[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.
The last time this number got so low was the peak of the Dot Com Bubble. Over the following decade, value stocks out-performed growth stocks by more than 10% per year.
The thinking here is a similar dynamic will play out over the next decade. Growth stocks don’t outperform value stocks forever. Value stocks outperform growth stocks forever. Growth stocks had their time to shine last decade. This decade, it’s time for value stocks to shine.
Also of note: because value stocks are cheaper, they tend to hold up better during times of market volatility, which is what we find ourselves in today with the coronavirus outbreak.
With that in mind, here are some of the top value stocks to buy in 2020:
- AT&T (T)
- Target (TGT)
- Intel (INTC)
- Dollar Tree (DLTR)
- United Airlines (UAL)
- CVS (CVS)
- Bank of America (BAC)
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 9-times forward earnings, and the forthcoming 5G and streaming TV catalysts are still on the table.
To be sure, the coronavirus outbreak does present a sizable risk here. If COVID-19 tips the U.S. economy into a recession, then AT&T’s consumer demand trends will weaken, adding stress to an already highly levered balance sheet.
But, evidence shows that social distancing does work to quell the outbreak. If done properly, such social distancing could allow things to get back to semi-normal within the next two to three months (see China). Thus, assuming the U.S. appropriately implements social distancing measures and that the economy can find its footing again in May or June, then the second-half of 2020 could be quite good for AT&T.
If all that happens, AT&T stock won’t stay this cheap for long.
Shares of general merchandise retailer Target (NYSE:TGT) should win in both the near- and long-term, making TGT one of the top value stocks to buy today.
In the near-term, consumers in the U.S. are panic-buying as they prepare to be cooped up inside for several weeks. That should help boost Target’s sales over the next few weeks.
In the long-term, it appears that the U.S. is more aggressively responding to the outbreak via social distancing measures. Such measures should help curtail the spread of COVID-19, and ultimately cause the virus to “wash out” by the summer. The economy should get on normal footing. Consumers should get back to spending. And Target’s sales should rebound, thanks to the company’s favorable positioning in the retail market as an omni-channel, all-in-one retailer.
Overall, Target is a strong company, that should be able to weather a rough patch over the next few months, with a stock price that is deeply discounted at 14-times forward earnings. That’s a winning combination.
Despite being exposed to multiple hyper-growth industries, semiconductor giant Intel (NASDAQ:INTC) still trades at just 9.6-times forward earnings.
This combination of big growth exposure and dirt cheap valuation is what makes Intel stock one of the best value stocks to buy today.
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. Its unrivaled size will enable the company to remain relevant in all of these growth markets for several years to come.
To be sure, coronavirus presents a significant risk for this company through supply chain disruptions and depressed global demand. Such risks will be short-lived. A lot of factories in China are already coming back online. Demand will rebound, too, by the summer.
Thus, near-term risks on Intel stock are overstated, while long-term upside potential is understated. So long as this remains true, INTC stock will remain one of the top value stocks to buy.
Dollar Tree (DLTR)
Much like Target, value stock Dollar Tree (NYSE:DLTR) should be a relative winner in both the near- and long-term.
In the near-term, coronavirus-related panic-buying will provide a boost to Dollar Tree’s numbers, especially because Dollar Tree is a discount store, and consumers — who are also worried about the economy — will likely be looking to save money in their panic-buying efforts. This will only become more true as the pandemic wears on.
Long-term, Dollar Tree is a high-quality, high-margin discount retailer with a huge real estate footprint and an enduring consumer value prop. The company should continue to grow revenues and profits at a steady rate over the next several years, once virus headwinds pass. Coupled with a multi-year low 14-times forward earnings multiple, that steady growth profile should lead to strong share price returns.
Overall, then, near-term weakness in DLTR stock won’t last forever. Taking advantage of this massive sell-off should pay off in the long run.
United Airlines (UAL)
United Airlines (NYSE:UAL) stock has plunged on coronavirus concerns, and reasonably so. The world is shutting down, and no one is flying.
But, the U.S. government has pledged to support U.S. airlines like United during this time. Such help will likely come with strings attached, such as squandering buybacks over the next few years. But, such support is also necessary, and will help ease liquidity concerns across the industry.
On that front, United is actually in the best financial position in the group, with $8 billion in liquidity and $20 billion in additional unencumbered assets.
At the same time, it’s important to remember that coronavirus will cause a sharp but short-lived downturn in airline demand. Air travel has become a necessary component of modern travel. Once the virus clears up, consumers globally will fly again.
So, United is staring at a manageable short-term problem (thanks to government support), and the stock is trading at 2.3-times forward earnings.
Long-term, the virus will pass, demand trends will rebound, and this plunge in UAL stock will reverse course.
One of the best value stocks to buy because of strong long-term fundamentals is CVS (NASDAQ:CVS).
Long story short, 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). In 2019, though, CVS management figured out a way to differentiate themselves with 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. Given how much consumers have gravitated towards one-stop-shops like Walmart (NYSE:WMT) and Target 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 all improved. CVS stock has rallied.
Sure, COVID-19 has thrown a wrench in the HealthHUB growth narrative. But, that wrench won’t stick around forever. Soon enough, it will pass. When it does, the HealthHUB growth narrative will resume. CVS will get back to growing traffic, revenues, and profits. The stock will rally.
Bank of America (BAC)
Much like airline stocks, bank stocks have been killed recently. Bank of America (NYSE:BAC) stock has been no exception. Shares are down 50% over the past month, and trade at their lowest valuation and highest yield in several years.
Of course, all of this negativity is warranted by a slowing U.S. economy, plunging yields, and a flat yield curve.
But, bank stocks are trading like its 2008 again, and it’s anything but that. Back then, banks were the problem. Today, banks are part of the solution.
That is, thanks to strict controls and consistent stress tests put into place in the wake of the Financial Crisis, banks like Bank of America have come into the coronavirus crisis with strong balance sheets, tons of reserves, and ample liquidity. They are not are risk of collapsing like they were in 2008. They won’t need a government bailout. Instead, they are pillars of strength which will provide support to struggling businesses across America.
Yet, they are all trading at dirt-cheap valuations. BAC stock, for example, is trading below its tangible book value.
This discrepancy is an opportunity. By the second-half of 2020, I fully expect coronavirus headwinds to be much less severe. The economy will rebound, yields will rise, and the yield curve will normalize. Amid all those improvements, Bank of America stock will rally.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.