a double-digit increase this year.
AbbVie is best known for hit drugs such as Humira and Imbruvica, which account for about 55% of ABBV's 2020 sales. But UBS, which calls the stock a Buy, says the market is underappreciating the potential of Rinvoq and Skyrizi, which treat rheumatoid arthritis and plaque psoriasis, respectively.
"If ABBV is able to recreate its success in current indications to future indications, then Rinvoq plus Skyrizi alone will replace Humira completely with about $20 billion in sales," UBS says.
Despite some risk from drug-price reform, most analysts remain optimistic about ABBV. Of the 19 analysts covering the stock tracked by S&P Global Market Intelligence, nine call it a Strong Buy, four say Buy and six rate it at Hold.
Considering the high dividend yield, the long-term growth forecast of almost 5% and the fact that shares trade at only 8.42 times expected earnings, AbbVie looks like a slam-dunk value stock. Indeed, it has been among the cheapest Dividend Aristocrats for several months.
- Market value: $205.1 billion
- Dividend yield: 3.0%
- Analysts' average recommendation: 1.68
Merck (MRK (opens in new tab), $81.06) which is another Dow healthcare stock, has seen shares languish in 2020. And that has made the stock too cheap to ignore.
Analysts forecast Merck to generate average annual earnings growth of almost 8% over the next three to five years, and yet the stock changes hands at only 13.1 times future earnings. Meanwhile, the dividend yields a healthy 3% and the company sports a solid balance sheet and cash flow situation.
Central to Merck's fundamental performance is Keytruda, a blockbuster cancer drug approved for more than 20 indications. As with its bullish view on Johnson & Johnson, CFRA cites key medications as part of its Buy call on Merck.
"We keep our strong positive long-term outlook for MRK," CFRA's Sel Hardy says. "Looking forward, though, we see a favorable patent setup with no key brands losing marketing exclusivity until 2022, and MRK's growth engine, Keytruda, on patent until 2028."
Returning a moment to the dividend: The payout had been growing by a penny per share for years, but now it's starting to heat up. MRK upgraded its payouts by 14.6% in 2019, then followed that up with a nearly 11% improvement for 2020. That lands Merck solidly among the best value stocks to buy if you're looking for large-cap stability and rising payouts.
- Market value: $218.1 billion
- Dividend yield: 1.9%
- Analysts' average recommendation: 1.68
Comcast (CMCSA (opens in new tab), $47.67), the nation's largest cable company, regularly makes the list of hedge funds' favorite stock picks. That's because its combination of content, broadband, pay TV, theme parks and movies is unparalleled by rivals, and gives this blue-chip stock a huge strategic advantage.
The diversification has come in handy this year as the pandemic has walloped theme parks, movies and spending on advertising. Deutsche Bank's Bryan Kraft, who has CMCSA at Buy, highlights strong broadband subscriber growth, cable margins and cable capital intensity as reasons to like the stock.
"While NBCU and Sky continue to be really messy given the disruption to spectator sports schedules, the ad market, theme park operations, and theatrical releases; Comcast's Cable business' results haven't lost a step," says Deutsche Bank. "We view NBCU's and Sky's recovery to full earnings power as a two-year process."
A supermajority of analysts lump Comcast in with other value stocks they're bullish on. Of the 31 analysts tracked by S&P Global Market Intelligence covering CMCSA, 17 rate it at Strong Buy, seven say Buy and seven call it a Hold.
That's at least in part because Comcast stock looks like such a bargain. Analysts expect the company to deliver average annual earnings growth of 12.9% over the next three to five years, and yet shares trade at only 17.7 times expected earnings.
- Market value: $72.0 billion
- Dividend yield: N/A
- Analysts' average recommendation: 1.57
Fiserv (FISV (opens in new tab), $107.36) is another market laggard that has such deep apparent value that it deserves a closer look.
The company is what's known as a core processor. Its technology allows financial services firms to operate debit networks, transfer funds electronically and process credit card transactions, among a host of other critical functions.
Unfortunately, that centrality to the global economy leaves FISV highly exposed to the ongoing crisis, which has tamped down shares this year. On the flip side, the 7.6% retreat in the stock in 2020 also affords bargain hunters an opening.
"Over the last several years, FISV has consistently turned single-digit revenue growth into double-digit earnings-per-share growth with help from strong margins and share buybacks," notes Argus Research (Buy). "While challenging market conditions will weigh on the company's earnings in 2020, management has reinstated its full-year guidance and expects to record at least 10% earnings-per-share growth this year."
Argus adds that given Fiserv's strong platform growth, history of innovation and highly scalable business model, the stock deserves a premium valuation – and it's not getting one.
Unlike the other best value stocks on this list, Fiserv doesn't pay out a dividend. Also, FISV shares trade roughly on par with the S&P 500 at about 21 times future earnings. The difference-maker here is that Fiserv's stock not only trades at a steep discount to peers, but it also has a market-beating long-term growth forecast of 16.5%.
- Market value: $82.6 billion
- Dividend yield: 2.2%
- Analysts' average recommendation: 1.55
If there was a knock on Mondelez International (MDLZ (opens in new tab), $57.74) earlier this year, it was its outsized valuation. But now that expected earnings growth is outpacing a rising share price, that is no longer a problem.
The snacks company, whose brands include Oreo cookies and Triscuit crackers, trades at a slight discount to the S&P 500, and has a higher dividend yield than the broad market index and an industry-beating long-term growth rate of 6.9%.
And as for the fundamentals, analysts say the company's centrality in the market and its market-share gains make it a force to reckon with.
"We hold a strong growth outlook for Mondelez, and while challenged a bit in the short term around COVID-19, we believe its long-term growth remains intact," writes Stifel (Buy). "The company's dominance in its categories lends itself to consistent market share gains and with its emerging market presence, the strength of its balance sheet, and a compelling valuation level in relation to these features, we expect continued strong upside for the shares from this level."
Stifel's investment thesis, or variations of it, appear to be a common view on the Street. Of the 20 analysts tracked by S&P Global Market Intelligence who cover MDLZ, 11 say it's a Strong Buy and seven say Buy. Two analysts rate it at Hold.
Dan Burrows is Kiplinger's senior investing writer, having joined the august publication full time in 2016.
A long-time financial journalist, Dan is a veteran of SmartMoney, MarketWatch, CBS MoneyWatch, InvestorPlace and DailyFinance. He has written for The Wall Street Journal, Bloomberg, Consumer Reports, Senior Executive and Boston magazine, and his stories have appeared in the New York Daily News, the San Jose Mercury News and Investor's Business Daily, among other publications. As a senior writer at AOL's DailyFinance, Dan reported market news from the floor of the New York Stock Exchange and hosted a weekly video segment on equities.
Once upon a time – before his days as a financial reporter and assistant financial editor at legendary fashion trade paper Women's Wear Daily – Dan worked for Spy magazine, scribbled away at Time Inc. and contributed to Maxim magazine back when lad mags were a thing. He's also written for Esquire magazine's Dubious Achievements Awards.
In his current role at Kiplinger, Dan writes about equities, fixed income, currencies, commodities, funds, macroeconomics and more.
Dan holds a bachelor's degree from Oberlin College and a master's degree from Columbia University.
Disclosure: Dan does not trade stocks or other securities. Rather, he dollar-cost averages into cheap funds and index funds and holds them forever in tax-advantaged accounts.
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