Value stocks are so out of fashion at the moment that despite being cheaper than they’ve been in the past 30 years, some experts suggest they’re still not the stocks to buy.
“We could’ve had this story 10 years ago and talked about the 20-year anniversary of it being a bad market for value,” Dave Nadig, managing director of ETF.com, said recently on CNBC. “We could go another 10 years and it could be a bad market for value. I’m not sure that value and growth as an investing paradigm makes that much sense anymore.”
Another expert who appeared on the same CNBC show as Nadig suggested that you should only buy value stocks heading into a recession or in the first year coming out of one.
Until either of these situations comes around, Datatrek Research co-founder Nick Colas believes investors ought to stick with growth stocks.
I say, not so fast.
I’ll select seven stocks to buy for the second half of 2019, all from the top 50 holdings of the Vanguard Value ETF (NYSEARCA:VTV), the biggest value ETF in the U.S. with $48 billion in assets under management.
Value Stocks to Buy: Berkshire Hathaway (BRK.A, BRK.B)
Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) is the largest of the 338 holdings in VTV with a weighting of 5.6%. Warren Buffett’s company continues to have a bad year on the markets, up just 2.2% year to date.
However, when you consider that Berkshire had a total return of 3% in 2018, Buffett’s working on a 17-month losing streak.
That’s why I recently provided InvestorPlace readers with seven ideas to make Berkshire Hathaway stock more attractive. I’m as enamored with the holding company as the next person, but it is having a hard time convincing investors who’ve never owned its stock why they should get on board.
With all the talk of it underperforming the S&P 500 in recent years, its sum-of-the-parts valuation still makes it one of the best value stocks to buy inside or outside the index. Long-time investors know this, hence why they continue to hold despite going into a second year of single-digit returns.
Also, it’s essential to add that its poor performance in 2018 was 739 basis points higher than the index.
Verizon (NYSE:VZ) is the 10th-largest of VTV’s 338 holdings with a weighting of 1.9%. The second-largest wireless carrier in the U.S. is having a bad year, up just 4% year to date. Worse still, VZ stock is getting pulverized by AT&T (NYSE:T), which is up 14% year to date.
In late May, I highlighted the reasons why I thought Verizon was a better buy than T stock.
For me, it all comes down to the balance sheet. Verizon’s is much healthier due to AT&T’s massive purchase of WarnerMedia. AT&T supporters might view Verizon’s advantage as a temporary one given HBO’s future cash flow generation — and I get that argument.
However, because AT&T has long-term debt that’s 71% of its market cap compared to 45% for Verizon — with price-to-cash flow ratios almost identical — if I’m a value investor, I have to go with the smaller of the two companies.
AT&T might deliver in the long haul, but the bigger margin of safety lies with Verizon.
Caterpillar (NYSE:CAT) is the 37th-largest of VTV’s holdings with a weighting of 1.1%. The maker of heavy equipment for mines and construction is also having a bad year, up just 4.5% year to date through June 12. That’s on top of a 17.3% decline in 2018.
The problem for Caterpillar is that the construction industry, its most significant revenue source, could be slowing down. Furthermore, the Asia/Pacific market isn’t performing well, and that’s got investors worried about the future.
As a result of these worries, Caterpillar stock lost more than 14% in May.
The issues plaguing CAT stock at the moment have little to do with the company itself and more to do with the global economy. It’s something that shareholders can’t control.
However, with a dividend yield of 3.1%, free cash flow of $4 billion, a free cash flow yield of 3.9%, and a forward P/E of 10.1, CAT stock appears to be trading at below fair value, making a bet on its stock a winning one over the long haul.
Morgan Stanley (MS)
Morgan Stanley (NYSE:MS) is the 52nd-largest of VTV’s 338 holdings with a weighting of 0.82%. The global investment bank is having a decent year, up 11% year to date.
When Morgan Stanley reported Q1 2019 results in April, they were nothing to write home about. That said, both its revenue and profits beat analyst expectations. The consensus was for earnings of $1.17 a share on $9.94 billion in revenue. MS delivered $1.39 a share in earnings on $10.3 billion in revenue.
More importantly, the company’s wealth management business, the company’s largest, delivered revenues of $4.39 billion in the quarter, $200 million higher than the estimate.
Since taking the reins, CEO James Gorman has focused Morgan Stanley on wealth management and that’s ensuring it continues to generate significant revenues and profits.
Yielding 2.8% and trading at 8.1 times forward earnings, MS stock is cheaper than a lot of the mainline banks.
CVS Health (CVS)
CVS Health (NYSE:CVS) is the 40th-largest of VTV’s 338 holdings with a weighting of 0.94%. Both CVS and its biggest competitor, Walgreens Boots Alliance (NASDAQ:WBA), are having terrible years on the market. CVS and WBA are down 16% and 22% year to date.
CVS has been bogged down getting approval from regulators for its $69 billion takeover of Aetna in November. The retail pharmacy chain is transforming its business into a one-stop shop for health and wellness. Aetna’s insurance plans will allow CVS to provide its customers with vertically integrated medical care.
A report surfaced June 11 that suggested the federal court judge considering whether to allow the merger is leaning toward blocking it from happening. However, CVS strenuously denied that the rumor had any merit.
I like CVS’ transformation plan and fully expect the deal to go through. Trading at just 7 times cash flow and 8 times forward earnings, CVS is too cheap to ignore.
Walt Disney (DIS)
Walt Disney (NYSEDIS) is the 24th-largest of VTV’s 338 holdings with a weighting of 1.56%. After three sub-par years in the markets — up 0.6%, 4.7%, and 3.6% in 2016 through 2018 — DIS stock is delivering like gangbusters for shareholders, up 30.2% year to date.
I was a fan of Disney before it closed its $71-billion acquisition of 21st Century Fox and I’m still a fan. That being said, I did suggest in March that the Fox deal would do little to boost the company’s share price.
My feeling is that we won’t be able to quantify the success of the deal for at least 3-5 years. In the meantime, Disney’s going to be spending like a drunken sailor to ensure Disney+ is a Netflix (NASDAQ:NFLX) killer.
I’m facetious, of course. No one, not even the world’s largest entertainment company, is going to take Reed Hastings down. At least not overnight.
InvestorPlace’s Tom Taulli recently wrote a great piece about Disney and artificial intelligence. I recommend you read it. For me, Taulli’s article exemplifies why you should own Disney stock — its use of technology to entertain people is the best on the planet.
Disney’s got a lot of moving parts and Bob Iger and the rest of its management team will continue to do what it takes to remain the world’s biggest and best entertainment company.
It’s not dirt cheap, but it’s worth every penny.
PepsiCo (NYSE:PEP) is the 17th-largest of VTV’s 338 holdings with a weighting of 2.4%. Since long-time CEO Indra Nooyi stepped down in October, Pepsi stock is up 26.7%, an annualized total return of 40%.
Before you get any ideas Nooyi was holding back PepsiCo stock; she delivered a cumulative total return of 136% over 17 years in the top job, including a significant stretch through the 2008 recession which saw PEP stock drop to below $20.
The work she did to get the beverage and snack food maker in fighting form in recent years helped her successor, Ramon Laguarta, hit the ground running. Laguarta joined Pepsi Europe in 1996, moving up the ranks until becoming PepsiCo president in September 2017; ascending to the top role when Nooyi retired a year later.
Nooyi built an exceptional bench of talent.
Case in point: PepsiCo chief commercial officer Laxman Narasimhan just took the CEO job at Reckitt Benckiser (OTCMKTS:RBGLY) — whose brands include Lysol, Woolite, Calgon, Scholl and Clearasil — less than three months after being appointed to the newly created role at Pepsi.
Pepsi reached on to its deep bench to appoint Ram Krishnan to replace Narasimhan. Krishnan currently runs the company’s Greater China business.
Trading near a 52-week high of $134.71, PepsiCo stock looks ready to continue moving higher.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.