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All Contents © 2019The Kiplinger Washington Editors
By James Brumley, Contributing Writer
| January 29, 2019
Not that 2018 was a stellar year for growth companies, but it was downright miserable for value stocks. Using a pair of popular funds as proxies, growth stocks finished last year 4.5% in the hole … but value equities lost nearly 8%.
The coming year could look quite different, however.
Yes, growth has led for a couple years now, but 2019 might well be the year value stocks take back the lead. While a full-blown bear market has faded as a fear, we do appear to be in the latter stages of an economic expansion phase. That is when growth-oriented companies begin to lose their luster and the value of underappreciated stocks starts to shine through. Qualities such as reliability and consistent income can start to matter in a big way when growth stories are threatened. This all has led some experts to predict a comeback for bargains in the year ahead.
Here are the 10 best value stocks to buy for 2019 … and potentially for many more years to come.
Data is as of Jan. 28, 2019.
Market value: $10.0 billion
Forward P/E: 5.9
What happens when the economy is strong enough to spur the usage of industrial equipment but confidence in that economic strength’s longevity is shaky? Do construction outfits and industrial-oriented companies rent rather than buy?
Actually, many organizations that use equipment ranging from scissor lifts to excavators to skid steer loaders prefer to lease that equipment rather than purchase it anyway. But when the future is less than clear, that environment turns United Rentals (URI, $124.79) from a good prospect into a great one.
United Rentals hasn’t appeared to be either, given the stock’s performance since early 2018. URI shares are presently trading 34% below their March peak. Most of the damage was done since September on fears that the construction slowdown could be a prelude to a more widespread headwind prompted by an escalating trade war with China.
The sellers have arguably overshot their target, though. The pros still see revenue growth of 16% this year that should generate a 17% pop in profits. Sales growth is expected to slow to 4% in 2020, but earnings still should advance another 12%. And newcomers can plug into that projected profit growth at just about six times next year’s estimated earnings.
Market value: $30.5 billion
Forward P/E: 12.1
Eaton (ETN, $69.11) isn’t exactly a household name. But considering it’s priced at less than 15 times trailing profits and roughly 12 times next year’s projected earnings, it arguably has a place in more households’ portfolios.
Eaton makes a variety of power-management products that meet the needs of the transportation, building management, utilities and mining industries, just to name a few. Motion controllers, hydraulic pumps, valves, clutches and air handling hardware are just some of the goods found in its extensive catalog. It always has something to sell to someone, and odds are good every consumer and every investor in North America benefits from Eaton’s portfolio in one way or another.
That doesn’t outright guarantee year-over-year revenue growth each and every quarter. Given enough time, though, Eaton grows the top line more often than it doesn’t, and operating income makes forward progress even more reliably.
The track record – and Eaton’s growth rate, for that matter – might be on the cusp of even more improvement. ETN has been upgraded by analysts twice since August, and three more research outfits have initiated coverage of the stock with a bullish stance. There have been no downgrades in that time.
Market value: $45.2 billion
Forward P/E: 9.7
FedEx (FDX, $173.96) isn’t a growth stock. There’s simply a limited amount of delivery business that needs to be done, here and abroad, and most of it’s being done more than well enough. Established competitors like DHL and United Parcel Service (UPS) help keep prices in check for all of these players in the meantime.
Even by value stock standards, however, a 35% year-over-year decline leaves FDX shares undervalued at a forward-looking P/E of less than 10.
There’s no single reason for the stock’s deterioration. Amazon.com’s (AMZN) interest in handling more of its own shipping duties is certainly one concern, and the possibility of a global economic slowdown prompted by trade wars has likely weighed on investors. Last quarter’s earnings miss and lowered earnings guidance for 2019 also spurred more profit-taking of a stock that admittedly started 2018 out in an overbought condition.
But as the dust starts to settle on all these matters, it’s increasingly clear FedEx still is the company it was a year ago, three years ago, even five years ago. It has reported revenue growth in every quarter since 2010, and earnings growth – while not as persistent – still has been impressive. There’s a lot to be said about reliability, never even mind how FedEx managed to push through the last recession with only minor cuts and bruises.
One last possibility to chew over: Loop Capital Markets analyst Anthony Chukumba reiterated recently his thought that if Amazon wants to enter the shipping arena, FedEx shares could be a relatively cheap way to do it.
Market value: $222.1 billion
Forward P/E: 8.6
Shares of telecom outfit AT&T (T, $30.67) have been treated like anything but a blue chip of late. The stock’s is down roughly 30% from its mid-2016 peak, reaching fresh multiyear lows in December before bouncing back to still-depressed levels.
The curious part of the setback is, there’s no clear reason for it – at least not for the depths that it has made. While last year’s top line shrank, it was being compared to very healthy growth from 2016 that was largely spurred by the acquisition of DirecTV. Ditto for operating income, which was pressured in 2017 as the entire industry entered a price war that left all key players battered and bruised.
While the impact of the cutthroat price war is abating, investors are now worried AT&T’s expensive acquisition of Time Warner may also fail to bear enough fruit. But those investors seem to have priced in an apocalypse that just isn’t going to happen. T shares now trade at just six times the company’s trailing-12-month earnings and less than nine times next year’s estimated bottom line. Meanwhile, sales growth actually is expected to accelerate, from 6.4% this year to 8.1% in 2019.
The kicker: Not only is AT&T a deep-value stock, but it’s now delivering a whopping 6.7% yield on a dividend that has been paid (and grown) like clockwork for years. In fact, AT&T is a member of the Dividend Aristocrats – the select group of S&P 500 stocks that have grown their payouts every year for at least a quarter-century.
Market value: $29.9 billion
Forward P/E: 9.6
The last three months of 2018 were tough on insurer Allstate (ALL, $86.49), and by extension its shareholders. The stock lost almost a quarter of its value between late September and Christmas, prompted in large part by Hurricane Florence battering the East Coast and Hurricane Michael hitting the Gulf Coast.
Both storms did more damage than the nation had reason to expect, and that meant heavy payouts from insurers. Allstate was no exception, with the company reporting $202 million in losses in October, most of that coming from Michael. September’s reimbursements were on the order of $177 million. Then there are the California wildfires, which cost Allstate about $529 million after taxes.
But investors may have unduly punished Allstate, forgetting that hurricane and wildfires aren’t exactly unusual any longer. The premiums it collects largely factor in these stunningly large payouts, even if the actuarial math isn’t laser-precise.
Greg Oray, President of Michigan-based Oray King Wealth Advisors, explains the stock is “off the highs since September, due to the recent U.S. market correction and missing earnings in October.” Oray adds, however, that “this year’s catastrophe losses have been priced in … I think this stock has the potential to get back to its 52-week high with strong revenue growth over the next two quarters.”
Market value: $7.2 billion
Forward P/E: 16.3
The spinoff of nVent (NVT) from Pentair (PNR, $40.54) in the first half of 2018 has made it tough to evaluate the newly shrunken company. But, even before the divestiture was complete, investors (professional and amateur alike) were more stoked about nVent than they were about the now-former parent. PNR shares broadly continued the downward trek they began shortly before the spinoff was even announced.
But the market might not be giving the slimmed-down Pentair its due respect. This isn’t necessarily the same company that was holding nVent down.
Pentair used the cash infusion reaped from the spinoff to whittle down the company’s former debt of $1.4 billion to only $800 million now. More than anything, though, Pentair already has alluded to new products and bolt-on acquisitions that will embellish its existing water-management portfolio. Its new automated/smart pool management solution already has won awards, and its connected internet-of-things platform for Beer Membrane Filtration (BMF) systems could become a must-have for breweries.
Next year’s projected sales growth is a modest 3%, but analysts believe that should be enough to push the bottom line from $2.33 per share this year to $2.55 in 2019. With an overhauled portfolio in the works, the current lull might be a buying opportunity.
Market value: $26.6 billion
Forward P/E: 17.3
Electronic Arts (EA, $90.47) shares have lost nearly 40% of their value since July 2018, as investors have been forced to digest two rounds of disappointing revenue and earnings guidance.
The cause for the surprising weakness is both complicated and simple. The simple explanation is, it’s not selling enough video games. The more complicated explanation is, Electronic Arts didn’t foresee competing games like Fortnite proving so disruptive, and it didn’t fully embrace the way gamers now like to purchase (digital downloads) and play games (on a subscription basis).
The stock’s meltdown has caught the attention of Daniel Lugasi, Portfolio Manager with Winter Park, Florida-based VL Capital Management. He notes “We have recently become increasingly bullish on Electronic Arts Inc. (EA). The stock is currently trading at … a significant discount from a few months back when it was trading well over 26x earnings.”
Moreover, Lugasi feels the game publisher has addressed its recent miscues, adding, “A significant near-term catalyst for the stock is the release of the highly anticipated first-person shooter title Battlefield 5, which saw a delay and impacted the stock quite significantly. Longer term, we view the transition of disc-based game distribution to 100% downloadable games as a significant driver of margins for EA as distribution costs drop to zero.”
The portfolio manager concludes, “EA is expected to launch a cloud gaming service in the next few years, which will be somewhat like the Netflix (NFLX) of gaming. Early impressions from those that have tested the service are overwhelmingly positive.”
Market value: $75.2 billion
Forward P/E: 10.1
Caterpillar (CAT, $124.37) – as well as several analysts and investors – have said that the imposition of trade tariffs on steel imported from China will be devastating. Indeed, after CAT shares soared over the course of 2017 when it finally looked like the machinery maker was back to its former full stride, fears of a trade war shaved roughly a third of Caterpillar’s value reached at the beginning of 2018. The stock still is down 25% from that peak.
The company has since sent a couple of very mixed messages.
Caterpillar’s third-quarter report indicated that the added cost of steel stemming from these tariffs would only cost the company an extra $100 million to $200 million in 2018. Not chump change, but a palatable expense for an organization that earned $3.8 billion over its previous four quarters at that point.
However, Caterpillar recently followed that up with its biggest earnings miss in a decade in its fourth-quarter report, with analysts perhaps too encouraged by that Q3 result. Caterpillar also disappointed with its 2019 outlook, now seeing “a modest sales increase” because of several pressures, China growth and tariff issues foremost among them.
Both of these issues will continue to be pivotal in determining Caterpillar’s direction from here. That said, if you’re convinced that the U.S. eventually will end its tariff spat with China, CAT is trading at an attractive speculation price of just 10 times forward earnings estimates.
Market value: $285.7 billion
Forward P/E: 9.2
Rising interest rates are a two-edged sword for banks. On the one hand, higher rates make lending a more profitable venture for the lender, usually in a strong economic environment. On the other, higher interest rates makes borrowing more expensive, and therefore less attractive.
Investors haven’t been sure if the glass has been half-full or half-empty since interest rates have been edging higher. But the 10% pullback Bank of America (BAC, $29.63) has been through – including a much larger dip to below $23 per share by December – suggests investors are moreso leaning toward the latter.
Perhaps some optimism is warranted, however. Last quarter, Bank of America’s loans were up 1.9%, helping the consumer banking business grow by 52%. That was part of a record-breaking fourth quarter that saw the company deliver $7.3 billion in profits. Once investors realize the economy isn’t going to implode and that rates are rising because the economy is firm, they’ll likely realize Bank of America’s forward-looking P/E of 9.2 is simply too low.
BofA also is laying a long-term foundation that reflects the way the nation’s demographic breakdown is maturing. Bill Smead, CEO of Seattle-based Smead Capital Management, explains, “The multiplier effect of millennial household formation should be a bonanza to the nation’s largest depository bank, Bank of America. They have the technology the under-40 crowd likes and already uses for banking.”
Market value: $116.8 billion
Forward P/E: 8.1
AbbVie (ABBV, $77.14) had a downright lousy 2018. Even with a November bounce, ABBV shares are down 38% from their January 2018 peak. And some Wall Street analysts are in fact souring on the stock.
The prod for the pullback has mostly been fears surrounding its Humira franchise. Its primary patent has already expired, though the company has done an admirable job of introducing related patents that protect its blockbuster status; the multi-purposed anti-inflammatory drug still drove roughly $20 billion in sales last year.
The defensive maneuvering is only buying small bits of time, however. Rival pharmaceutical companies are going to introduce alternatives to Humira sooner than later. In the meantime, the federal government continues to threaten AbbVie’s bottom line with reform that will ultimately make prescription drugs cheaper to purchase.
The doubters might have overdone it, though. While Humira’s best days are almost behind it, investors are largely ignoring the pharmaceutical giant’s pipeline, which is well-positioned to offset the eventual end of Humira’s dominance. In January 2018, AbbVie’s chiefs suggested that sales of drugs other than Humira – led by the likes of cancer drug Imbruvica – could grow from 2017’s $10 billion to $35 billion by 2025. Indeed, the company already has started down a growth path that doesn’t rely on Humira.
ABBV’s weakness over the past year is an opportunity. Shares trade at almost eight times next year’s projected profits and yield a fat 5.3%.
James Brumley was long T at the time of this writing.
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