In 2020, the debate between growth stocks and value stocks hasn’t been a debate at all.
It has all been about growth, baby.
Value stocks have been hammered by a collapsing economy, while growth stocks have been buoyed by the work-from-home phenomenon. If you can make a good living in your living room, your spending has stayed the same. If you can’t, it has collapsed.
But this could indeed be a V-shaped recovery. Non-farm payrolls increased by 1.78 million in July, and the unemployment rate fell to 10.2%. Average hourly earnings increased by 4.8%.
Value stocks represent the real economy. These are the stocks that need to take off for a recovery to take hold. They’re where you’ll find the richest dividends, and the bulk of the economy’s revenue. These are the companies that make our cars, grow our food and loan us money. Their ranks now include tech companies that produce computer hardware or provide essential services that existed before Gordon Moore was born.
Many of these value stocks were hammered by the novel coronavirus. This means they’re now bargains:
- Kroger (NYSE:KR)
- Kraft Heinz (NASDAQ:KHC)
- General Motors (NYSE:GM)
- Intel (NASDAQ:INTC)
- Nokia (NYSE:NOK)
- ADT (NYSE:ADT)
- Capital One (NYSE:COF)
Buy low, sell high.
Value Stocks: Kroger (KR)
Kroger stock was underperforming for years before the virus hit.
No more. On Aug. 10 it opened for trade at about $35 per share. That’s a 21% gain for 2020, against 4% for the S&P 500.
Kroger is America’s second-leading grocery chain, with 10% of the U.S. market. Its share is double that of Costco (NASDAQ:COST) and five times that of Amazon’s (NASDAQ:AMZN) Whole Foods, at 2%.
During the April quarter this made Kroger an essential company. Sales zoomed 11.5% year over year to $41.6 billion. Profits also rose sharply, to $1.54 per share, up from 96 cents a year earlier. Analysts are expecting revenue of $29.6 billion when Kroger next reports.
As the pandemic eases, Kroger is unifying its brand message for the first time. Many people didn’t know that Fred Meyer in Portland is Kroger, or that Ralph’s in Los Angeles is Kroger or that Mariano’s in Chicago is Kroger. Now they will. All ads are being combined under a single national team, including streaming and internet-based ads on Roku (NASDAQ:ROKU) boxes.
More controversial are Kroger’s plans for home delivery. These still focus on automated warehouses from Ocado Group (OTCMKTS:OCDDY), a British company it partnered with two years ago. It’s a contrast to Walmart (NYSE:WMT), which has been handling online fulfillment directly through its stores.
Despite this year’s gains, Kroger still trades for 25% less than it did five years ago. The price-earnings ratio is 13.4 times, and the 18-cent dividend yields 2.1%.
Those are bargain prices.
Kraft Heinz (KHC)
After years of underperformance marked by a dividend cut, Kraft Heinz stock is on the move again. The shares are up 8.3% so far in 2020. They have been rebounding after another down quarter, marked by $2.9 billion of write downs on some of the company’s best-known brands.
Investors are attracted to the dividend, a 40-cent payout that yields 4.5%. They’re focused on increased sales, $6.6 billion for the quarter ending in June, and looking at adjusted earnings of 80 cents per share.
Analysts are starting to pound the table softly for Kraft Heinz.
They have praise for the new CEO, Miguel Patricio, brought in last year from Anheuser-Busch InBev (NYSE:BUD). The maker of Budweiser, like Kraft Heinz, is controlled by Brazil’s 3G Capital.
They see Americans eating at home rather than going out. A return to lockdown conditions should benefit the stock. Aggressive write downs, poor performance in the past and the pandemic have analysts calling Kraft Heinz a long-term turnaround play.
Shares bottomed last year, soon after Patricio joined the company.
Patricio plans to increase advertising by up to 40% during the second half of the year. This will include social media, where another 3G company, Restaurant Brands International (NYSE:QSR), struck gold with the Popeye’s chicken sandwich. Kraft Heinz has already done a burial and rebirth for its “Mr. Peanut” and is now pushing Velveeta with the Twitter handle @EatLiquidGold.
Value Stocks: General Motors (GM)
If the second quarter was the bottom for General Motors, it should come out of the recession OK.
The company lost $800 million, 50 cents per share, on revenue of $16.8 billion. It ended the quarter with $30.6 billion in liquidity after going through $7.8 billion of cash. Analysts had expected a loss of $1.77 per share.
GM CFO Dhivya Suryadevara said her company could soon make $4.5 billion before interest and taxes if an overall recovery is underway. GM expects to pay back the $16 billion in revolving credit it drew down in March by the end of the year.
CEO Mary Barra is now telling reporters she expects a short, sharp recession and recovery by 2021. To that end she will invest $20 billion in electrics and autonomous vehicles over the next five years.
GM has begun construction of a 30 GW battery plant in Ohio, comparable in capacity to the Tesla (NASDAQ:TSLA) Gigafactory in Nevada. The Ultium battery produced there will eventually have 20 different configurations to power the entire GM line. A network of 2,700 fast-charging stations should be in place for the Ultium in 2025.
The company plans to launch 12 electrics by 2023, on all its brands. Most will be pick-ups and SUVs. This pivot could become the heart of a full electric brand spinoff, with its own dealer network. Such a brand could produce 100,000 cars per year.
But Wall Street isn’t so sure about the plan. Analysts are betting a complete transformation of transportation could be complete before GM gears up to compete.
If they have miscalculated, as they once did on Tesla, GM is a buy.
Intel CEO Robert Swan talked about earnings in the company’s June quarter report.
“We exceeded our guidance by $1.2 billion on the top line and 13 cents on the bottom line,” Swan said. “Our data-centric businesses grew 34 percent and drove approximately 52 percent of the company’s revenue, and our PC-centric business grew 7 percent.”
Seen in isolation, the numbers were spectacular. Non-GAAP earnings of $1.23 per share on revenue of $19.7 billion. Add to that $10.6 billion in free cash flow and $2.8 billion paid out in dividends.
Yet shares that traded at $61 a week before earnings opened a few days after at $49.30. The dividend now yields 2.7%. Intel’s price-earnings ratio is 9 times.
The problem is that Intel has fallen behind on Moore’s Law, which it invented in the 1960s. The idea was that chips could double in complexity, at the same price, every few years. Today that means making chips with circuit lines just 7 nanometers apart.
For now, Intel can’t do it. For at least six months Intel is going to buy production from its manufacturing rival, Taiwan Semiconductor (NYSE:TSM). This is like Ford (NYSE:F) saying its new pick-up would be made by Toyota (NYSE:TM)
This means Intel is a value stock, not a growth stock. It’s a stock you buy for its dividend, not for capital gains. But when Intel gets its act together, your patience may be rewarded.
Value Stocks: Nokia (NOK)
Nokia stock has become a call on the global economic war.
If the U.S. and China were not at odds, Huawei would be wiping the floor with Nokia and Ericsson (NASDAQ:ERIC), the other big supplier of 5G gear.
But nationalism is giving Nokia a second chance at big carrier contracts. Nokia will be the exclusive vendor for Asia Pacific Telecom’s new 5G network in Taiwan.
NOK shares have nearly doubled from the pandemic lows. The stock opened for trade Aug. 10 at $5. That’s a market capitalization of $28 billion on about $23 billion of annual revenue — very low for a tech company.
But Nokia isn’t a tech company. It’s an equipment company, a hardware vendor. Specifically, it sells wireless infrastructure, the kind of things your phone company must buy to bring you 5G service.
Once fully built on all available frequencies and configurations, 5G is a gold mine for vendors like Nokia. The market is expected to be worth $47.75 billion by 2027, growing at 67% per year. Nokia has about 27% of this market.
The new boss, Pekka Lundmark, has diplomatic skills honed at Fortum (OTCMKTS:FOJCF), a Scandinavian energy company with operations in Germany, Russia, Poland and India.
Nokia needs those skills now. President Donald Trump made Nokia a champion, suggesting a U.S. company buy it. But Nokia is still selling into China. Chinese retaliation would be bearish for investors.
Lundmark is selling Nokia as a “third way” forward. Price targets are rising as analysts calculate what its latest contract wins will do to its bottom line.
But 5G won’t remain a three-way race. As part of its neutrality efforts Nokia is supporting OpenRAN. It’s a vendor-neutral method for building Radio Access Networks. It will weaken the control Nokia patents, bought with Lucent and Alcatel in the middle of the 2010s, have over the market.
It could also bring a host of new competitors, including Intel and Cisco (NASDAQ:CSCO), into the cellular infrastructure market. Nokia will need lower costs, and sound technology leadership, to make it in this new world.
Still, if Nokia renews its dividend, and can maintain it, you’re getting a bargain at $5 per share.
Shares in ADT nearly doubled on Aug. 3 after it signed an alliance with Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL). Google is putting $450 million into ADT stock and $150 million into new products. The $450 million buys Google a 6.6% stake that values ADT at $6.8 billion.
ADT needs Google because its growth has been slowing over the last year.
Think about it. ADT is nearly 150 years old. The company launched in 1874 as American District Telegraph. It has had central monitoring systems for a century, and an app offering climate control since 2010. ADT’s “Command and Control” panel, launched last year, would presumably be absorbed inside the Nest Hub.
For Google, the deal is all about Nest.
Originally seen as an “other bet” when it was bought for $3.2 billion in 2014, Nest was absorbed into the main company in 2019. Nest offers smart thermostats, security cameras and a “Nest Hub” incorporating the Google Assistant. Google’s hope is that pushing Nest as a security solution, with ADT, will get Nest products into homes. From there it can presumably add services that broaden its reach.
Over the last few years, self-installed solutions like Alarm.com (NASDAQ:ALRM) have been grabbing market share from professionally installed systems like ADT. ADT still has the biggest brand name in the business, but its market share has fallen.
Google needs this to work. ADT will benefit hugely if it does.
Value Stocks: Capital One (COF)
Credit card banks like Capital One Financial have a problem during the current pandemic. Everything you put on your credit card is a loan. The merchant gets their money at settlement. The bank only gets its money when you pay the monthly bill. But what happens if they can’t collect?
Capital One shares opened for trade Aug. 10 at $66. They’re down nearly 35% on the year. They have been hit hard by the pandemic, but could come roaring back once it ends.
Capital One had $1.5 billion in charge-offs during the quarter. It prudently added $2.7 billion to its loan loss reserves. The bank also cut its marketing budget during the quarter by 44%, and operating costs by 8%. This was followed July 31 with a 75% cut to the dividend for the quarter.
Capital One passed its stress tests, but its customers aren’t passing theirs.
Capital One’s digital transformation is also a double-edged sword. It suffered a hack in July, by a former employee of Amazon, that exposed 106 million accounts. It’s the largest hack to hit the processing industry in over a decade. It was also one of the simplest, taking place entirely outside the bank’s systems.
Capital One will come back — from the pandemic and the hack. The only question is when. It has the financial strength to weather the storm. Your patience will be rewarded.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN and TSM.