This year has not been great for value investing. Instead, the markets have been focused on new, shiny names. But value stocks have actually underperformed since the financial crisis of 2008. So, the problem is not a short-term phenomenon contained to 2020 — these investments have steadily fallen out of favor.
That’s why investors can buy them at low prices now. They are reliable and fundamentally strong, but not as exciting as growth stocks.
To use an analogy, growth stocks are like babies — everyone loves them because they’re brimming with potential. If that’s true, then value stocks are the reliable, middle-aged worker. Absolutely respectable but relatively unnoticed — until they do something really special.
Analogy aside, there are a lot of reasons to consider value picks before they become hot. I think these kinds of stocks will undergo a renaissance after this year. Clearly, money in the market was chasing get-rich-quick names in the first few quarters. As 2021 brings along vaccines and reality checks in the aftermath of Covid-19, my bet is that investors will be more cautious.
That means value stocks will catch on. And when they do, all these stocks will only have to trade at fair value in order to make investors strong returns. Then the trendy money will follow, which will mean more appreciation.
So, here are seven value names to consider if you’re an investor who’s looking ahead.
- IBM (NYSE:IBM)
- Ford Motors (NYSE:F)
- Unum (NYSE:UNM)
- Caterpillar (NYSE:CAT)
- Intel (NASDAQ:INTC)
- Citigroup (NYSE:C)
- Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B)
Value Stocks to Buy: IBM (IBM)
Trailing price-to-earnings: 13.27
IBM — like most value stocks — is a name that investors believe should be priced higher. By value metrics, there are many reasons to like the company. However, investors haven’t shown it much love for the most part, despite it being a world-class IT service provider. So, if value investing comes back into style, IBM stock is definitely one to consider.
To paraphrase what a member of the InvestorPlace Staff wrote a month ago, IBM has had a rough five years but can turn it around with a pivot to cloud services.
IBM foresees a “$1 trillion market opportunity” in its open hybrid cloud platform. To enable and expedite that shift, the company acquired Red Hat. The company’s goal is to move its revenue streams away from its traditional services toward high-value cloud software and solutions.
In my opinion, they’re doing the right thing here. IBM is aligning its revenue sources with higher profit opportunities that recur rather than selling services that stopped working for them. As such, the tech company is poised for margins, profitability and emerging opportunities in the cloud.
Once it shows investors that this strategic move is taking hold, IBM stock should move upward.
Ford Motors (F)
Trailing price-to-earnings: N/A
Next on my list of value stocks it Ford, which — like many legacy automotive companies — has one foot in the past and one foot in the future. The company is also a name that Wall Street can’t seem to agree on. Recently, Ford posted a strong earnings per share beat of 65 cents, seriously outpacing its 20-cent consensus.
Additionally — while it does seem that the markets are coming around on GM (NYSE:GM) stock — Ford is still a better value stock in my eyes. That’s even despite it’s forward price-to-earnings ratio of 8.17, which is downright tiny considered alongside electric vehicle (EV) manufacturers. Of course, I know this stock isn’t Tesla (NASDAQ:TSLA), but bear with me.
The reason I look at Ford as a value stock — although by some measures it isn’t — is because the company has a lot invested into the EV future. And I think it can rise significantly on that future, while making money elsewhere to boost its fundamentals. Ford is in an enviable position, aligned with EV growth while possessing cash cows like its F-Series trucks.
Ford is also betting that the electric future is more likely to begin catching on with commercial vehicles. For instance, the company recently released details on its electric E-Transit van, which is projected to lead to lower maintenance costs than comparable vehicles over an eight-year period. Commercial fleet managers are eager to see how this prospect bears out in reality.
In short, I like F stock because it represents the best of both worlds — value with a clear play on growth.
Trailing price-to-earnings: 4.59
UNM stock comes with a rock-bottom trailing price-to-earnings ratio, an even lower forward price-to-earnings of 4.07 and a pretty pitiful price-to-book. All of these metrics are low. In fact, they should probably come with a cautionary note: Unum is dangerously close to value-trap territory. That means that investors may never come around on it, failing to recognize its inherent value.
However, this article is about if value investing returns to style, not when. In my opinion — if value stocks come back into favor — the deeply underappreciated stocks like Unum will suddenly garner a lot more attention.
As such, it’s important for you to know what this company does. Unum engages in the provision of life and disability insurance — not the sexiest area of investment by a long shot. Typically, investors are attracted to businesses that do something interesting. So, why have I included this company?
My bull thesis is that, in a post-pandemic world, there is going to be a shift toward value investing and this insurance stock should get some love. This is especially true after a year full of uncertainty.
In it’s most recent earnings report, Unum’s management even hints at the fact it should trade higher than current levels. One of the top bullet points reads, “Book value per common share of $53.50 grew 14.6 percent over the year-ago quarter.”
Therefore, investors should give UNM stock a look at its current price of around $22. If value investing comes back, the price appreciation between $22 and a fair value of $53.50 could make investors a lot of money.
Trailing price-to-earnings: 28.63
As you probably know, Caterpillar is a heavy equipment manufacturer. Moreover, because the company is associated with infrastructure and construction, it’s stock has already risen this year. Why? Joe Biden has made it no secret that infrastructure is going to be a central tenet of his presidency. Therefore, more construction equals more Caterpillar vehicles sold.
With CAT stock’s recent shot in the arm, the name now comes with a price-to-earnings ratio that is significantly above where it has usually been. For over the past 10 years, Caterpillar has had a median price-earnings ratio of 16.24. Essentially, the stock has gone from underappreciated to overvalued in a short period of time.
So, investors will want to know how to play this pick of the value stocks. I believe CAT will dip down soon and that will be the time to buy. Biden isn’t going to assume office for several months and once he does, his infrastructure initiatives will take time to bear fruit.
While CAT stock rose on Biden’s infrastructure plans, the price could drop back down to something more in line with its historical ratios in the interim. That’s when I’d buy it — when its value is apparent.
Trailing price-to-earnings: 8.96
Intel lost ground in 2020 to competitors in the semiconductor space, with both AMD (NASDAQ:AMD) and Nvidia (NASDAQ:NVDA) stealing the attention. As such, investors moved their dollars to the company’s rivals. In fact, Nvidia now has a much higher market capitalization than INTC, at over $323 billion compared to Intel’s almost $187 billion.
The net effect is that — while Nvidia and AMD are both significantly overvalued — Intel is now a bargain. That makes it one of the more promising value stocks. NVDA stock carries a trailing price-to-earnings ratio of 85.54. Likewise, AMD sits at 114.38. INTC stock, on the other hand, has a trailing price-to-earnings ratio that’s still in the single digits.
Of course, the company has had trouble and does need to address some legacy issues. Traditionally, Intel drew strength from its manufacturing capability. Now, however, it’s switching to a more outsourced, software reliant business model. Intel’s Chief Architect Raja Koduri summarized the changes back in August. Koduri said, “We are going through a massive cultural and mindset change in order to shift to a software-first approach to hardware architecture and design.”
Right now, INTC stock represents great value. It has every chance to regain much of its former glory.
Trailing price-to-earnings: 10.09
Citigroup is still down substantially year-to-date (YTD). Big banks in general have a long road to recovery ahead. Based on a S&P Global report, U.S. banking systems look to recover to 2019 levels some time in 2023. That puts the United States in the middle of the pack worldwide, giving investors some basis to judge Citigroup from. The verdict? Wall Street is very keen on Citigroup’s ability to weather the storm. Currently, analysts overwhelmingly rate it a buy.
That’s encouraging news for investors in value stocks. Right now, C stock is “modestly undervalued.” The company is directing cash toward shoring up its business, building up reserves to outlast all possible scenarios.
I wrote about Citigroup back in July, saying it was a buy even then. This bank is a massive company with massive sway. Moving forward, it can quickly divert that reserved capital toward growth when the moment is most opportune.
Banks are going to be integral to an economic recovery — that much is an obvious truth. In my opinion, C stock is among the best within that group. Right now, the stock is underappreciated because it’s been so battered. But that won’t last. So, now is a great time to snag this one on the cheap.
Berkshire Hathaway (BRK.B)
Trailing price-to-earnings: 15.45
Last on my list of value stocks is Berkshire Hathaway, a company that is most notable for its association with Warren Buffett. Of course, Buffett is regarded as one of the greatest investors of all time. On top of that, he is a value investor at heart. The financial legend learned about stocks from Benjamin Graham, another value investing guru.
So, being that Warren Buffett is known for value investing, it might not surprise you to learn that BRK.B stock is considered “fairly valued.” Berkshire Hathaway is a holdings company touching on many industries. That helps it diversify. But it also allows the firm to seek fair value across assets. In essence, that’s what this stock is all about — finding fairly valued assets and investing in them.
A look at the company’s most recent earnings report shows that as well (Page 21). Berkshire Hathaway judges its investments based on “carrying value” and “fair value.” Here’s another way of describing this: the firm has amounts of money invested and then what they believe those assets should be worth. The company strives to have a net carrying value that is lower than its net fair value.
So, in many ways, Berkshire Hathaway is a great resource for understanding value investing at large. On top of that, it is certain to stay focused on value investing. As such, I’d say that — whether value stocks come back into fashion or not — this one is worth a look. Regardless of what’s in vogue, this company is a name that investors can trust.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.”