Explore these year-end bargains. Shoppers aren’t the only deal-seekers during the holiday season. Value investors may also be on the hunt for year-end bargains. The premise of value investing is simple: buy stocks that appear…
Explore these year-end bargains.
Shoppers aren’t the only deal-seekers during the holiday season. Value investors may also be on the hunt for year-end bargains. The premise of value investing is simple: buy stocks that appear underpriced in the market and sell when prices rise. Claims that value investing is dead have made the rounds in recent years, but a swift reversal could be in order for 2019. Further interest rate hikes, which increase borrowing costs, could make accessing capital more difficult for companies, causing some growth stocks to lose steam. As the year winds down, here are eight stocks that value investors should consider.
The holiday season puts big retailers like Amazon.com (AMZN) in the spotlight, but FedEx is a value dark horse. “All of the things we buy online now, somebody’s got to move them,” says Richard A. “Trip” Miller III, managing partner at Gullane Capital Partners in Memphis, Tennessee. “As you see more dependence and growth in online purchases, it’s only beneficial for FedEx’s numbers.” FedEx is down roughly 16 percent from its 52-week high, but its core businesses are growing. Miller says downside risk centers on the possibility of a global trade war, but believes “that risk from China and growing trade tensions are already priced into the company.”
A cooling growth outlook may push Starbucks into value stock territory just in time for the holidays. “Starbucks has remained relatively bullish even with the pullback in the market and saw a nice bounce higher from fourth-quarter earnings,” says Allison Ostrander, director of risk tolerance at online education platform Simpler Trading. She points out that the strength Starbucks has demonstrated during its pullback suggests that stock prices may propel higher if market trends continue to be bullish. “If we do see a pop up in the market and a Santa rally into the end of the year, there is a higher probability that Starbucks will continue to the upside,” Ostrander says.
Dollar General offers an advantage over other retail-stock competitors in that it’s a seller of seasonal goods, but it’s not a seasonal, cyclical retailer, Miller says. Further, it’s “an extremely well-run, growing business that we believe has a lot of catalysts that are propelling it along,” he says. That includes the opening of more than 1,300 locations in 2017 and an additional 900 stores in 2018. DG pays a dividend, albeit a small one. “It’s one of the few box retailers that’s on a growth trajectory and growing in small, underserved markets that Amazon or Walmart (WMT) do not serve well,” Miller says.
It’s arguable that Microsoft possesses both growth and value stock characteristics. John Traynor, chief investment officer at People’s United Wealth Management, says the time is ripe now for value investors to look for high-dividend growers and Microsoft is one stock that leads the pack. “Microsoft is showing good organic growth,” Traynor says, adding it “has been able to return a good amount of money back to clients.” The company’s 2019 first-quarter results showed revenue of $29.1 billion, an increase of 19 percent from last year. Microsoft is currently squaring off with Apple (AAPL) to become the largest publicly traded company.
Even though the gaming sector made a strong showing in 2018, several gaming stocks are delivering deep discounts for value investors. Daniel Lugasi, founder and portfolio manager at VL Capital Management in Winter Park, Florida, points to EA as a go-to choice. “The stock is currently trading at a forward price-to-earnings ratio of 20 times earnings, which is a significant discount from a few months back when it was trading well over 26 times earnings,” Lugasi says. Forward P/E represents a current stock’s price over its predicted earnings per share.Overall, the stock’s price has declined more than 40 percent in recent months. But future prospects are bright as EA prepares to launch a cloud-gaming service.
As a consumer products giant, Procter & Gamble may be attracting a larger investor audience, says Jeff S. Vollmer, managing principal at Hyde Park Wealth Management in Cincinnati. Share prices in late November, trading at roughly $92, reached a level not seen since December 2014. Vollmer attributes the stock’s upswing to internal restructuring under CEO David Taylor’s leadership, and the confidence boost with billionaire businessman Nelson Peltz on the board. “Either way, with a trailing price-to-earnings ratio of 24.2, shares are reasonably valued on a relative basis,” Vollmer says. “With shares providing an excellent return on shareholder equity and a history of stable performance during unstable times, PG may be just the stocking stuffer this Christmas.”
AbbVie is a pharmaceutical company, owning some of the top-selling drugs in the world, such as Humira and Vicodin. It’s also undervalued, relative to much of the market, with a P/E-growth ratio of 0.66. The PEG ratio represents the P/E ratio divided by the growth rate of its earnings over a specific time period. ABBV’s current PEG translates to excellent value and growth prospects, Vollmer says, “which is no wonder, as the company has seen consistent growth in sales, cash flow, earnings and book value per share.” Share prices are about 29 percent below ABBV’s January high, trading at $89, and the 4.8 percent dividend yield sweetens the deal further for value investors.
Facebook has historically been a growth stock, but it could be suited to value investors over the long term. Ostrander says it may end up becoming a bearish trade, if there’s no year-end market rally, as revenues are on a slowing trend. “Between the drop in users in recent months and the infamous Cambridge Analytica scandal, Facebook has not been able to find its footing,” she says. If additional questions arise over Facebook’s privacy controls and personal data policies, that could drive prices lower. Ostrander says a market rally could result in a pullback to stronger resistance levels for FB, but “unless it breaks and holds above $150, it’s hard to trade this bullish (stock).”