Once again, value stocks are underperforming. For most of the bull market that ended in March, growth names were in favor. In the recovery from mid-March lows, once again high-valuation, high-growth stocks have led the way.
At some point, presumably, that will change. Growth names no doubt have benefited from lower interest rates, which have brought capital into the equity markets and, at least in theory, increase the value of out-year profits. But there is a point where valuations, even for the market’s biggest winners, will have to matter. With the NASDAQ Composite now positive year-to-date despite a global pandemic, that point may be arriving soon.
In the meantime, some caution is advised. Cheap stocks in recent years generally have stayed cheap. But, as always, the wheel will turn, and when it does there are value stocks with solid upside potential.
Here are 10 value stocks to watch for investors looking toward that end of the market:
- Dell Technologies (NYSE:DELL)
- Knoll (NYSE:KNL)
- Ericsson (NASDAQ:ERIC)
- Dollar Tree (NASDAQ:DLTR)
- Mastercraft Boat Holdings (NASDAQ:MCFT)
- Photronics (NASDAQ:PLAB)
- Capri Holdings (NYSE:CPRI)
- Facebook (NASDAQ:FB)
- Bristol-Myers Squibb (NYSE:BMY)
- John B. Sanfilippo & Sons (NASDAQ:JBSS)
10 Value Stocks: Dell Technologies
DELL stock jumped 8% on Wednesday on news that the company was considering a spin-off of its stake in VMware (NYSE:VMW). But even with that gain, there’s plenty of potential upside ahead, at least on paper.
After all, Dell’s 81% stake in VMware is worth more than Dell’s current market capitalization. Debt on Dell’s balance sheet explains that to some extent, but even accounting for those borrowings, the non-VMware businesses are assigned an absurdly cheap valuation.
One potential reason why is Dell’s history. The company has been through two bruising buyouts. As a result, some investors don’t trust founder Michael Dell and private equity partner Silver Lake.
That’s why the reports on Wednesday moved the stock so sharply (though VMW did rally as well). A VMware spin-off seems like the purest way for DELL shareholders to realize the value inherent in a “sum of the parts” case. If optimism toward a realization of that case grows, DELL shares should continue to rise.
As the market turned south in February, KNL stock was one of the biggest losers. Its price went from $26 in mid-February to below $10 a month later. Though the stock has rallied 50% from the lows, a recovery to a current price below $12 still seems rather muted.
There are obvious challenges here. Knoll is best-known for its office furniture business. That business will face short-term headwinds from the coronavirus pandemic; 2020 orders are likely to be down substantially.
But there’s also a mid-term headwind, as companies like Facebook and Shopify (NYSE:SHOP) plan for a significant amount of employees to work remotely even once normalcy returns. Smaller office footprints suggest order weakness can last for some time. In a worst-case scenario, the industry may well have peaked.
That said, 58% of the company’s profit in 2019 actually came from its Lifestyle segment. That business does have some office exposure as well. But it also serves ultra-high-end residential markets — markets that are likely to see resilient demand going forward.
Knoll will need some time to right-size the office business. 2020 and likely 2021 results are going to be soft at best. But over the long term, there’s a chance for the company to claw back at least some of its losses from February levels — which still leaves a path to double-digit annual returns.
Investors looking for value stocks with exposure to 5G wireless tend to look past ERIC. Nokia (NYSE:NOK) gets significantly more attention. Qualcomm (NASDAQ:QCOM) is a perennial “buy the dip” candidate. Even Cisco Systems (NASDAQ:CSCO), despite underperforming in recent years, is called out as a 5G pick.
But I wrote in February that ERIC stock looked like the best play in 5G. With shares at a similar price at the moment, I still think that’s the case. Ericsson clearly has out-executed Nokia, giving it a better chance of capitalizing on the political pressure facing China’s Huawei. Qualcomm’s still-contentious relationship with Apple (NASDAQ:AAPL) creates a risk to its bull case. Cisco’s 5G business isn’t yet big enough to really move the needle for that networking giant.
To be sure, Ericsson has had its own struggles over the long haul: shares are actually down 17% over the past decade. But 5G could be a game-changer, and ERIC is cheap enough to see significant upside if that indeed proves to be the case.
The safe bet in dollar stores is Dollar General (NYSE:DG). Dollar General long has proven its bona fides as one of the country’s best retailers.
But a 22% rally so far this year leaves DG stock at all-time highs — and at a valuation much higher than historical levels. Higher unemployment perhaps suggests a mid-term tailwind, but there’s a case that the easy money has been made.
That leaves DLTR stock as an intriguing value play. The company hasn’t executed nearly as well as its larger rival. The acquisition of Family Dollar did not work out the way Dollar Tree management projected. As a result, DLTR stock has gained just 14% over the past five years. DG stock has soared 137%.
But for investors focusing on value stocks, there’s an intriguing case for DLTR stock at this point. The fiscal first quarter earnings report handily beat analyst estimates, leading shares to soar. But the gains have been given back in recent weeks. Valuation is much more conservative, at just 16x forward earnings. Weaker Family Dollar stores are being closed, and execution is slowly getting better.
Again, the safe bet is with stronger Dollar General stock. But while DLTR has more risk, it also has more potential reward.
Mastercraft Boat Holdings
Investors dumped boating stocks in a hurry in February and March. The coronavirus seemed likely to have a significant economic impact, which would hit demand.
But the sector has rallied just as fast: MCFT stock has more than tripled from the lows. The stock now is handily in the green so far this year, and it’s not alone: the same is true for larger rival Brunswick (NYSE:BC) and fellow performance boat manufacturer Malibu Boats (NASDAQ:MBUU).
The sector is gaining because it appears the pandemic actually has helped the industry. High-income individuals, many of whom have kept their job, have put funds allocated to travel or events toward the purchase of new boats. More may follow.
If that bull case plays out, MCFT stock should have still more upside ahead. It remains much cheaper than both MBUU and BC (neither of which is particularly expensive). Shares trade at about half their 2018 peaks.
To some extent, the easy money in MCFT probably has been made. But it’s too conservative to believe the rally is at an end.
For years, Photronics stock couldn’t hold its gains. The stock repeatedly cleared $10, and occasionally challenged $12, but each time wound up pulling back.
The pattern seemed to finally end late last year. The manufacturer of photomasks used in semiconductor production saw its stock bust out to a 13-year high above $16. Optimism toward two new facilities in China, which would serve that country’s growing domestic industry, was a key catalyst.
Of course, the coronavirus upended those plans. PLAB stock started fading in January, and a bounce from March lows has reversed. Once again, the stock is back below $11.
But that weak trading comes in the context of a chip sector that has actually performed rather well in 2020, all things considered. The Philadelphia Semiconductor Index is up over 5% year-to-date. PLAB stock, however, is off 32%.
Trade war concerns might account for some of that underperformance relative to the sector. It can’t account for all of it, however. It remains to be seen whether Photronics stock finally can hold $12, but it seems a reasonable bet it will at least have a chance to try.
Capri stock looks exceptionally cheap. But it might well be the highest-risk stock on this list.
After all, there’s an almost surefire way to lose money over the past few years: own a retailer with significant debt on the balance sheet. Whether it’s a play like Michaels Stores (NASDAQ:MIK) or The Container Store (NYSE:TCS), ‘cheap’ earnings multiples have not been enough.
That was true for CPRI stock as well even before it turned further south in 2020. The legacy Michael Kors business is posting revenue declines. Profits at the Jimmy Choo and Versace units are taking a short-term hit as the company invests behind those brands.
But investors have written off Capri to a degree that seems potentially unwise. Both the Jimmy Choo and Versace brands should be resilient. Capri’s long-term targets suggested it could get earnings per share past $6; something above $4 probably gets the stock at least above $25 against a current $15.
Again, retail has been a disaster zone for investors for years now, with mostly value traps and very few actual value stocks. This time may not be any different. But even with that caveat, CPRI is at least intriguing.
At this point, investors might quibble with putting Facebook stock into the category of value stocks. After all, the stock trades at 24x next year’s earnings per share. That’s not quite the kind of multiple usually assigned value plays.
Investors might argue that Facebook is better classified as a growth stock. Revenue, after all, increased 27% year-over-year in 2019.
But that’s precisely the point. FB stock is undervalued relative to its growth, which seems enough to qualify as a value stock. And with the forward price to earnings multiple closer to 21x backing out the company’s net cash, shares hardly are expensive.
There are risks here. Political pressure on the namesake platform once again is rising. But WhatsApp and Instagram alone support a good deal of the market value. Even with a sharp rally from March lows, FB still should have more upside ahead — no matter how investors categorize it.
Bristol-Myers Squibb, on the other hand, quite clearly belongs among value stocks. BMY trades at less than 8x forward earnings.
There is an argument that the cheap valuation makes some sense. Large-cap pharmaceutical stocks, with only a few exceptions, have struggled in recent years. Celgene, acquired last year, is heavily reliant on cancer treatment revlimid, faces patent expiration in 2026.
But particularly with a pull back from May highs, Bristol-Myers Squibb stock simply looks too cheap. This still is one of the better pharmaceutical companies out there. Celgene has a solid pipeline, and more cost savings from the merger are on the way.
A 3.1% dividend yield is attractive given the safety in the business and a 10-year Treasury paying out less than 1% annually. BMY looks like a nice “buy on the dip” candidate at the moment.
John B. Sanfilippo & Sons
JBSS stock is another name that has underperformed its group so far this year. The nut processor and distributor has seen its shares decline 9% so far in 2020. Yet most grocery-focused stocks have rallied amid “pantry stocking” during the pandemic.
At some point, JBSS should make up this gap. Earnings are somewhat volatile, owing to wholesale prices for key products. But profits have steadily risen over time. Meanwhile, the family-owned business has been exceptionally shareholder-friendly: some long-time shareholders have a negative cost basis, as dividends (including a number of special payouts) have exceeded their original price.
Simply put, John B. Sanfilippo is an excellent company, despite a relatively unique business model. That should be enough for upside, even if it might take some patience.
Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets. He is long shares of Dell Technologies, short VMware as a partial hedge, and has no positions in any other securities mentioned.