This market is offering stocks that are both value and growth plays… one such hybrid stock from Louis Navellier… a value/growth trade from our Strategic Trader technical experts
As the nation edges toward a full economic reopening, investors continue to struggle with one of the most pressing questions of today’s market…
Is there more pain ahead for growth stocks, meaning it’s wise to rotate into value stocks?
Let’s jump straight to legendary investor, Louis Navellier, for his take.
From Louis’ Growth Investor update last Friday:
Growth stocks have continued to slide lower with the broader market, and cyclical value stocks have taken flight.
The divergence may have left you questioning our growth strategy or even contemplating following the “sell in May and go away” crowd this year.
In fact, I’ve been asked a lot if we should scoop up shares of value stocks or exit more positions ahead of the bumpy summer months.
My simple answer to both questions: No.
I should point out that Louis isn’t anti-value. There are certainly profits to be made in traditional value stocks that were beaten up during lockdowns. But such a value stock would need to provide investors something else…
Back to Louis:
If a value stock has accelerating earnings growth, I’ll consider adding it to the Buy Lists. I’ll even buy some of the cyclical stocks if they have strong, sustainable earnings growth.
But I do not want to buy value for value’s sake. I also do not want to a buy a sector for sector’s sake.
We want to own the best stocks, and that means I will only recommend stocks with accelerating earnings and sales momentum, as well as positive guidance.
If you’re a newer Digest reader noticing Louis’ focus on earnings and sales, this is because Louis is a quantitative investor. This means he relies on cold, impartial numbers – not emotions or gut feel – to determine his investment decisions.
The metrics Louis analyzes tend to reduce to one, core characteristic – quantifiable earnings strength.
After all, if a company consistently and organically grows its bottom-line earnings number, the stock price is going to rise.
Circling back to the question facing investors about growth versus value, the great thing about today’s market is that Louis is finding earnings strength in many places, so investors don’t have to pick a side.
***We’re enjoying a “have your cake and eat it too” market for a select group of stocks
When your focus is on quantifiable earnings strength, you don’t have to choose between growth and value. You simply find earnings strength wherever it exists.
Back to Louis:
The reality is that we are in a rare environment where we can “have our cake and eat it, too” with dividend stocks.
In other words, we can have a decent dividend yield with strong earnings and sales growth. Let me give you an example…
There’s Target Corporation (TGT), which rallied more than 6% (last) week following its stunning first-quarter earnings report.
The retail giant reported 525.4% year-over-year earnings growth and 23.4% year-over-year revenue growth.
Target also crushed earnings estimates by 64%, which inspired the analyst community to up second-quarter estimates by 15% in the past week alone.
Target has also rewarded shareholders, paying a dividend for 164-consecutive quarters. The stock has a 1.2% dividend yield currently.
Target’s chart is truly impressive. Though its losses were on par with those of the S&P during the pandemic crash, its ensuing rally has easily outperformed.
Below, you can see Target up 82% compared with the S&P’s 30% gains since January 1, 2020. That’s outperformance of nearly 175%.
Plus, as Louis pointed out, investors are enjoying some “mailbox money” to the tune of 1.2% as they hold their shares.
Back to Louis with his broad takeaway for investors today:
The bottom line: Dividend growth stocks are the safest stocks right now.
Yes, the stock market is going to remain bumpy in the near term, especially as we enter the summer months. But, as long as you have good fundamentals like we have in our Elite Dividend Payers and High-Growth Investments Buy Lists, we can power through the bumpiness together.
To learn more about the specific stocks Louis is recommending to his Growth Investor subscribers, click here.
***Meanwhile, our technical experts, John Jagerson and Wade Hansen are eyeing another company offering value and growth
For newer
Digest readers, John and Wade are the analysts behind Strategic Trader. This premier trading service combines options, insightful technical and fundamental analysis, and market history to trade the markets, whether they’re up, down, or sideways.
From yesterday’s trade alert:
We are encouraged that after a weekend of news about rising wages (on the low end), traders seem to be moderating their inflation expectations again.
We feel that fears about inflation and higher interest rates are overblown right now, which has kept technology companies undervalued.
Given this, John and Wade recommend a new trade on one particular undervalued tech company…
Apple.
***Many of you may suddenly be scratching your heads…how is Apple undervalued?
Well, first, it’s actually trading beneath its early-September level, as you can see below. That’s roughly nine months of going nowhere.
Meanwhile, what’s been happening with Apple’s earnings while its share price has been going sideways?
They’ve been breaking records.
About a month ago, Apple posted a March-quarter record revenue of $89.6 billion, up 54% year over year.
Below, let’s look again at Apple’s stock chart. This time we’ll go back to July of 2018. More importantly, we’ll add Apple’s earnings-per-share (EPS) growth from its continuing operations. That’s in orange.
Look at the EPS growth-curve angling higher since last fall…about the same time that Apple’s stock price began trading sideways…
In short, it’s been enjoying a steep climb…over a period in which the stock price hasn’t.
***When earnings growth climbs while a stock price doesn’t, that affects valuation
On this note, look at how this earnings growth, combined with a flat stock price, has impacted Apple’s price-to-earnings (PE) ratio.
Below, you can see the PE tumbling more than 30% since the start of the year. This has offered some relief for investors worried about a nosebleed valuation.
We can get more color on this valuation-change by looking at Apple’s PEG ratio, which is its price-to-earnings-to-growth ratio. You get this number by dividing a company’s P/E ratio by its annual earnings-per-share growth number.
The PEG Ratio measures valuation but does so with a tip-of-the-hat toward a company’s expected earnings growth.
So, how is Apple’s PEG ratio shaping up these days?
It’s down…a lot (meaning a far more attractive valuation for investors).
Below, look at it falling from a level of greater than 6 back in January of 2020, to its current value of 0.72.
So, what do John and Wade expect from Apple’s share price today?
Back to their trade alert:
Apple (AAPL) has been consolidating in the $124-$126 range for almost two weeks, and we think a floor near $123 is very likely to hold through June.
Given this, John and Wade just recommended their subscribers open a bullish short-term trade on the tech giant.
By the way, since Louis highlighted Target’s dividend situation earlier, I should note that Apple pays a dividend too.
It currently offers investors 0.7% dividend yield. That’s not huge, but it’s better than the near-0% you’d get from a bank.
Plus, about a month ago, Apple announced a $90 billion expansion of its stock repurchase program and increased its quarterly dividend by 7%. As the company buys back stock, it will boost this dividend yield, all else being equal.
Bottom-line there’s a lot to like here.
Wrapping up, “growth or value” doesn’t have to be a mutually-exclusive decision for investors today.
As Louis pointed out, certain stocks are offering both. We’ll continue to bring them to you as our analysts dig them up.
Have a good evening,
Jeff Remsburg
