Eq: Value (12)
Stocks got wounded very badly in the last quarter of the year, with many stocks entering deep bear markets. Many analysts think stocks are in for a good year, so many feel it is a good time to buy. So what are the best rebound picks for 2019? Sector-wise, it might be best to look at IT, energy, communication services, and utilities. In terms of individual names, consider Noble Energy, Conagra Brands, Alexion Pharma, American Airlines, Electronic Arts, Norwegian Cruise Lines, Tiffany & Co., and Citigroup.
FINSUM: Quite a diverse list! But then again, that is what happens when the S&P 500 falls 20%--there are a lot of wounded stocks to choose from.
The big market rout has left no shortage of stocks trading at large discounts to their previous valuations. The important question is which ones are actually a good value given the eruption in markets. With that in mind, here are four well-known names to take a look at. They are General Motors, CVS Health, Macy’s, and American Airlines. GM and AA are trading at near 5x earnings, the latter despite a thriving business. AT&T is interesting too, as shares have fallen 20% in the last year, and the dividend has swelled to 6.7%.
FINSUM: This seems like a good chance to pick up some healthy stocks that have been heavily dented by a selloff, but are poised to recover. We particularly like American Airlines and AT&T.
McDonalds has been slowly reinventing itself over the last few years. Big menu changes and and healthier items have been a major part of that shift. Now the restaurant chain is doubling down on one its recent focus areas—breakfast. A few years ago McDonalds decided to make a handful of breakfast items available all day. The change was a hit with customers and investors and helped grow sales for the year. However, recently, McDonalds has blamed it for slowing sales as its morning business has actually weakened because consumers can get breakfast items all day. Now it is changing its tact by offering breakfast sandwiches starting at just a Dollar and offering extra-meat breakfast sandwiches all day.
FINSUM: It seems all day breakfast has cannibalized some sales for old Mickey D’s. The dollar menu approach in the morning should help.
Walmart has taken a pounding this year. The stock is down 8.4% even though it has seen solid earnings performance. The reason why? Shares first got beat up early in 2018 when investors worried its digital strategy wasn’t taking hold. Then in the middle of the year worries about margins cropped up. Finally, in November, shares saw losses even though Walmart beat earnings and raised payouts. Interestingly, the shares were a counterpoint to the rest of retail, which saw gains for much of the year.
FINSUM: We think Walmart is a great buy. It has good same store sales momentum and its ecommerce operation is growing rapidly. This seems like a good buying opportunity to us, especially as the brand sells consumer staples, which will hold up even in an economic downturn.
How do you know when the market is bad? When the safest stocks are also the best performing. It sounds like an old market joke, but it couldn’t be more true right now. Stocks are down around 10% this month, the worst December since the Great Depression. A good sample of these low volatility stocks can be found in Invesco’s S&P 500 Low Volatility ETF (SPLV). That ETF has fallen just 7% from the market’s September peak, while the S&P 500 has fallen 16%. Looking at correlations, the majority of stocks with the best 90-day momentum are also those with the lowest volatility.
FINSUM: The market is playing defense, and with good reason.
Are you looking for places to ride out the current storm in markets? It is a tough time to be doing so, as even traditional bastions of safety—utilities, healthcare, and consumer staples—have been deeply wounded lately. Here is one you probably haven’t thought of—Berkshire Hathaway’s stock. The captain of the Berkshire ship, Warren Buffett has long been a master of profiting in down markets, and with the company’s $100 bn in cash, the combination looks appealing. One CIO put it this way, saying “As a long-term Berkshire holder, this is the kind of environment that you hope for given all the cash … I love the risk-reward, embedded safety, and diversity of the earnings flows”.
FINSUM: Berkshire is not the kind of stock that is going to get hammered in down markets, and it would seem to have a lot of upside in such environments. Seems like a potentially good buy.
A lot of investors may be looking for stocks with good value at the moment. Stocks that are badly beaten up, but have good underlying businesses, can be prime buys during adverse market conditions. With that in mind, take a look at Nike. The sportswear giant has shed 16% this quarter and will release earnings later today. Investors’ skepticism will either be proven correct, or wrong. The thing is, the core business looks compelling. The company gave guidance in September that it was expecting currency-neutral revenue to grow 9%. One analyst summarized the stock this way, saying “buy Nike into earnings. Nike sales are gaining momentum and the company is gaining market share across channels and geographies.”
FINSUM: Nike has done an admirable job catching up to rivals recently, as well as in passing on rising costs to consumers. Our instinct is that this is a good buy.
Something interesting has been happening for value stock investors lately—value stocks have been outperforming. Value investing as a discipline has been suffering for at least a decade as growth stocks won out. The malaise has been so poor that many have given up on the philosophy altogether. So with the recent turnaround, should that be reconsidered? Barron’s says the answer is a firm “no”. The recent outperformance of value may just be an aberration related to movements in particular sectors. The reality is that most value indexes have little exposure to the sectors that are suffering, like tech and consumer discretionary. Therefore, their outperformance is more a coincidence than a turn in the market.
FINSUM: We’d have to agree with this view. It does not seem like there has been some fundamental change in investors’ thinking, more that anxiety has just struck the most growth-oriented sectors.
If you think the market has been bad overall, take a look at the asset management sector, which has been brutalized in the last few weeks. The S&P index of asset managers has fallen 14% this month, compared with a 9.3% drop for the market overall. That adds to a lot of pain already this year—the index has lost almost 25% of its value in 2018 and is headed for the biggest loss since 2008. Some, like leader BlackRock, have been hit very hard just this month with shares down 17%.
FINSUM: Weak fees and poor fund flows are the immediate problem, but they are a major issue because they support investors’ fears of disruption in the industry.
The market is not doing well this month. That is probably a serious understatement, in fact. Yet, that leaves room for opportunity, both in aggregate, but also in specific shares that might lead in these tougher times. Retail is an interesting choice right now, as the economy is still doing well and we are headed into the busy holiday shopping period. With that in mind, take a look at Gap, Foot Locker, and Michael Kors Holdings, all of which look cheap “relative to their respective sectors” and have “identifiable catalysts between now and year-end”, according to analysts at Jefferies.
FINSUM: Retail is interesting to us at present because it is not overly rate sensitive and is heading into its strongest period of the year right when the economy is looking best. That said, we are worried about consumer spending falling on the back of these equity losses.
Value investing has been dead for a long time. So long in fact that many of its strongest disciples are even starting to wonder if it will ever return. Well, something interesting has happened this month. The broader market was down 8.9%, but the S&P Value Index only fell 5%, showing that value stocks have actually been outperforming the market during the recent turmoil. BlackRock is sticking to value stocks, with the head of factor-based investment strategy commenting that “We find the economic rationale still holds … We’re comforted by 90 years of long-run data, where value time and time again outperforms growth”. One of the issues for investors is that there is no clear way to define value, as each index uses its own metrics.
FINSUM: Value stocks do seem interesting right now, as this is the kind of environment where they would thrive. But do you determine value based on price to book, P/E ratio, returns, or something else?
Value stocks have been hurting for years. They have lagged growth stocks considerably over the last decade, and have been underperforming growth stocks for so long that even some ardent value fans say the shares might never rebound. However, an increasing group of analysts are saying that value is set to stage a big comeback versus growth. Some indicators show that a reversal of growth stocks is imminent, and P/E ratios are running so high that value looks likely to appreciate. Morgan Stanley analyst Michael Wilson thinks that the current rotating bear market will end with growth and small caps sinking.
FINSUM: We don’t see much of a catalyst for growth stocks sinking while value stocks rise. Further, if stocks fall, they could all fall in unison without value seeing any outperformance.