[Editor’s note: “7 Strong Value Stocks to Buy for 2020” is regularly updated to include the most relevant information available.]
Value stocks can broadly be defined as stocks which trade at a discount to the market, typically measured on a price-earnings basis (i.e. stocks with lower price-earnings multiples than the market).
For a long time, these value stocks have been getting killed by growth stocks, or stocks which trade at a premium to the market.
But that may change in a big way for two reasons…
First, value stocks have hit an “inflection point” in terms of historical under-performance. Just look at this interesting chart, which has been circling on Twitter (NYSE:TWTR). It plots the relative performance of value stocks versus growth stocks on a 10-year annualized basis, and finds that over the past decade, value stocks have under-performed growth stocks by an average of 2.9% per year — the biggest under-performance on record.
The last time this number got nearly this low was at the peak of the dot-com bubble. Over the following decade, value stocks outperformed growth stocks by more than 10% per year.
In other words, history says it’s time for value stocks to shine.
Second, thanks to the coronavirus pandemic, we are increasingly entering an era of investment uncertainty and economic turbulence. Against such volatile backdrops, value stocks tend to perform better than growth stocks.
With that in mind, here are some of the top value stocks to buy in 2020:
- AT&T (NYSE:T)
- Target (NYSE:TGT)
- Intel (NASDAQ:INTC)
- Dollar Tree (NYSE:DLTR)
- American Airlines (NASDAQ:AAL)
- CVS (NASDAQ:CVS)
- Bank of America (NYSE:BAC)
Let’s take an in-depth look at seven value stocks to consider buying for 2020:
Strong Value Stocks to Buy: AT&T (T)
One value stock which outperformed in 2019 and should continue to outperform in 2020 is AT&T.
In 2019, shares of the telecommunications giant had their best year since 2006, rising 37% in anticipation of big 5G and streaming TV catalysts in 2020. Despite that run higher, AT&T stock is still very cheap at just about 9-times forward earnings, and the forthcoming 5G and streaming TV catalysts are still on the table.
To be sure, the coronavirus outbreak does present a sizable risk here. If Covid-19 tips the U.S. economy into a recession, then AT&T’s consumer demand trends will weaken, adding stress to an already highly levered balance sheet.
But, evidence shows that social distancing does work to quell the outbreak, and that if done properly, daily life can resume within a few weeks (see China). Thus, assuming the U.S. appropriately implements social distancing measures and that the economy can find its footing again in May or June, then the second-half of 2020 could be quite good for this company.
If all that happens, AT&T stock won’t stay this cheap for long.
Shares of general merchandise retailer Target should win in both the near- and long-term, making TGT a top value stock to consider buying amid recent weakness.
In the near-term, consumers in the U.S. are panic-buying as they prepare to be cooped up inside for several weeks. That should help boost Target’s sales amid the Covid-19 outbreak.
In the long-term, it appears that the U.S. is more aggressively responding to the outbreak via social distancing measures. Such measures should help curtail the spread of Covid-19, and ultimately cause the virus to “wash out” by the summer. The economy should get on normal footing. Consumers should get back to spending. And Target’s sales should rebound, thanks to the company’s favorable positioning in the retail market as a omni-channel, all-in-one retailer.
Overall, Target is a strong company, that should be able to weather a rough patch over the next few months, with a stock price that is deeply discounted at 14-times forward earnings.
Despite being exposed to multiple hyper-growth industries, semiconductor giant Intel is still a value stock that trades at just 12.8-times forward earnings.
This combination of big growth exposure and dirt cheap valuation is what makes Intel stock so attractive.
Over the next several years, Intel’s revenues and profits will continue to push higher, supported by rising demand for central processing units (CPUs) from end-markets like data-centers, autonomous driving, artificial intelligence, machine learning, the Internet of Things, so on and so forth. Sure, there’s a lot of competition in these markets. But Intel is the 400-pound gorilla in the industry, and its unrivaled size will enable the company to remain relevant in all of these growth markets for several years to come.
To be sure, coronavirus presents a significant risk for this company through supply chain disruptions and depressed global demand. But, such risks will prove to be short-lived. A lot of factories in China are already coming back online as spread has approach near-zero in that country. Assuming the outbreak follows a similarly trajectory everywhere else, then coronavirus spread will be near-zero within a few months, and global semiconductor supply and demand trends will get back to normal.
Out of fear, however, investors have sold Intel stock to levels which price in coronavirus-related weakness for a lot longer than just a few months. Take advantage of this fear. By mid-to-late 2020, coronavirus fears will subside and this dirt cheap value stock will rebound in a big way.
Dollar Tree (DLTR)
Much like Target, value stock Dollar Tree should be a relative winner in both the near- and long-terms.
In the near-term, coronavirus-related panic-buying will provide a boost to Dollar Tree’s numbers, especially because Dollar Tree is a discount store, and consumers — who are also worried about the economy — will likely be looking to save money in their panic-buying efforts.
Long-term, Dollar Tree is a high-quality, high-margin discount retailer with a huge real estate footprint and an enduring consumer value prop. The company should continue to grow revenues and profits at a steady rate over the next several years. Coupled with a multi-year low 14-times forward earnings multiple, that should lead to strong share price returns.
Overall, then, near-term weakness in DLTR stock won’t last forever. Taking advantage of this massive sell-off should pay off in the long run.
American Airlines (AAL)
American Airlines stock has plunged on coronavirus concerns, and reasonably so. The world is shutting down, and no one is flying.
But, the U.S. government has pledged to support U.S. airlines like American during this time. Such support should help ease liquidity concerns, and give a nice boost to these stocks.
At the same time, it’s important to remember that coronavirus will cause a sharp but short-lived downturn in airline demand. Air travel has become a necessary component of modern travel. Once the virus clears up, consumers globally will fly again.
So, American is staring at a manageable short-term problem (thanks to government support), and the stock is trading at its lowest levels since 2012.
Long-term, the virus will pass, demand trends will rebound, and the this plunge in AAL stock will reverse course.
A significant and impressive pharmacy retail turnaround — which started in 2019 — will continue over the next few years, and push CVS stock higher.
The pharmacy retail world became commoditized in the 2010s. Outside of proximity, it became tough to tell CVS, Walgreens (NASDAQ:WBA), Rite Aid (NYSE:RAD), and others apart. In the absence of product or platform differentiation, the drug retail world relied on price differentiation to drive growth. That meant price cuts, lower revenue per item, lower margins, and lower profits.
That’s exactly what happened at CVS. And lower profits is exactly why CVS stock stumbled from 2015 to 2018.
In 2019, CVS management figured out a way to differentiate their retail operations like HealthHUBs, or stores that include personalized, in-store health care services like nutrition counseling and blood pressure screenings. The thinking was that HealthHUBs would help CVS stores turn into one-stop-shops, and given how much consumers have gravitated towards one-stop-shops like Walmart (NYSE:WMT) and Target over the past few years, this transformation should reinvigorate traffic growth trends.
Management was right. As CVS has opened up more HealthHUBs, traffic, revenue, and profit trends have improved. CVS stock has rallied.
Over the next several years, CVS will continue to open up more HealthHUBs. Sure, Covid-19 will throw a wrench in the HealthHUB growth narrative for the next few months. But, by the back-half of 2020, the economy should get back on solid footing, and the HealthHUB growth narrative will resume.
When it does, the 2019 rally in CVS stock, will resume.
Bank of America (BAC)
Much like airline stocks, bank stocks have been killed recently. Bank of America stock has been no exception. Shares are down 34% over the past three months, and trade at their lowest valuation and highest yield in several years.
Of course, all of this negativity is warranted by a slowing U.S. economy, plunging yields, and a flat yield curve.
But, all of those adverse impacts are the result of Covid-19. While Covid-19 is a big near-term risk, it’s tough to see it lasting past the summer of 2020.
As such, in the back-half of the year, the U.S. economy should rebound, yields should rise, and the yield curve should normalize.
If all those things do materialize, then BAC stock will rally big from its currently dirt-cheap levels. To be sure, buying this stock at the current moment is risky, so I’d wait until more clarity emerges on the coronavirus front. But, once the data starts to turn a corner — and already is, to an extent, with the curve flattening — then I’d considering buying the dip here.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long AAL.