Growth stocks have had a spectacular year, especially for those companies that are building next-generation technologies. Just some of the names include Datadog (NASDAQ:DDOG), Okta (NASDAQ:OKTA), DocuSign (NASDAQ:DOCU) and of course, Zoom Video Communications (NASDAQ:ZM). But then again, the valuations are really getting stretched. And that’s why it makes sense to start considering value stocks.
For the most part, markets periodically go through times of rotation. It’s healthy. It’s a way to bring reasonable balance to the markets.
Interestingly enough, there are already signs of a move toward value stocks. In some cases, the returns have been looking more like what you would see with growth stocks!
So then, what are some names to consider? Well, I have put together a list of seven companies that have strong fundamentals and should benefit from longer-term positive trends. They have also been able to post nice returns lately.
Let’s take a look at these seven value stocks:
- NCR (NYSE:NCR)
- Dell Technologies (NYSE:DELL)
- Penske Automotive Group (NYSE:PAG)
- Insight Enterprises (NASDAQ:NSIT)
- Kinross Gold (NYSE:KGC)
- Evercore (NYSE:EVR)
- PennyMac Financial Services (NYSE:PFSI)
Value Stocks: NCR (NCR)
NCR has a storied history, with the company’s roots going back 135 years. As of now, it is global leader in point-of-sale (POS) software for the retail and hospitality industries, as well as the No. 1 player in multi-vendor ATM software.
But NCR has had to deal with disruptive startups and industry changes. Moreover, the novel coronavirus pandemic has taken a toll.
Yet investors should be confident in the prospects of NCR. During the past two years, the company has been engaged in a major restructuring. This has included both cost cutting and changes in the business. For example, a large amount of the revenue base has been transitioned to recurring subscriptions. Keep in mind that this strategy has rejuvenated other legacy tech companies like Adobe (NASDAQ:ADBE) and even Microsoft (NASDAQ:MSFT).
NCR stock should also benefit from the company’s innovations with contactless technologies. The company has systems for self-service and low-contact checkout. Last month, NCR also launched a sophisticated mobile app system to accept payments. Then there was a deal with Microsoft, which leverages the Azure platform to provide in depth analytics for NCR’s Digital Connected Services internet of things (IOT) management software platform.
Dell Technologies (DELL)
Wall Street has little enthusiasm for old-line computer hardware companies. The margins are generally low and the markets tend to be commoditized.
This certainly helps to explain the dirt-cheap valuation on DELL stock. Consider that the forward price-earnings ratio is only 10.4x.
But lately, DELL stock has actually been in the bull mode. It seems that the valuation has been way too low.
It’s important to note that — over the years — Dell has been diversifying its business through acquisitions. The result is that the company has more software assets, which has helped with growth. But perhaps biggest catalyst for DELL stock is the spinoff of VMware (NYSE:VMW). The company is a leader in the market for virtualization of IT systems. It’s a lucrative market with juicy margins.
The current market capitalization of VMW stock is roughly $64 billion and Dell’s is only $50 billion –even though it owns 81% of the stock! So yes, it seems likely that there will be continued bull moves in Dell stock to make up for the valuation gap.
Value Stocks: Penske Automotive Group (PAG)
Penske Automotive Group is the second-largest auto dealership in the United States, with sales of $20.6 billion last year and 321 retail franchises. The company also has a strong footprint of truck dealerships.
While PAG stock has climbed recently, the valuation is still relatively low. The forward price-earnings ratio is 11.1x, making the company an interesting value stock. A big issue is that a majority of the business is from the U.S. market, which has seen a stalling of the economy because of the novel coronavirus.
But the company has been taking swift actions. In the latest quarter, there was notable progress with sales. PAG has also been aggressive in cutting back costs.
In the meantime, the company has been getting more serious about its digital efforts. For example, PAG has about 42,000 vehicles online and has been using social media and video to help with sales. Then there has been the implementation of infrastructure to allow for virtual transactions, such as with digital signatures.
But with PAG stock, the key advantage is the massive scale and liquidity. This means that the company can capitalize on this with M&A dealmaking.
According to Roger Penske on the latest earnings call: “We’ve got some truck retail, big truck operations that would be potential acquisitions this year. There’s no question about it and then our continued investment in the supercenter.”
Insight Enterprises (NSIT)
Insight Enterprises, which is an IT consulting and services firm, got its start in 1988. The co-founders, brothers Tim and Eric Crown, got the idea for their business when they did a college assignment. For the funding, they would get a cash advance on a credit card.
Fast forward to today: NSIT generates about $2 billion per quarter and has operations across the globe. There are over 11,000 employees.
While the IT consulting market is highly competitive, NSIT has been savvy with acquisitions to evolve its services. Note that the company helps with areas like the data center and cloud, supply-chain optimization and digital innovation. Just some of the partners include Intel (NASDAQ:INTC), Microsoft, Cisco (NASDAQ:CSCO) and Oracle (NYSE:ORCL).
The latest deal was for PCM, which has specialties like digital transformation, security and procurement. The transaction is expected to result in annual cost savings of $70 million for the next two years.
In terms of the valuation for NSIT stock, it is at reasonable levels. The forward price-earnings ratio is 9.8x.
Value Stocks: Kinross Gold (KGC)
While the price of gold is off its highs, the commodity is still up about 26% for the past year. There are a variety of drivers. With rock-bottom interest rates, there are growing fears of inflation. There are also worries about the Federal Reserve’s balance sheet as well as the value of the U.S. dollar.
A way to play this — and hedge some of the potential problems — is to buy a gold stock. And a good option is KGC stock.
The company has a diverse platform, with mines and projects in the United States, Brazil, Chile, Russia and Ghana. KGC also has a solid balance sheet, with $2.3 billion in liquidity.
But the real key is the underlying operating leverage. The fact is that even small moves in the price of gold can lead to nice increases in earnings.
As for the valuation of KGC, it is at an attractive 10.9x. There is even a modest dividend yield of 1.4%.
Evercore is one of Wall Street’s top investment bankers. But this year, with the Covid-19 pandemic, there has been a plunge in M&A activity, which has weighed on the firm’s results.
However, there have been some offsetting factors. Evercore has benefited from its underwriting business, as there has been a spike in IPOs. For the first half of this year, the fees jumped by over 160% to $114.7 million. In the meantime, there has been a uptick in the number of assignments for restructuring projects.
Yet it looks like M&A may be making a comeback. According to the most recent earnings call from Evercore, there has been more discussion and exploration for strategic deals. It certainly helps that equity markets remain strong and there has been access to liquidity from the credit markets.
What about the valuation on EVR stock? It’s definitely at value stock levels, with the price-earnings ratio below 15x.
Value Stocks: PennyMac Financial Services (PFSI)
PennyMac Financial Services is the fourth-largest originator and eighth-largest servicer of mortgages in the U.S. The company is also the No. 1 government loan lender.
And given that interest rates are at low levels, the business has been booming. It also helps that there has been a surge in home sales, partly driven by people relocating because of the trend toward remote working.
For the latest quarter, pretax income soared by 382% to $480.4 million. There was also a 15% increase in the book value since the start of the year.
But the market conditions are just one of the reasons for the strong profitability of the company. Note that there have been major investments in digital technologies, which have made the organization much more efficient.
Even though the PFSI has spiked this year, it is still a very compelling value stock, with the shares trading at a lowly 5x ratio.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is an advisor/board member for startups and author of various books and online courses about technology, including Artificial Intelligence Basics, The Robotic Process Automation Handbook and Learn Python Super Fast. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s.