As investors once again chase growth stocks, some are inclined to ask: “Is value investing dead?” Since we’ve been here before, it’s worthwhile to consider the key observation made by Wharton finance professor Richard Marston in November 2017.
“Growth stocks have outperformed value stocks since the bottom of the financial crisis in February 2009 [using monthly data], but both have done extraordinarily well. Growth booked a cumulative return of 337.9% through August 2017 while value brought in 278.3%.”
Clearly, value stocks have delivered healthy returns. Yet, it makes sense to have a portfolio that has a mix of growth and value stocks. In that latter category, in particular, after a big rally, valuation for several sectors looks stretched. It’s a good time to analyze underperforming sectors and accumulate some value stocks.
This column will discuss four value stocks from different industries that I believe can be top performers in 2021.
Specifically, the undervalued names worth examining are:
4 Strong Value Stocks for Savvy Investors: Lockheed Martin (LMT)
In the last 12 months, Lockheed Martin shares have declined by 4.6% as the S&P 500 index is up 13.8%. At a forward price-to-earnings-ratio of 14.9, LMT stock is among the top value stocks. To add to the attractiveness, the stock offers an annual dividend of $10.40, which implies a dividend yield of 2.88%.
Interestingly, nothing in the company’s financial performance or business developments have warranted the decline. When the company reported third quarter results for 2020, it was the ninth-consecutive quarter of record backlog.
For the quarter, the company also generated $1.9 billion in operating cash flows. This implies an annualized OCF of $8.0 billion. With a backlog in excess of $150 billion, the company’s cash flows will remain strong.
It’s also worth noting that President-elect Joe Biden has “said he does not foresee reductions in the U.S. defense budget.” Therefore, order intake is likely to remain strong. In addition, Lockheed Martin also stands to benefit from order intake from the allies of United States.
Geo-political tensions are unlikely to de-escalate significantly with China and Russia. This factor makes LMT stock worth holding for the long term. In the near term, I believe that the stock will outperform in 2021.
JPMorgan Chase (JPM)
The banking sector has also been an underperformer in the last one year. JPMorgan Chase is my top pick from the sector among value stocks. At a forward P/E of 13.9x and a dividend yield of 3.5%, JPM stock is attractive.
One of the reasons for banking stocks remaining weak is the novel coronavirus-triggered recession. However, the International Monetary Fund believes that the global economy will expand by 5.2% in the coming year. With higher economic activity and credit growth, banking stocks can bounce back.
JPMorgan has seen a decline in net interest income in the recent quarters. However, this weakness has been partially offset by an increase in non-interest revenue, which includes income from trading securities. It’s worth noting that for Q3 2020, corporate & investment bank net income surged by 52% on a year-on-year basis. Further, the bank has seen a 31% growth in net income from asset and wealth management for Q3 2020.
Clearly, there are segments driving growth even as the core banking business remains weak. Once there is revival in that core segment, I expect JPM stock to trend higher.
Overall, JPM stock is worth considering for the long-term portfolio. The bank has robust balance sheet metrics. An attractive dividend yield makes the stock worth holding for income investors.
Unlike some of the others in this bunch, Pfizer sit in a sector that has underperformed. The pharmaceutical sector has been in limelight as companies race to develop a vaccine for COVID-19. However, PFE stock has been sideways for most of the last year.
I see this as a good opportunity to accumulate a stock that currently trades at a forward P/E of 12.6x. PFE stock is also worth holding for dividend investors with an attractive yield of 4.18%.
Recently, Pfizer Chairman and CEO Albert Bourla, wrote an open letter on the developments related to the COVID-19 vaccine. He believes that an application for Emergency Use Authorization in the U.S. could come as soon as the third week of November.
If trials do deliver a positive outcome, I believe that PFE stock can trend higher. It’s therefore a good time to consider fresh exposure to the stock.
Besides the vaccine-driven trigger, the company’s Biopharma revenue growth has been strong. In addition, with a deep pipeline of drugs, the company expects revenue growth at a CAGR of 6% through 2025.
The company is on track to deliver operating cash flow of $10.5 billion (mid-range of guidance) for 2020. If top-line growth remains strong, I expect higher dividends in the coming years. At current valuation, PFE stock is certainly worth grabbing.
Ford Motor Company (F)
Ford investors have seen their holdings lose 11% in the past 12 months. However, F stock has recovered since the end of March, gaining almost 60% from the early days of the U.S. pandemic.
I believe that F stock is still a value buy and fresh exposure here below $8 a share.
From a financial perspective, Ford reported a total liquidity buffer of $45 billion as of Q3 2020. In addition, the company reported an adjusted free cash flow of $6.3 billion for the quarter. Therefore, the company has navigated challenging times with robust liquidity.
The company’s pending model launches include the F-150 pickup, the Mustang Mach E, Bronco Sport and Bronco. These are likely to keep the markets excited and sustain the positive stock momentum.
In addition, Ford has big plans for China, in particular, in the electric vehicle segment. New energy vehicles (NEV) as a percentage of total car sales in China is just at 5%. By 2025, Beijing plans to increase NEV sales to 20%, with a target of half of total car sales by 2050.
Therefore, there is big potential in China. Even with competition from the likes of Tesla (NASDAQ:TSLA), Ford is likely to made inroads in the EV market. Given these factors, I am bullish on F stock.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.