There’s an old real estate adage that says that you should never buy the best house in a bad neighborhood. But when it comes to investing, sometimes the best stocks in the worst sectors, like Schlumberger (SLB), Citigroup (C) and AbbVie (ABBV), are excellent long-term value plays for patient investors.
The energy sector has actually bounced back pretty nicely of late, but most energy stocks are still severely depressed compared to where they were a couple of years ago. There are certainly better short-term value plays in the space than SLB. But if you want a best-in-class stock that is relatively low-risk and has positioned itself perfectly for the eventual rebound in oil prices, SLB is a great play. Not only is SLB financially healthy enough to weather the downturn in oil prices, its aggressive buyout of Cameron International Corporation (CAM) was both opportunistic and strategic.
Rival Halliburton (HAL) agreed to buy Baker Hughes (BHI) back in November 2014. The latest news on that deal is that the U.S. Justice Department is suing to block it. SLB announced its $14.8 billion buyout of CAM in August 2015, and because the two companies offer complementary product lines, SLB has already closed the deal.
SLB, which was already the world’s largest oil services company prior to the CAM acquisition, has expanded its business scope, trimmed the fat and is ready to boom when oil prices and production begin to ramp up again.
Before you start yelling at me through your screen for declaring Citigroup the best stock in the financial sector, hear me out. Just look at the numbers. Citigroup currently offers the best value of any large U.S. bank by any metric you could imagine. It has an incredibly cheap 8.3 forward P/E ratio and trades at only 64% of book value. If you factor in growth, Citigroup’s PEG ratio is a minuscule 0.43, less than half that of any other large U.S. bank.
Citigroup has shed its riskiest assets and is now poised to generate average annual earnings growth of 18.2 percent over the next five years. Again, this growth is the best among all the big banks. Just this week, Citi was the only one of the eight “too big to fail” banks to have its living will pass both the Federal Reserve and the FDIC’s tests. The only one.
Post-crisis Citigroup has completely redefined its business, and in due time it will shed its reputation as a dangerous investment as well.
Healthcare stocks have really taken a dive so far in 2016, and ABBV stock is down 4.6% in the past year.
None of the large cap healthcare stocks offer the one-two punch of value and growth that ABBV does. The stock currently trades at a forward P/E of only 10.1 compared to peers that are trading in the 12-16 range. In addition, according to Finviz, ABBV is projected to grow earnings by an average annual rate of 17.3% over the next five years. That growth and value combo gives ABBV the lowest PEG (1.1) of all the 57 large cap healthcare stocks.
Citi analysts also recognized the value opportunity in ABBV back in February when they upgraded the stock to a “Buy” on the strength of the company’s drug pipeline.
As of this writing, Wayne Duggan was long HAL, SLB and BHI.
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