Funds that follow a value-based approach to investing are making a comeback, according to recent statistics — a suggestion that investors might want to get out their value lenses heading into the second half of 2016.
For the first time in years, value ETFs are showing up on lists highlighting fund flows. In the second quarter through June 22, the Vanguard Value ETF (NYSEARCA:VTV) made ETF.com’s Top 10 Creations list with a net flow of $1.3 billion.
While value funds haven’t performed in recent years, historically they’ve outperformed their growth peers by a considerable margin. Between 1974 and September 2015, the MSCI USA Value Index beat the MSCI USA Growth Index by 81 basis points. That’s almost a full percentage point annually — so just think about that kind of a difference when you stretch it out for 42 years!
With many including the Federal Reserve suggesting that the markets are expensive, value stocks appear ready for a comeback. For investors leaning in this direction, here are seven “hidden” value stocks to buy very soon.
7 “Hidden” Value Stocks to Buy: AmerisourceBergen (ABC)
Analysts like AmerisourceBergen Corp. (NYSE:ABC), in part, because its distribution deal with Walgreens Boots Alliance Inc (NASDAQ:WBA) generates 30% of overall annual revenue. It’s by far ABCs biggest client.
But this 10-year partnership with Walgreens is just one reason to like the company.
ABC also makes good money. In 2015, Amerisource made $1.14 billion, an increase of 25% year-over-year, on $134.1 billion in revenue. Analysts expect it to earn $5.78 in fiscal 2016, a 17% increase over 2015. However, Amerisource isn’t resting on its laurels. It knows that the generic business is slowing; as a result, it’s entered the specialty drug market in a big way.
“There is a transition going on from generics to specialty drugs, where high-priced—but lower-margin — specialty drugs will become a bigger factor in earnings-per-share growth in the next few years,” Joe Agnese, an analyst at S&P Global Market Intelligence, told Barron’s recently.
No matter what happens in the specialty drug side of its wholesale business, in the end, its deal with Walgreens gives the company and investors a great deal of certainty on future revenues.
ABC stock has an earnings yield of 8.8% — 340 basis points higher than the S&P 500. I think Amerisource rebounds in the second half of 2016, even amid a reduction in the company’s fiscal 2016 estimates.
7 “Hidden” Value Stocks to Buy: Ralph Lauren (RL)
Ralph Lauren Corp (NYSE:RL) is dead.
Well, not literally, but the company he founded is struggling like it never has before, and that has investors really nervous. Ever since Roger Farrah stepped down from Ralph Lauren in May 2014, the company hasn’t appeared to be itself — even after it hired Stefan Larsson last September as its CEO.
Quietly, RL stock has been having a rough go of it.
Over the past 10 years through June 24, Ralph Lauren’s stock has achieved an annualized total return of 6.1% — 380 basis points less than its apparel manufacturing peers, and 162 basis points lower than the S&P 500. Ralph Lauren is supposed to be this icon of American fashion, so underperforming over such a long period of time is definitely not part of the script.
That’s why it was forced to bring out its “Way Forward” plan June 20. With RL stuck in neutral, Larsson plans to take the company in a slightly different direction that focuses on its three core brands: Ralph Lauren, Polo and Lauren. Larsson reckons that it was spending too much time on various other brands including Club Monaco (which I expect will be sold over the next two years) when it should have been narrowing its focus to the brands that consumers want and that got the company to where it is today.
It’s the old 80/20 rule — a select group of brands drives a majority of the revenue. Focusing on anything else is a distraction.
While Ralph Lauren’s stock might not be done dropping, given that the company is undertaking a yearlong restructuring, I believe now is the time to begin buying before the turnaround is complete.
7 “Hidden” Value Stocks to Buy: GameStop (GME)
GameStop Corp. (NYSE:GME) is another underachiever just like Ralph Lauren — its stock is down 56% through June 23 from its five-year high of $57.74.
But there’s no mystery as to why this is happening. Video game publishers are moving consumers from a physical gaming environment to one operating online. By doing s, they’re cutting out the middleman, which is GameStop. GME’s first-quarter results revealed that new video game hardware sales fell 28.8% in Q1 to $312.9 million, a $127 million haircut.
However, GameStop has replaced some of that lost business. In Q1, its collectibles business increased 261% year-over-year to $82.3 million. In addition, its electronics and mobile phone sales increased by 41% year-over-year to $192.6 million. Those two relatively new additions to its revenue streams were able to replace all but $12 million of the lost new hardware gaming revenue.
Investors so far aren’t buying this argument, however, knocking GME stock down 11% since announcing Q1 results on May 26. Fear is in the water.
But that’s an opportune time to be buying.
GameStop stock currently yields 5.8%. Given that the company expects to generate at least $3.90 in diluted earnings per share in fiscal 2016 and it’s paying out $1.48 per share in dividends, you’re being paid almost 6% to hold GME despite the fact it will retain about 60% of its earnings.
To me, that’s more than fair.
7 “Hidden” Value Stocks to Buy: Trinity Industries (TRN)
I’ve written several articles about Trinity Industries Inc (NYSE:TRN) over the past few years. I’m a big fan. So take this into consideration when reading what I have to say about the industrial conglomerate. After all, a healthy dose of skepticism is always good.
In February, I argued that Trinity’s railcar business would recover as oil prices recovered. Unfortunately, that came at the same time management announced 2016 earnings would drop by 60% as a result of weakness in its railcar business. That seriously spooked investors who were informed in the very same announcement that the company had generated $5.08 in earnings per share in fiscal 2015.
It’s the ultimate irony. As a result of this news, TRN stock tanked 23% that February day on volume of 23 million shares, around 10 times the normal daily average. It has recovered somewhat, but not above $20 — where it was before its fateful announcement.
Where are things four months later?
If its Q1 2016 results are any way to assess things, I’d say much hasn’t improved in its railcar business, which saw earnings decline by 26% year-over-year. Its guidance calls for earnings per share in 2016 to be somewhere between $2 and $2.30. Q1 2016 EPS were 64 cents, 43% lower than a year earlier. If you consider that it earned another $3.93 per share over the remaining three quarters in 2015, it should hit around $1.57 for the remaining three quarters in 2016, representing an annual EPS of $2.21.
The silver lining: It signed a billion-dollar wind tower order in late May that should take some of the sting out of its poor year ahead.
Nonetheless, at under $20, TRN is a considerable bargain.
7 “Hidden” Value Stocks to Buy: Icahn Enterprises LP (IEP)
A friend asked me about Carl Icahn’s company the other day. He wanted to know if the 11% yield on Icahn Enterprises LP (NASDAQ:IEP) was safe or not, because if it was safe, IEP was worth owning.
He’s not wrong.
The question one must first ask themselves is whether the current troubles facing Icahn are permanent or temporary. I believe, like Trinity Industries, the issues plaguing IEP stock are temporary and they will soon disappear into the woodwork as all temporary setbacks do.
At the moment, Icahn is trying to buy all of the shares in auto parts maker Federal-Mogul Holdings Corp (NASDAQ:FDML) he doesn’t already own. It’s a brilliant move. That’s because his auto-related investments have done well at the very same time that his oil investments have tanked. By gaining control of the entire company, Icahn can affect more change at Federal-Mogul, generating greater profits in the future.
When oil prices are high, auto stocks don’t do as well and vice versa. By doing what he’s doing, Icahn is protecting his company against future moves, up or down, in the price of oil. That’s smart diversification.
At the end of the day, Icahn Enterprises’ total debt of $12.5 billion is just 39% of its total assets, and while it did lose $837 million in the first quarter, that is temporary. With 4% returns the norm for equities moving forward, an opportunity to get 11% on the dividend alone is music to any value investor’s ears.
7 “Hidden” Value Stocks to Buy: Leucadia National (LUK)
Once upon a time Leucadia National Corp. (NYSE:LUK) was a holding company — investing in everything from oil to beef — with a track record that ranked right up there with some of the best including Warren Buffett. It then went and bought the 71% of investment banker Jefferies Group it didn’t already ow, and its stock has been on a downward spiral ever since.
LUK announced the deal on Nov. 12, 2012. Since then, its stock is down 19% through June 24 while the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) is up 65% over the same period.
From that perspective, it appears founders Joseph Steinberg and Ian Cumming made a big mistake.
But if you subscribe to the idea that the sum-of-the-parts are worth more than the whole when it comes to Leucadia National, you’re looking at one cheap stock. In its 2015 letter to shareholders, CEO Richard Handler said this about LUK (emphasis mine): “There remains significant long-term upside in the value of Leucadia, which exists in the intrinsic value of our businesses and is not fully reflected in our current dismal stock price.”
Leucadia’s book value per share as of the end of March was $27.48. Currently, LUK shares are trading for 60% of its book value. I’m not going to run down each of its businesses but if you look under the hood I think you will see that this stock is easily worth another $10 per share.
With Brexit knocking it down even further, now is the time to buy.
7 “Hidden” Value Stocks to Buy: Harman International (HAR)
If you drive a lot, there’s a good chance you’ve either been listening to a Harman International Industries Inc./DE/ (NYSE:HAR) stereo or utilizing one of its in-car navigation systems. With a $23 billion order backlog and double-digit operating margins, Harman is both a critical and financial success.
You would think with such a big backlog in orders HAR stock would be part of the ever-growing $100-plus club — those elite stocks that trade for triple digits. Alas, it’s not the case. At least not at the moment. HAR stock last traded in triple digits on Dec. 7, 2015. Since then, it has lost 30% of its value.
It seems the company’s smaller segments (Professional Solutions, Connected Services) are facing some margin issues at the moment, and that has some analysts sitting on the sideline until it can figure those out.
Let me put any reservations you might have about this stock to rest.
In the third quarter ended March 31, it grew revenues 12% excluding currency to $1.63 billion and operating income by 48% excluding currency to $135 million. Both perfectly acceptable numbers. What investors didn’t like was that at the same time Harman announced its Q3 numbers, it announced full-year revenue guidance that would be $175 million less (2.5%) than previously estimated, along with a 30-cent cut (4.6%) to its earnings per share.
At the end of the day, Harman still is going to generate $6.8 billion in revenue and $6.20 per share in earnings. So considering that HAR stock is trading at less than 12 times those earnings, the 30% drop in HAR stock hardly seems fair.
This is a good company whose stock has seen many ups and downs. Hold it long-term, and you’re going to make money.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.