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7 Strong Value Stocks to Buy for 2020

Under-performing value stocks over the past decade will out-perform over the next decade

Source: Shutterstock

[Editor’s note: This article is regularly updated to include the most relevant information available.]

Value stocks can broadly be defined as stocks which trade at a discount to the market, typically measured on a price-to-earnings basis (i.e. stocks with lower price-to-earnings multiples than the market).

For a long time, value stocks have been getting killed by growth stocks, or stocks which trade at a premium to the market. But, an interesting chart has been circling on Twitter (NYSE:TWTR) which uses historical data to make the case for buying value stocks over the next decade.

The chart plots the relative performance of value stocks versus growth stocks on a 10-year annualized basis. It finds that, over the past decade, value stocks have under-performed growth stocks by an average of 2.9% per year — the biggest under-performance on record — with data dating back to 1960.

The last time this number got so low was the peak of the Dot Com Bubble. At that point in time, value stocks had under-performed growth stocks by about 2.7% per year over the preceding decade. Over the following decade, value stocks out-performed growth stocks by more than 10% per year.

The thinking here is that growth stocks don’t outperform value stocks forever, nor do value stocks outperform growth stocks forever. Right now, the divergence in performance between the two is as wide as it has ever been. History says a snap-back is due. If we get that snap-back, then value stocks are due for big returns over the next decade.

With that in mind, here are some of the top value stocks to buy in 2020:

  • AT&T (T)
  • Bed Bath & Beyond (BBBY)
  • Intel (INTC)
  • International Business Machines (IBM)
  • Ford (F)
  • Best Buy (BBY)
  • CVS (CVS)
  • Bank of America (BAC)

With that in mind, let’s take a look at seven value stocks to consider buying for 2020.

AT&T (T)

Value Stocks to Buy for 2020: AT&T (T)
Source: Jonathan Weiss / Shutterstock.com

One value stock which outperformed in 2019 and should continue to outperform in 2020 is AT&T (NYSE:T).

In 2019, shares of the telecommunications giant had their best year since 2006, rising 37% in anticipation of big 5G and streaming TV catalysts in 2020. Despite that run higher, AT&T stock is still very cheap at just about 11-times forward earnings, and the forthcoming 5G and streaming TV catalysts look as good as ever.

That is, AT&T’s mobile business will get a big boost this year as consumers upgrade in bulk to 5G smartphone and 5G wireless coverage plans. This mass upgrade cycle will push the company’s wireless revenues and profits higher. At the same time, cord-cutting losses will start to be offset by streaming subscriber growth through the company’s new HBO Max streaming service.

In other words, as Deutsche Bank analyst Bryan Kroft recent highlighted in a note to clients, the company’s secular wireless discounting and cord-cutting challenges will ease in 2020. “Net Net, we expect greater stability in [AT&T’s core segments], which should help to temper investor concerns around AT&T’s exposure to these secularly challenged businesses,” says Kroft.

These favorable dynamics, on top of what’s still a cheap valuation, should keep the rally in AT&T stock alive for the next twelve months.

Bed Bath & Beyond (BBBY)

Source: Jonathan Weiss / Shutterstock.com

The value stock on this list with the most potential upside is Bed Bath & Beyond (NASDAQ:BBBY).

The struggling department store operator has a new chief executive — Mark Tritton — and he’s a top quality executive. He comes from Target (NYSE:TGT), where he was instrumental in taking what was a struggling physical retail business in the mid-2010s, and turning it into an omni-channel retail powerhouse by 2019.

The bull thesis on Bed Bath & Beyond stock rests on the idea that Tritton can execute a similar turnaround at Bed Bath & Beyond. Admittedly, things aren’t off to a great start. In the holiday quarter, Bed Bath & Beyond reported a bigger-than-expected 5.4% drop in comparable sales, as store traffic remained weak and inventory management issues persisted.

Indeed, Wells Fargo analyst Zachary Fadem recently noted: “In our view, this represents a discouraging start to the Tritton era, and while it’s widely understood that a BBBY turnaround would be no easy task, we believe it’s safe to say that [near term] improvement appears increasingly unlikely at this point.”

But, Tritton is doing everything right to stabilize this sinking ship and drive long term improvements.

That includes better sourcing, cost-cutting, real estate optimization, an expanded digital presence, and built-out omni-channel capabilities — all of which are already happening in the new year. For example, the company reported a 20% increase in digital sales in the holiday quarter (the biggest increase in recent memory), they sold PersonalizationMall.com for $252 million, and are planning to invest $350M to $400M on store upgrades in 2020.

These changes lay the groundwork for Bed Bath & Beyond to stabilize its sales base and improve margins. If so, then profits will move higher. So will the stock’s forward earnings multiple. Profit growth plus multiple expansion equals a higher price tag for Bed Bath & Beyond stock.

Intel (INTC)

Intel Intel Stock Is Topping out for Now, but It Definitely Is a Buy on the Dip INTC, INTC stock, Intel stock T. Gecgil TR Hot Stocks 7:21 a.m.
Source: Kate Krav-Rude / Shutterstock.com

Despite being exposed to multiple hyper-growth industries, semiconductor giant Intel (NASDAQ:INTC) is still a value stock that trades at just 13.5-times forward earnings.

This combination of big growth exposure and dirt cheap valuation is what makes Intel stock so attractive.

Over the next several years, Intel’s revenues and profits will continue to push higher, supported by rising demand for central processing units (CPUs) from end-markets like data-centers, autonomous driving, artificial intelligence, machine learning, the Internet-of-Things, so on and so forth. Sure, there’s a lot of competition in these markets. But Intel is the 400-pound gorilla in the industry, and its unrivaled size will enable the company to remain relevant in all of these growth markets for several years to come.

At the same time, the stock only trades at 13.1-times forward earnings. Valuation friction is not an issue here. If anything, there’s actually a lot of potential upside through multiple expansion as Intel increasingly turns into a growth company thanks to its data and AI tailwinds.

Big growth and a cheap valuation lay the groundwork for Intel stock to out-perform for the foreseeable future.

Ford (F)

Source: r.classen / Shutterstock.com

While electric vehicle giant Tesla (NASDAQ:TSLA) has surged to all-time highs, traditional U.S. auto giant Ford (NYSE:F) has sunk to decade lows. That’s because the former is aligned with rising electric vehicle demand, and is consequently growing its reach across the global auto landscape. Meanwhile, the latter is aligned with falling traditional auto demand, and is consequently seeing its revenues and profits fall.

But things about to change for Ford. Over the next five years, Ford is going to become more like Tesla and align itself more closely with the electrification trend. Ford is going to launch several new fully electric and hybrid vehicles, the sum of which will give Ford much broader exposure to rising EV demand tailwinds.

Of particular interest, Ford will launch the Mustang Mach-E (which the company advertised for during the Super Bowl) in 2021. That car projects to have particularly high demand given the strong branding behind Mustangs.

As Ford gains broader exposure to the EV market, demand trends will improve, revenues will run higher, margins will expand, and profits will get back to growing. At just 7.6-times forward earnings, Ford stock isn’t priced for re-accelerated growth. Thus, as growth does pick up over the next few years, Ford stock should drive higher.

Best Buy (BBY)

A Strong Investor Day Underscores That Best Buy Stock Is Undervalued
Source: BobNoah / Shutterstock.com

For the past several years, Best Buy (NYSE:BBY) stock has been one of the cheapest — and often times, the cheapest — high-quality retailers on the market. Not surprisingly, over the past five years, Best Buy stock has simultaneously rallied more than 130%, while the SPDR S&P Retail ETF (NYSEARCA:XRT) has dropped about 10%.

This out-performance in Best Buy stock will persist for two reasons. First, Best Buy stock remains dirt cheap. Shares trade at 14.5-times forward earnings. Sure, that’s above the stock’s five-year-average forward earnings multiple. But it’s well below the market average multiple (19.1) and the consumer discretionary sector average multiple (23.5). Plus, Best Buy stock has a 2.2% dividend yield, which is also above the market’s yield of 1.7%. For all intents and purposes, Best Buy stock remains cheap.

Second, Best Buy continues to fire off strong quarterly numbers. Comparable sales growth at the retailer has been consistently positive for the past several years. Over the past several quarters, it has been consistently north of 1%. Margins are expanding. Profits are running higher.

All of these trends should persist, because more consumer products are becoming consumer tech products, implying that consumers will continue to do more shopping at Best Buy. Steady growth coupled with a discounted valuation should keep Best Buy stock on a solid uptrend.


Source: QualityHD / Shutterstock.com

A significant and impressive pharmacy retail turnaround — which started in 2019 — will continue in 2020 and keep the recent rally in CVS (NASDAQ:CVS) stock alive for the foreseeable future.

The pharmacy retail world became commoditized in the 2010s. Outside of proximity, it became tough to tell CVS, Walgreens (NASDAQ:WBA), Rite Aid (NYSE:RAD), and others apart. In the absence of product or platform differentiation, the drug retail world relied on price differentiation to drive growth. That meant price cuts, lower revenue per item, lower margins, and lower profits.

That’s exactly what happened at CVS. And lower profits is exactly why CVS stock stumbled from 2015 to 2018.

In 2019, CVS management figured out a way to differentiate their retail operations like HealthHUBs, or stores that include personalized, in-store health care services like nutrition counseling and blood pressure screenings. The thinking was that HealthHUBs would help CVS stores turn into one-stop-shops, and given how much consumers have gravitated towards one-stop-shops like Walmart (NYSE:WMT) and Target (NYSE:TGT) over the past few years, this transformation should reinvigorate traffic growth trends.

Management was right. As CVS has opened up more HealthHUBs, traffic, revenue, and profit trends have improved. CVS stock has rallied.

CVS will continue to open up more HealthHUBs in 2020. As they do, all of these favorable dynamics will persist, including the big rally in CVS stock.

Bank of America (BAC)

Source: PL Gould / Shutterstock.com

The bull thesis on Bank of America (NYSE:BAC) stock for 2020 goes something like this: buy bank stocks this year because the U.S. economy is improving.

Specifically, excluding the near-term adverse impacts from the coronavirus outbreak, all economic conditions in the U.S. are favorable and should improve throughout 2020. The U.S.-China trade war is deescalating. This deescalation is accelerating amid the coronavirus outbreak, as China has halved tariffs on U.S. goods and appears significantly more willing to get started with phase two of a trade deal in order to support its own economy.

At the same time, the U.S. Federal Reserve continues to pour liquidity into the market via asset purchases, and is supporting expansion by keeping rates low. Indeed, over the past four quarters, the U.S. Fed has injected more fiscal stimulus into the U.S. economy that at any stretch since the late 2000s Financial Crisis.

Meanwhile, the U.S. jobs market remains robust, with record-low unemployment rates, huge job growth, and steady wage gains. Manufacturing activity in the U.S. is picking back up, too. As are corporate capital expenditure levels.

Big picture: the U.S. economy is in rebound mode after a shaky 2018 and 2019. As goes the U.S. economy, so go U.S. banks. Bank of America stock, at just 11.4-times forward earnings and with strong operating results, is one of the more attractive U.S. bank stocks to buy for this economic rebound.

As of this writing, Luke Lango was long CVS. 

Article printed from InvestorPlace Media, https://investorplace.com/2020/02/7-strong-value-stocks-to-buy-for-2020/.

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