This is when investors look for value.
Value stocks have fallen out of fashion during the current bull market, severely lagging the performance of high-growth stocks. However, the evolving economic climate may soon once again shift investor attention away from growth and toward value. The Federal Reserve is planning to shrink its balance sheet by $1.4 trillion over the next four years. According to LPL Financial, large-cap value stocks have historically been the best-performing asset class for investors during similar periods of Fed tightening. Bank of America recently named the following 10 stocks as its “Value 10” top value stock picks.
American Airlines Group (ticker: AAL)
Analyst Andrew Didora says U.S. airlines are the most profitable in the world, generating 45 percent of global airline profits despite accounting for just 23 percent of revenue per passenger miles. Didora says American Airlines should continue to benefit from a boost in corporate travel spending and higher corporate pricing as a result of tax reform. Two-thirds of American’s revenue comes from corporate fares, making it a prime beneficiary of those trends. AAL stock has a price-earnings ratio of just 9.8. Bank of America has a “buy” rating and $66 price target.
Allstate Corp. (ALL)
Analyst Alison Jacobowitz says second-quarter catastrophe losses through May are in line with Bank of America’s projections, but she says investors should focus more on strength in Allstate’s underlying property and casualty underwriting margins. Property and liability premium growth was 5 percent in the first quarter, double the 2.5 percent growth reported in 2017. Jacobwitz is projecting a return on equity of between 14 and 15 percent over the next several years. ALL stock has a P/E ratio of 9.8. Bank of America has a “buy” rating and $113 price target.
AutoZone (AZO)
Analyst Elizabeth Suzuki says AutoZone is simply too cheap to ignore. Despite the company maintaining its market share and growing its number of stores by 3 percent annually, Suzuki says AZO stock still trades at a significant discount to its peer group. Suzuki predicts AutoZone’s sales growth will re-accelerate in coming years, triggering earnings multiple expansion. She says the auto parts market should benefit from a glut of new cars reaching the six-year-old mark starting in 2019. Autozone has P/E ratio of 13.5. Bank of America has a “buy” rating and $850 price target.
D.R. Horton (DHI)
Analyst John Lovallo II says he is “as bullish as ever” on U.S. homebuilders considering the strong, consistent cash flows and solid balance sheets of companies like D.R. Horton. Lovallo says U.S. homebuilders are priced as if the U.S. economy is headed toward another severe recession and housing market collapse, but there is no evidence of either. Bank of America’s 2019 earnings per share projection is $4.90, about 12 percent above consensus expectations. DHI stock has a 13.4 P/E ratio. Bank of America has a “buy” rating and $74 price target.
Kraft Heinz Co. (KHC)
Analyst Bryan Spillane says Kraft Heinz investors should expect a difficult second-quarter earnings report, but downside is limited given the stock’s attractive valuation. Spillane says Kraft Heinz should continue to leverage its scale advantages to drive margins higher and expand its international business. While Spillane is calling for a 1.7 percent decline in sales growth in the second quarter, he says growth will pick up in the second half of the year. KHC stock has a 6.9 P/E ratio. Bank of America has a “buy” rating and $85 price target.
Marathon Petroleum Corp. (MPC)
Analyst Doug Leggate says Marathon will enjoy $1 billion of merger synergies following its recent acquisition of Andeavor (ANDV). MPC stock is up just 6 percent year-to-date, but Leggate says the deal will be earnings accretive immediately and will boost Marathon’s 2020 EPS by 17 percent and cash flow per share by 42 percent. Leggate says Andeavor adds about $8 per share of value to Marathon stock, which has gained just over $4 per share in 2018. MPC stock has a 10.1 P/E ratio. Bank of America has a “neutral” rating and $88 price target.
Newfield Exploration Co. (NFX)
Oil prices recently hit their highest levels since 2014, which is good news for exploration and production companies such as Newfield Exploration Co. However, weakness in natural gas prices have hurt Newfield. Leggate says NFX stock has been punished for its conservative hedging of 85 percent of its oil production at prices between $55 and $56 per barrel in the near term. Things should improve in 2019, when Bank of America is predicting WTI crude prices to average $69 per barrel. NFX stock has a 16.5 P/E ratio. Bank of America has a “buy” rating and $47 price target.
PulteGroup (PHM)
Lovallo says PulteGroup is another U.S. homebuilder that should benefit from the boom in the U.S. housing market and puzzingly low valuations among homebuilder stocks. Lovallo says PulteGroup should generate above-average EPS growth for at least the next several quarters. In addition, the high end of the company’s full-year 2018 home delivery guidance suggests no more than 12 percent growth, but PulteGroup reported 12.2 percent growth in the first quarter. PHM stock has a 16.3 P/E ratio. Bank of America has a “buy” rating and $44 price target.
United Continental (UAL)
United Continental joins airline American Airlines on the Value 10 list at a time when airlines are more profitable than they’ve ever been. Still, investors seem skeptical that airlines will maintain those profits during the next economic downturn. Didora says United will benefit from an uptick in corporate travel in its corporate hubs, and United has more international route diversification than other major U.S. airlines. He also says United’s margins have room for further improvement. UAL stock has a 9.6 P/E. Bank of America has a “buy” rating and $90 price target.
United Rentals (URI)
Analyst Ross Giraldi says United Rentals is a leader in specialty rentals, and the company’s recent $715 million buyout of BakerCorp will produce $19 million in synergies. Giraldi says United paid a higher price for Baker than previous buyouts due to its stronger growth outlook, but he says the deal will be EPS accretive immediately. Giraldi said United can fund the deal with free cash flow and the company’s $1.25 billion buyback plan should proceed without a hitch. URI stock has a 8.8 P/E ratio. Bank of America has a “buy” rating and $186 price target.
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10 Value Stocks to Buy in an Unpredictable Market originally appeared on usnews.com
