Great stocks to buy for value.
Fourth-quarter earnings season confirmed investors’ fears that earnings and revenue growth for U.S. stocks are finally slowing. Analysts project that S&P 500 revenue growth will drop from 8.9 percent in 2018 to 4.9 percent in 2019. In a more difficult economic environment, many investors are shifting their attention from growth stocks to value stocks, which have significantly underperformed throughout the bull market. In a maturing economic cycle, value stocks have historically outperformed growth stocks. Here are nine value stocks that Bank of America says are among the best stocks to buy in a difficult growth environment.
American Airlines Group (ticker: AAL)
Analyst Andrew Didora says the first quarter unit revenue guidance that American Airlines issued recently was above his expectations. Didora says American’s branded fare initiative and the end of its multi-year investment cycle will serve as positive catalysts for the stock and will drive a meaningfully positive cash flow inflection in 2020. The S&P 500’s average forward earnings multiple is currently about 16. Based on Bank of America’s estimates, AAL stock has a forward earnings multiple of just 5.4. The firm has a “buy” rating and $42 price target for AAL stock.
Capital One Financial Corp. (COF)
Analyst Kenneth Bruce says Capital One Financial had a better fourth quarter than its large earnings miss suggested. Expenses were up 10 percent, but Bruce says the stock looks cheap given its earnings growth and total return potential. Recent credit trends have been encouraging, and Bruce says there’s room for modest earnings multiple expansion from its current level of just 6.5. Even at a depressed multiple, Bruce says there is at least 25 percent upside for COF shares. Bank of America has a “buy” rating and $106 price target for COF stock.
Micron Technology (MU)
Analyst Simon Woo says Micron Technology investors are focusing too much on a cyclical peak in memory demand and not enough on the company’s extremely profitable business. Despite macroenvironmental concerns and guidance for meaningful quarter-over-quarter declines in earnings and revenue, Micron’s impressive gross margins remain in the 50 percent range. An end to the trade war could also be a positive near-term catalyst for the stock. MU stock has a forward earnings multiple of just 5.4, the lowest valuation on this list of best value stocks. Bank of America has a “buy” rating and $50 price target for MU stock.
U.S. generic drug applications peaked in January 2018, and generic drug maker Mylan is well-positioned to benefit from a stabilization in generic drug prices in the next couple of years. The U.S. Food and Drug Administration recently approved Mylan’s generic version of GlaxoSmithKline (GSK) asthma drug Advair, which represents $1.4 billion in annual U.S. sales. Analyst Jason Gerberry says Mylan should generate $159 million in generic Advair sales in 2019. MYL stock has a forward earnings multiple of just 6.3. Bank of America has a “buy” rating and $34 price target for MYL stock.
NRG Energy (NRG)
NRG is a power provider with operations in the U.S. Northeast and Texas. Analyst Julien Dumoulin-Smith says NRG investors can enjoy an aggressive $500 billion 2019 stock buyback program while the company continues its transformation plan. NRG has sold off assets to shore up its balance sheet, and Dumoulin-Smith says the deployment of the capital NRG has raised will be a positive catalyst for investors. NRG stock has a forward earnings multiple of just 6.1. Bank of America has a “buy” rating and $43 price target for NRG stock.
Prudential Financial (PRU)
Analyst Jay Cohen says insurance giant Prudential is a market leader in the rapidly growing business of pension de-risking. Cohen says Prudential’s domestic business is solid, while its international business in Japan provides growth potential. Rising interest rates should help profitability over time, and Cohen says Prudential will continue to reward patient shareholders with impressive capital returns. In addition to its appealing 4.3 percent dividend yield, PRU stock has a forward earnings multiple of just 6.7. Bank of America has a “buy” rating and $110 price target for PRU stock.
United Continental Holdings (UAL)
Like American Airlines, Didora says United Continental had a strong fourth quarter across the board and offers long-term investors a compelling valuation. Unit revenue growth of 5 percent in the fourth quarter was a pleasant surprise. Didora says UAL should be able to achieve its 2019 earnings per share guidance of between $10 and $12 even if unit revenue growth is at the low end of its flat to 3 percent target range. UAL stock has a forward earnings multiple of 6.8. Bank of America has a “buy” rating and $90 price target for UAL stock.
Some investors may see Viacom as a value trap given the seemingly secular transition away from the cable TV model to the streaming video model. However, analyst Jessica Reif says Viacom’s most recent quarter is further evidence that the company’s business is actually relatively stable considering the stock’s extremely pessimistic valuation. Reif says Viacom has the resources for major acquisitions to drive growth, and the stock has potentially bullish near-term catalysts with little downside risk. VIAB has a 6.5 forward earnings multiple. Bank of America has a “buy” rating and $39 target for VIAB stock.
Valero Energy Corp. (VLO)
Oil refiners like Valero are more profitable when oil prices are low, which is probably why an unexpected drop in crude prices in the fourth quarter resulted in a blowout quarter, in which the company beat consensus EPS estimates by more than 100 percent. Analyst Doug Leggate says crude oil prices will be “anchored” in a relatively narrow range of between $50 and $70 per barrel until at least 2024. VLO stock has just a 6.5 forward earnings multiple. Bank of America has a “buy” rating and $126 price target for VLO stock.
The best value stocks to buy this year
Bank of America analysts rank these stocks among the best picks for value stocks in 2019:
— American Airlines Group (AAL)
— Capital One Financial Corp. (COF)
— Micron Technology (MU)
— Mylan (MYL)
— NRG Energy (NRG)
— Prudential Financial (PRU)
— United Continental Holdings (UAL)
— Viacom (VIAB)
— Valero Energy Corp. (VLO)
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