Value stocks have underperformed growth stocks over the past decade or so. This is due to the cheap financing available to hyper-growth businesses. Moreover, investors employed a risk-on approach towards stock picking. However, the tables have turned this year, with investors looking to find the best value stocks trading at a discount.
Inflation remains at a 40-year high, while the Federal Reserve has tightened it’s monetary which has compelled investors to rotate out of growth stocks. The inflated valuations of several of the most popular growth stocks have forced investors to take shelter in businesses with attractive fundamentals and lower share prices.
Hence, investors must hunt for the top value stocks trading at discounts with massive upside potential.
|LEG||Leggett & Platt||$39.1|
Online-travel booking giant Expedia (NASDAQ:EXPE) recently reported its first-quarter results, reflecting a business recovery. Its first-quarter revenues came in at $2.25 billion, an 81% improvement from the prior-year period and ahead of Wall Street estimates of $2.23 billion.
It has its work cut out to catch up to pre-pandemic levels, but the gradual recovery in its results suggests it could reach that goal within a couple of years.
Looking ahead, the momentum is likely to increase significantly as international travel restrictions ease out. Nevertheless, the impact of the coronavirus, inflation, and geopolitical tensions are likely to weigh on company results.
Its CEO Peter Kern believes that the “pent-up demand that’s out there for travel seems to be outweighing anything the market can throw at it.” With the investor skepticism surrounding EXPE, the stock trades at multi-year lows, creating an attractive entry point for long-term investors.
AbbVie (NYSE:ABBV) is a leading global pharmaceutical company that commercializes and develops some of the biggest moneymakers in the industry.
Its arthritis medicine in Humira has been its cash cow, but with its patent expiration, investors are concerned over its future. However, it has one of the deepest portfolios in the industry, generating revenues in excess of $56.1 billion last year, which is close to a 100% bump compared to five years prior.
With Humira’s patent expiry horizon, ABBV has shed a fair bit of its value of late. Nevertheless, combined sales of its two leading immunology drugs, Skyrizi and Rinvoq, are likely to surpass sales of Humira.
Moreover, it’s also winning big with its neuroscience and aesthetics portfolios. In its recently released quarterly report, sales from its neuroscience and aesthetics department were double-digit from the prior year. Another major positive for the business is that it comes with a healthy dividend, yielding over 3.69%.
Target (NYSE:TGT) was one of the most successful retailers during the pandemic, with a 19.3% increase in comparable sales in 2020. The company capitalized on the shift in consumer shopping habits during the pandemic.
Comparable sales rose almost 13% in fiscal 2021, which boosted total sales by a whopping $28 billion. The rampant growth in the company’s top line made it significantly more efficient, reducing operating expenses as a percentage of sales.
The adverse market conditions have severely impacted recent results at this time. Discretionary spending is down, but over the long run, the results are likely to improve over time. More encouraging for Target is that it announced a massive dividend hike of 20% to $1.08 beginning in September. The boost takes forward yields past the 3.10% mark.
Leggett & Platt (LEG)
Leggett & Platt (NYSE:LEG) is a consumer durable goods giant with a proven track record of rewarding its shareholders. It has grown its dividend payouts by an incredible 51 years, making it a dividend king and aristocrat.
A lot of it has to do with its consistent performance over the past several years, delivering single-digit across multiple revenue and profitability metrics. Its performances have plenty to do with the diversity of its product base, which covers furniture, bedding, textile, and other related products.
Barring the third quarter of 2021, it has consistently beaten analyst estimates across its top and bottom lines since the fourth quarter of 2020. The company plans to continue investing for the future, but not at the expense of its dividend payouts and share repurchases. It boasts an investment-grade balance sheet with over $1 billion in its credit facility.
Barclays (NYSE:BCS) operates a diversified business model that includes its investment wing and a consumer banking wing catering to the U.K. and U.S. markets.
Such as arrangement puts it in a position to weather the challenging macro-environment at this time.
The investment side should benefit immensely from the heightened volatility. Moreover, the current volatility in fixed income should be a blast for larger investment banks. Additionally, the interest rate hike should benefit the consumer side. Its first-quarter report showed that just a 25 basis points increase could result in £525 million to the bottom line.
Moreover, it is targeting a 10% return on tangible equity for the year, which puts it in an incredible position amongst investors.
United Rentals (URI)
United Rentals (NYSE:URI) is the largest equipment rental business with an incredible history of outperformance in a highly fragmented sector. It’s been one of the biggest wealth compounders in its sector, generating over 630% in returns in the past decade.
Year-to-date gains have been in the negative, while its management forecasts record demand due to the long-term tailwinds and growing government infrastructure spending. Its management expects a 16% jump in sales in fiscal 2021.
Moreover, it has done remarkably well to improve its financial flexibility. It paid over $2.5 billion in debt in the past year, significantly decreasing its financial leverage. Operating cash flows are up by a staggering margin, averaging in at 18% over the past five years.
Having said all that, URI stock remains one of the best value plays at this time.
D.R. Horton (DHI)
D.R. Horton (NYSE:DHI) is one of the most prolific homebuilders operating in over 98 markets in the U.S.
It boasts an incredible track record of growing its EBITDA and revenues by double-digit margins over the past several years.
Nevertheless, its stock has taken a beating of late, and it now trades at just 0.74 times forward sales. However, the market conditions are robust despite rising mortgage rates.
During the second quarter, DHI revealed that it had 33,900 homes in its backlog and roughly 59,800 in its inventory. Revenues during the quarter shot up 22% to $7.5 billion, up from $6.2 billion in the same quarter last year.
Average sales prices came in at $378,200, up a healthy 21% from the prior-year period. As we advance, the firm expects revenues to fall in the $35.1 billion to $36.1 billion range, up significantly from consensus estimates of $35.33 billion.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.