Theoretically, we really should have seen a renaissance in value stocks during the impact of the novel coronavirus pandemic. With an unprecedented crisis rippling throughout the international community, the global equity markets initially tumbled on the mass spread of the disease. If anyone wanted to go contrarian, they should have done so on the companies that now presented excellent value.
Instead, risk-on money poured into growth names like a thunderstorm. Indeed, much of the enthusiasm was understandable. For instance, tech firms that specialized in contactless services — digital documentation and teleconferencing come to mind — performed extraordinarily well. At the same time, you’d figure that value stocks should also get some love.
No, they might not carry the sexiness that growth plays do. However, many, if not most, value stocks are tied to stable, relevant industries. Quite a few pay dividends, which add to their appeal. In other words, these are organizations that simply got caught in a downdraft through no fault of their own. Therefore, it’s plausible that they can make a comeback down the line.
Another reason to consider value stocks is that their growth counterparts tend to peter out when their catalysts fade. I think that’s the number one risk for equity units that received extreme bullishness. Usually, such bullish cycles also tend to correct substantially. So, investors should consider value stocks to diversify their exposure to these crazy markets.
Of course, just because you go with value stocks over growth names doesn’t necessarily mean that they’re guaranteed to move higher in the years ahead. This is the capital markets we’re talking about and anything can change. On this list, I’ve included a mix of companies with different risk-reward profiles, proving that value doesn’t always have to be so square.
- Nintendo (OTCMKTS:NTDOY)
- NRG Energy (NYSE:NRG)
- AbbVie (NYSE:ABBV)
- Altria Group (NYSE:MO)
- The Geo Group (NYSE:GEO)
- Sunoco (NYSE:SUN)
- Anheuser Busch (NYSE:BUD)
Value Stocks to Buy: Nintendo (NTDOY)
Though the current talking point centers on electric vehicles, in my view, video games also deserve consideration for a renaissance. During the advent of this sector, many people considered it to be child’s play. As a former nerd — well, maybe that hasn’t changed — I can attest to many of the stereotypes of avid gamers.
But the Covid-19 crisis also sparked a mini-renaissance in this sector. According to a Nielsen survey, 55% of Americans played video games to wile away the hours during the initial phase of lockdowns. An early 2021 TheVerge.com article argues that this habit is here to stay. That benefits Nintendo, one of the rare gaming-related value stocks.
While other video game companies skyrocketed off the pandemic’s unexpected catalyst, NTDOY stock still offers a great value proposition. Currently, its forward price-earnings ratio is 18.5, whereas the interactive media industry — of which Nintendo is a part — has a median forward price-to-earnings (P/E) ratio of 29.
Also, NTDOY stock is down 11% for the year, which contrasts with other gaming rivals. It might not get the love because of its underlying family friendly orientation. But in my view, this is a positive, making NTDOY one of the best value stocks to consider.
NRG Energy (NRG)
In late 2020, shares of NRG Energy looked poised to go gangbusters and they pretty much did. As I’m sure you’ve heard by now, NRG Energy is one of the biggest power generators and retailers in Texas. Unfortunately, a terrible winter storm devastated the Lone Star State and affected regions are still picking up the pieces.
According to the Houston Chronicle, NRG stated that “it lost an estimated $750 million from February’s winter storm that knocked out generators and electricity across the state.” To be fair, this is one of the trickier value stocks in that the underlying company isn’t totally faultless. This was a disaster that culminated with many fail points being checked off one after the other.
In hindsight, both public and private elements should have cooperated to bolster energy infrastructures in case stuff like this happened. I mean, there was recent precedent, with rolling blackouts in California. Still, this was mostly an Act of God and NRG stock got caught out.
However, this does make the company one of the undervalued stocks in the energy space, with a forward P/E ratio of 13.5 times, whereas the industry median is 19.5 times.
Value Stocks to Buy: AbbVie (ABBV)
When the coronavirus first became an unwanted guest in the U.S., it was a matter of time before the SARS-CoV-2 virus spread everywhere. Frankly, it was a shame because initially, the Former President Donald Trump’s administration had the right response: keep people out, including infected Americans. As the Washington Post stated, the former president was not told Covid-19 sickened Americans would be flown home from a Diamond Princess cruise ship.
In my opinion, this represented total failure of governance and respect for the chain of command. And with Trump not displaying the best performance under pressure, the American outbreak became an inevitability. Cynically, this benefitted biotechnology firms developing vaccines and treatments. But AbbVie? Not so much since the company didn’t make as aggressive of a pivot to Covid-19 like its peers.
However, now that coronavirus cases are fading in the U.S., ABBV stock has become one of the more intriguing value stocks to consider. In large part, I say this because of its Botox business. You see, when people are quarantining, there’s not much emphasis on looking good.
Once the pandemic fades, superficiality will be back on the bandwagon. Therefore, ABBV stock makes sense on the fundamentals shifting favorably toward its underlying business.
Altria Group (MO)
As one of the undervalued stocks in the vice industry, Altria Group may not be for everyone’s sensibilities. Also, MO stock is rather risky. Over the trailing five years, shares have lost 24% of market value. Much of that is due to declining smoking rates. According to the Centers for Disease Control and Prevention, the percentage of those who quit increased from 50.8% in 2005 to 59% in 2016. The FDA is also planning a ban on flavored cigarettes and cigars.
Still, the CDC points out that nearly 38 million Americans smoked cigarettes either everyday or some days in 2016. With the pandemic, this figure may have accelerated. Sure, you hear stories about people quitting because of the pandemic. But the crisis also incentivizes the dangerous habit due to increased stress.
Another cynical factor that might aid MO stock is the war against vaping. On the surface, vaping seems like a less-offensive alternative to “analog” cigarettes. But the “Preventing Online Sales of E-Cigarettes to Children (PACT) Act has forced many companies to discontinue U.S. online sales and even cease operations altogether,” according to TobaccoReporter.com.
If this trend continues, it could spark a rise in traditional cigarette smoking, which makes Altria an interesting though controversial name to consider.
Value Stocks to Buy: The Geo Group (GEO)
On the surface, The Geo Group’s specialty, adult rehabilitation, doesn’t sound controversial at all. Until you realize that the company is really talking about private prisons. Naturally, GEO is one of the ugliest value stocks available. Nevertheless, the underlying business of GEO stock has a long series of pros and cons.
Of course, there’s something unsavory about investors benefitting off the misery of others. People are in prison to pay their debt to society. It’s not necessarily an avenue from which to extract profit. So why have GEO stock at all?
The answer is that government is rarely the best solution, whether we’re talking about advancing capitalistic enterprises or for doling out punitive measures. Turns out, private prisons, because they’re private, can do the job more effectively, potentially leading to lower recidivism.
While that might sound like a benefit to taxpayers, you should know that various research papers provide conflicting analyses. Therefore, if you are a conscientious investor, you may want to dig a little deeper before considering GEO as one of your value stocks.
Technically, Sunoco isn’t exactly what you think about when you discuss value stocks. Indeed, Sunoco’s P/E ratio is 21 times, which is notably higher than the median 16-times ratio seen in the oil and gas industry. But, as a countering statistic, the forward P/E ratio of SUN stock is 9.5 times, which is lower than the industry median 34-times ratio.
So, what to do about Sunoco? Personally, I view the company as undervalued relative to its fundamentals. According to its website, Sunoco is one of the largest fuel distribution providers in the U.S. Obviously, that wasn’t the most helpful sector to ply your trade in during the initial onslaught of the Covid-19 crisis. But with cases fading, the narrative for SUN stock has conversely improved significantly.
As well, general reticence toward getting a Covid-19 vaccine may help the fuel distribution industry. These folks may not want to get vaccinated, but they might not want to take unnecessary risks either. Therefore, if they travel, they might do so by road, not by air.
Value Stocks to Buy: Anheuser Busch (BUD)
Admittedly, Anheuser Busch is a disappointment. It may very well be one of the most disappointing value stocks in the market. You’d think that with the company controlling some very popular beer brands that BUD stock would perform much better than it has (not including the “small numbers comparison” resulting from the initial Covid impact).
Much of this has to do with changing demographics and consumer habits. Generally speaking, there’s a shift among millennials and Generation Z to hard cider rather than beer. Also, it doesn’t help that young people drink less alcohol than prior generations. Naturally, this had Anheuser Busch scrambling for answers.
Now, this might be a stretch, but brewing economic factors may tilt the needle more favorably for BUD stock. According to Statista.com, U.S. household debt hit a new high. Largely, the culprit was mortgages. Thanks to a ridiculous housing market where people bid up available homes to the moon, individuals participating in the craze just don’t have as much disposable income available.
This may create an environment where beggars can’t be choosers. You want to get buzzed? Forget your apple cider — it’s Bud Light for you (yuck!).
On the date of publication, Josh Enomoto held a long position in MO stock.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.