If first-quarter numbers are any indication, value stocks are experiencing a bit of a renaissance. In the first three months of the year, the Vanguard Value ETF (VTV) delivered a 2.18% return — 99 basis points higher than its Vanguard Growth ETF (VUG) counterpart.
It’s a major victory when you consider that the VUG has significantly outperformed the VTV over the past three-, five- and 10-year periods by 231 basis points, 166 basis points and 210 basis points, respectively.
Not convinced? In mid-March, Barron’s ran a story suggesting value investing is rebounding. However, they tempered that argument with a caveat that value investing could be stuck in neutral as long as the Federal Reserve and other central banks have a vice-like grip on interest rates.
Value stocks could be at a tipping point. For those who believe its best days lie ahead, here are seven value stocks to buy soon.
Hidden Value Stocks to Buy Soon: Chevron Corporation (CVX)
It’s no secret that oil stocks have been getting hammered over the past two years, and with oil prices continuing to trade well below where they were this time in 2014, it’s going to be hard to pull the trigger on any buy in the oil patch.
However, investors might want to consider Chevron (CVX), whose profits fell off a cliff in 2015 — they declined 76% from $19.2 billion to $4.6 billion — and yet its stock has turned 4% higher in 2016.
Right now its stock is yielding 4.6%, which is about 30% higher than its five-year average. Forbes contributor John Tobey sees Chevron’s commitment to maintain its dividend by borrowing $2 billion per quarter to feed its shareholders’ desire for income as pure poppycock.
But here’s the thing: Chevron has stopped repurchasing its shares — an exercise that saw it spend $4.5 billion in each of 2013 and 2014, at prices that weren’t likely favorable to shareholders. Sure, $8 billion in debt just to pay a dividend seems foolish, but when you’ve been increasing your dividend payout annually for the past 28 years, to stop doing that is tantamount to saying your business has no future.
We know this isn’t true.
Over the past decade, Chevron has generated annual operating income of at least $30 billion in every year but 2015. In my opinion, the likelihood of operating income not returning to historical levels are slim to none. It might take a year or two, but when they do, value investors can expect to make a nice gain on their shares.
In the meantime, enjoy the yield.
Hidden Value Stocks to Buy Soon: Avis Budget Group Inc. (CAR)
Lyrical Asset Management CIO Andrew Wellington appeared on CNBC in mid-March touting the “extraordinary values” available from both Avis Budget (CAR) and Hertz Global Holdings Inc (HTZ) stock. Avis, Wellington said, is delivering record margins and profits.
He’s right. In 2015, CAR’s adjusted EBITDA grew 3% year-over-year to $903 million, the highest total in the company’s history. While its 2016 estimates suggest some softening in adjusted EBITDA — $820 million to $900 million — it still will deliver adjusted earnings per share of $2.70 at the low end of the range and $3.30 at the high end.
With Avis down nearly 30% year-to-date and 55% over the past 52 weeks, value investors like Wellington are licking their chops at the buying opportunity currently before them.
Considering CAR stock trades at less than 8 times forward EPS, it’s hard to argue with their logic.
Hidden Value Stocks to Buy Soon: Northstar Realty Finance Corp (NRF)
Not every stock that drops by 50% is automatically a value play; while value traps are all around us, separating the wheat from the chaff is easier said than done.
So, which one is Northstar Realty Finance (NRF)?
While it’s a work in progress, NRF appears to be a value play rather than a value trap for the specific reason that it’s taking substantive action on simplifying its portfolio of real estate investments.
At the end of February, NRF released its Q4 results. At the same time, real estate investment trust specialist Brad Thomas recommended a number of things NRF should do to get the REIT back on track. These included monetizing many of its nonessential assets that were distracting the company from its original focus of lending money to others for real estate projects and investing in commercial mortgage-backed securities, buying back its own stock, as well as exploring strategic alternatives such as recombining NRF with NorthStar Asset Management Group Inc (NSAM), the asset management business that it spun off in 2014.
In 2015, NRF monetized $2 billion in assets, with net cash proceeds of $930 million from those sales. In 2016, Northstar plans to use some of those proceeds to buy back stock and pay down some of its recourse debt.
In 2015, NRF repurchased $100 million of its stock; look for it to do more in 2016.
Hidden Value Stocks to Buy Soon: Stifel Financial Corp (SF)
Stifel’s (SF) stock has lost nearly half of its value over the past 52 weeks, with much of that decline coming in the first three months of 2016.
What’s going on at the middle-market investment bank that has its stock in such a funk?
Well, it’s not just Stifel whose stock is suffering. U.S. financial stocks in general have underperformed over the past year as businesses face a number of different headwinds such as lower energy prices and a never-ending low-interest-rate environment.
Right now, Morningstar gives the financial services sector a price/fair value ratio of 0.78, very low in comparison to the 0.98 ratio for its entire universe of stocks covered. Morningstar currently gives SF stock a fair value of $59, about double its current value.
More than 55% of SF’s revenue is from a growing wealth management business that should see this segment’s operating margins increase from 28% currently to above 30%.
This is a half-off sale you don’t want to miss.
Hidden Value Stocks to Buy Soon: Apple Inc. (AAPL)
You normally wouldn’t consider a stock that’s trading just 17% below its all-time high of $134.54, a value stock, but that’s exactly what Apple (AAPL) is.
Apple, which currently yields 1.9%, has increased its annual payment to shareholders by 11% per annum since introducing its dividend in 2012. Assuming AAPL continues to increase the dividend by 11% annually over the next decade, a purchase of 100 shares of the tech stock at current prices would mean an annual dividend payment of $5.91 in 2025.
So, if AAPL stock yielded the same 1.9% in 2025, the stock price at that time would be approximately $311; and that’s without any new product introductions, margin efficiencies or well-timed stock repurchases.
A whole lot could happen between now and then, but assuming Apple remains one of the most relevant businesses on the planet, a prospective $200 gain without any kind of catalyst driving earnings at a faster clip isn’t something value investors should say no to.
Hidden Value Stocks to Buy Soon: Santander Consumer USA Holdings Inc (SC)
I don’t often recommend buying stocks from companies facing lawsuits, but I’m going to make an exception with Santander Consumer USA (SC). While SC did file its 10-K two weeks late, it’s taking steps to deal with its mess.
The problem has to do with the way the vehicle finance company accounted for credit loss allowance estimates on individually acquired installment contracts. Its change in methodology brought on a 5% net income decreased to $827 million in 2015.
I won’t beat around the bush here: Don’t put any of your must-have retirement money in SC stock. If you have an account for “play money,” buy a few shares. SC’s 60% drop in less than a year is nothing to sneeze at.
Hidden Value Stocks to Buy Soon: Lions Gate Entertainment Corp. (USA) (LGF)
At first glance, Lions Gate’s (LGF) financials don’t hold a lot of hope, with its Q3 results delivering a 44% decline in earnings per share on a 11% decline in year-over-year revenue. That explains the 35% drop over the past three months.
But there is an upside.
LGF still making money – $41 million over the last 12 months through Q3 — and analysts believe its TV production business could top $1 billion in annual revenue by fiscal 2018. This suggests profits in the coming years won’t take as big a hit as investors think even if the films division fails to deliver.
Like Santander, I wouldn’t bet the farm, but Lions Gate’s stock does appear to be trading at a discount.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.