Recent volatility has hit growth stocks hard. But many deep value stocks have also experienced a pullback over the past few weeks. Factors like the Evergrande (OTCMKTS:EGRNF) crisis, the U.S. Federal Reserve’s tapering plans, Covid-19’s delta variant and possible corporate tax increases have convinced investors to tread carefully with cheap yet risky plays.
For some, these latest declines are on top of earlier selloffs that occurred during the summer. For instance, automotive stocks have moved lower due to the global chip shortage. Other industries, like private prisons and firearms makers, have faced headwinds related to pending or potential federal government policy changes. Yet whatever the reason and whatever the risk, for several of these names, the pullback may have been overdone.
Buying value stocks now, despite market uncertainty, could be a profitable move in hindsight. With their respective valuations much lower than that of the overall market, further declines may be minimal. Upside, however, could be substantial in time as investors realize past concerns were overblown.
So, which deep value stocks should you buy? These seven, a mix of large-, mid- and small-cap stocks, are some of the best value plays out there right now:
- AMC Networks (NASDAQ:AMCX)
- BorgWarner (NYSE:BWA)
- Cardinal Health (NYSE:CAH)
- CoreCivic (NYSE:CXW)
- Kroger (NYSE:KR)
- Sturm, Ruger & Company (NYSE:RGR)
- Vector Group (NYSE:VGR)
Value Stocks: AMC Networks (AMCX)
AMCX stock has traded sideways in September, priced around $47 per share throughout the month. But it’s down considerably since the summer, so this out-of-favor media stock looks like a solid opportunity for many reasons.
Trading at a single-digit forward price-to-earnings (P/E) ratio of 5.6x, multiple compression doesn’t appear to be a problem here. Putting it simply, AMCX stock can’t get that much cheaper.
Yes, AMC Networks is struggling to grow. And with its “old media”-heavy portfolio of cable television networks, it’s vulnerable to cord-cutting.
That said, it’s not as if this perceived dinosaur, which owns TV channels and media properties like AMC, WE tv and IFC, has its head in the sand. AMC Networks is pivoting to streaming with subscription services like AMC+ and Acorn TV, much like ViacomCBS (NASDAQ:VIAC) has done in the past year. It may at the very least be able to convince Wall Street that it will survive in a post-cable world.
On top of its low valuation — and likely upside if it’s able to prove its bears wrong — is AMC Networks’ status as a takeover target. So far, this still hasn’t moved beyond the rumor mill. But after all the media mergers and acquisitions we’ve seen this year, it could still get snapped up by a deeper-pocketed rival.
The global chip shortage has weighed on auto parts giant BorgWarner. Since hitting its 52-week high of $55.55 per share, BWA stock slid to about $44 per share. With automakers facing greater production headwinds than previously expected, many are questioning whether this leading supplier can meet the high expectations it set after releasing strong quarterly numbers in August.
Nevertheless, you may want to buy the stock. At first glance, BWA shares may not look cheap — at least for an automotive stock. A forward P/E of 8.3x is cheap overall. But others may see it as a stretched valuation for such a capital-intensive, cyclical and low-margin industry. However, it may be a true “this time, it’s different” situation for this more dynamic auto parts name.
Why? Namely, its big move into providing parts for the electric vehicle (EV) space. As I discussed last month, BorgWarner could become a more profitable business in the coming years as it increases its percentage of EV-related sales from 3% to a targeted 45%.
Investors may decide BWA stock is worthy of something better than a mere 8.3x forward multiple. It may continue to struggle over the next few months, as the chip shortage is expected to carry over into next year. But for long-term investors, BorgWarner is still a deep value stock with substantial upside potential.
Value Stocks: Cardinal Health (CAH)
CAH stock has seen modest declines over the past few weeks. But shares in the drug distributor experienced a full-on tanking in price on Aug. 5 following a big earnings miss and downbeat outlook.
A value play that performed well during the vaccine recovery, Cardinal Health shares are back to levels around $51 per share, not too far from where they traded last fall. On the flip side, now down to a single-digit forward P/E ratio of 8.9x with a nice 3.8% forward dividend yield to boot, it may be all uphill from here.
As a Seeking Alpha contributor detailed a few weeks after its big drop, there are many reasons why this undervalued stock may be a great long-term play.
Cardinal Health will soon be able to put its exposure to the opioid crisis in the rearview mirror. Along with its cost-saving plans and its continued use of dividends and stock buybacks to return capital to investors, CAH shares may have a path to a price in line with the company’s intrinsic value.
The contributor estimates CAH stock’s value to be $64 per share based on 3% annual free cash flow growth, but as much as $100 per share if growth exceeds this number.
Admittedly, it may take some time for Cardinal Health stock to hit $64 per share, much less $100 per share, so don’t assume this opportunity will play out quickly. Even so, dividend and value investors alike may want to keep it on their radar.
2021 has been a tough year so far for private prison operators like CoreCivic. Shortly after taking office, President Joe Biden quickly issued an Executive Order (EO) banning new federal contracts with private prisons.
However, it technically hasn’t been a bad year for CXW stock. Investors had already bid it down in 2020 when the real estate investment trust (REIT) suspended its dividend.
In fact, between January and June of this year, shares were up as much as 84%. This was due to contrarians piling into it and its peer, The Geo Group (NYSE:GEO). But as uncertainty has picked up again, the stock has tanked, falling from $10.80 on Aug. 11 to around $8.90 per share as of this writing.
So, after Biden resumed the federal government’s plan to phase out of private prisons, which was paused under former President Donald Trump, why buy this stock? Putting it simply, it’s dirt cheap.
Despite its many challenges, the aforementioned EO doesn’t destroy the company entirely. Only a quarter of CoreCivic’s 2019 revenue came from the two agencies covered by Biden’s order — the Bureau of Prisons and the U.S. Marshals Service.
Revenues from its operation of Immigration and Customs Enforcement (ICE) facilities are not affected. Neither are CoreCivic’s revenues from state and local contracts.
CXW stock is trading for 9.5x next year’s projected earnings. If the company can continue to adjust to the industry changes and reduce debt via the sale of non-core assets, shares may eventually see an epic rebound as investors realize it’s not deserving of such a fire sale valuation.
Value Stocks: Kroger (KR)
KR stock was one of many names that saw a boost from the stockpiling that kicked off at the onset of Covid-19 lockdowns. The grocery store operator continued to perform well through the post-lockdown recovery. From January until a few weeks back, shares rallied from around $32 per share to nearly $48 per share.
Of course, this has been bad news for investors who bought into KR stock at or near its 52-week high. But after tanking this month, you may want to buy the dip with this deep value stock. Trading for just 13.4x forward earnings, it’s at a sharp discount to publicly-traded rivals.
Sure, so far inflation has hurt Kroger more than it’s helped it. The company has not yet opted to pass along more of its rising costs to consumers, J.P. Morgan analyst Ken Goldman wrote in a recent research note.
That said, with the company now changing its approach by raising prices, subsequent results may not result in as much of a letdown as its most-recent quarterly numbers. Add in its merits as a “safe stock” that could hold steady if markets remain volatile, and you may want to add this Warren Buffett favorite to your basket — I mean, portfolio.
Strum, Ruger & Company (RGR)
Just like we’ve seen with private prison stocks, last year’s “blue wave” election results ramped up uncertainty for another controversial industry: firearms. This, coupled with concerns that the surge in demand seen in 2020 is cooling, has put pressure on RGR stock. Shares of its main publicly-traded rival, Smith & Wesson Brands (NASDAQ:SWBI), are also feeling the heat.
However, both worries among investors may be overblown. Recent developments signal that big changes to gun control policies aren’t happening soon.
For example, Biden withdrew his nomination of David Chapman, a vocal supporter of gun control, to lead the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF). The president lacked the votes needed in Congress to get Chapman confirmed. Given this, it’s unlikely sweeping gun control legislation is going to get passed, either.
When it comes to a possible pullback in firearm sales, gun sales in August may have dropped year-over-year. Yet they’re still up big from where they were pre-pandemic.
Biden may not have the support he needs to change America’s firearms laws. But just like what played out during the Obama years, a Democrat in the White House alone can help keep demand high.
Yes, earnings are set to decline this year. While still elevated, gun sales are falling off from the industry’s banner year in 2020. But RGR stock is trading for just 9.4x forward earnings with a high-yield dividend of 5.27%. Consider this a buy at its current price around $75 per share, down from levels above $90 seen in July.
Value Stocks: Vector Group (VGR)
When you think of undervalued tobacco stocks, Altria Group (NYSE:MO) may be what first comes to mind. But after its recent tanking, lesser-known VGR stock could be another solid sin stock to buy.
Vector Group is a diversified holding company, with discount cigarette maker Liggett Group as its main operating business. Its price recently dropped when an analyst downgrade from Barclays’ Gaurav Jain, citing possible pricing pressures ahead.
However, this selloff may have turned a reasonably-priced dividend stock with a 6.48% forward yield into a deep value play. VGR shares trade for just 9.75x expected earnings in 2022.
Yes, this low valuation is in line with those of its larger peers like Altria. But Vector Group has several other holdings, like real estate brokerage Douglas Elliman, and a $157 million investment portfolio.
Its underlying value may exceed its current stock price around $13 per share. That’s not to say VGR stock is not without its risks. If the bear case for its tobacco business plays out or if real estate sales fall further than expected post-Covid, it could spell trouble for Vector Group.
Additionally, next year’s expected earnings decline could end up larger than what’s currently projected. This could again make the VGR stock dividend unsustainable, necessitating yet another cut. Tread carefully, but consider it a unique opportunity at today’s prices.
On the date of publication, Thomas Niel held long positions in CXW, GEO, and MO. He did not have (either directly or indirectly) any positions in any other securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.