These 10 value stocks should benefit from the rotation away from growth.
The stock market is experiencing one of its largest rotations of the past decade. Investors are now rushing to dump their speculative growth and disruption companies. Exchange-traded funds such as Cathie Wood’s Ark Invest series have plummeted in value. Meanwhile, left-for-dead sectors of the market, such as energy and basic materials, have soared. The central theme driving all of this is the return of inflation. As the global economy has recuperated from the pandemic, massive shortages of raw materials, labor, and logistical services have caused a surge in inflation. Throw in the war between Russia and Ukraine, and commodities are booming. This has led investors to dump growth and return to value stocks. Many formerly cheap value stocks have already run up sharply given these macroeconomic developments. However, these 10 value stocks are still poised to benefit in this new market environment.
Unilever PLC (ticker: UL)
Unilever shares have fallen nearly 20% year to date. In doing so, that has turned the consumer staples company into a value play, as shares now sell for just 15 times forward earnings. That’s quite a discount historically for the multinational producer of deodorants, hair care products, ice cream, sauces, seasonings, teas and so forth. Usually these sorts of companies trade at a higher valuation given their recession-resistant characteristics and admirably steady cash flows. However, Unilever is in the penalty box over management’s uneven handling of the business and its issues with cost inflation. Activists are going after the company, trying to shake things up. Presumably, in good time, Unilever will get back on track. Its stable of brands is too attractive to sell at a bargain-bin valuation forever. In the meantime, shares offer a 4.3% dividend yield.
Meta Platforms Inc. (FB)
It’s official: Facebook, now Meta, is now a value stock. After falling 50% from its recent highs, Meta is now selling for less than 15 times earnings. It’s even cheaper than that once the company’s $48 billion of cash and cash equivalents is factored into that equation. It’s understandable why investors are nervous. Meta is now spending tens of billions of dollars on its metaverse ambitions without a clear payoff timeline. Meanwhile, its core advertising business has slowed down due to Apple Inc.’s (AAPL) privacy restrictions. However, the company is still an absolute cash flow machine. And monetization opportunities remain for certain Meta properties such as WhatsApp. Sentiment is certainly terrible for FB stock right now, but the actual fundamentals aren’t nearly as bad as the stock price would suggest.
Toyota Motor Corp. (TM)
Shares of Japan’s leading automaker have slumped 20% over the past month. The auto industry was already facing multiple challenges between the semiconductor squeeze, labor shortages and logistical headaches. Now throw in a major geopolitical event and spiraling fuel prices, and it’s understandable why traders are tapping the brakes on the auto industry. However, the selling has gotten out of hand with Toyota in particular. Shares have now fallen to just 8 times earnings. And yes, it’s understandable how rising fuel prices could dim the auto industry’s outlook. But investors should consider that Toyota is strong in both compact vehicles and hybrid vehicles, meaning it should benefit if buyers shift away from fuel-guzzling SUVs and pickups toward models where Toyota has a competitive advantage.
Citigroup Inc. (C)
Citigroup has slumped to 52-week lows over the past few weeks. The banking sector has suddenly gone into reverse as traders brace for a potential recession following the surge in commodities and energy prices. Until recently, the hope was that rising interest rates would lead to improving profit margins on bank lending. Now, however, the focus has shifted to credit risk. The banks are taking some losses on Russian exposure, for one thing. Earlier this month, Citigroup reported $5.4 billion in exposure to Russia, and some analysts projected that it will lose $100 million on Russian assets given recent events. In the grand scheme of things, though, a $100 million loss is a rounding error for Citi, with its market capitalization north of $100 billion. And, as things stand today, Citi is trading for just 7 times earnings and is paying a dividend yield of 3.6%
Goldman Sachs Group Inc. (GS)
From the pure numbers, Goldman Sachs is one of the cheapest stocks here. Down 16% year to date, shares are now trading at just 5.4 times trailing earnings. Pretty incredible, right? It’s normal for investment banks to trade at a lower earnings multiple than the S&P 500 as a whole given the risks in banking, but a 5 P/E ratio is something else. Investors have concluded that Goldman Sachs is set for a massive slowdown. Perhaps its investment bank will do fewer M&A deals and initial public offerings as the market slows. And fees on asset management would decline if overall asset values fall. Still, at mid-single digits price-earnings, there is a huge margin of safety. With the stock down significantly, it can buy back stock at an accelerated rate. Also, don’t forget, rising interest rates should help bolster profits, offsetting the other negatives.
Verizon Communications Inc. (VZ)
Telecom stocks have been out of favor in recent years, as investors have preferred names with more growth potential in the technology and communications arena. However, things are changing in 2022. As pandemic-driven winners such as Zoom Video Communications Inc. (ZM) have crashed, the old-school telecoms are showing their strength. Verizon stock is up several percentage points year to date despite the difficult market conditions. That makes sense, as investors are prioritizing profits and cash flows that are already here over future growth. Verizon, trading at 10 times earnings and a 4.8% dividend yield, fits the bill. It may actually have some growth potential, as well, as the long-awaited 5G deployment cycle should finally start to bear fruit.
3M Co. (MMM)
3M is a large industrial company focusing on health care, consumer products, protective safety gear and transportation. While it is known for its famous adhesive tape, the company has quietly become one of the largest and most powerful industrial conglomerates in the country. 3M shares have slid 30% from their 52-week highs amid fears of an economic slowdown along with some legal liabilities relating to its manufacture of certain chemicals in the past. However, the market has overreacted, driving the stock down to just 14 times forward earnings. Morningstar’s Joshua Aguilar agrees with the view that MMM stock is undervalued. Aguilar pegs 3M’s fair value at $192 per share, offering considerable upside from the current sub-$150 price. On top of that, 3M is now offering a dividend yield of greater than 4%, which is a rare occurrence for this dividend aristocrat.
Gilead Sciences Inc. (GILD)
Gilead has gone from cheap to cheaper throughout the first quarter of 2022. Some investors have long labeled Gilead a value trap, and the stock’s slide from $70 to $59 this year has only increased the volume of those calls. This is understandable. Gilead rose to prominence from a highly successful set of drugs to treat hepatitis C and was unable to immediately follow up that product line with a second act, causing the company’s fortunes to reverse. However, the company’s pipeline is starting to kick in. Analysts see Gilead returning to revenue and profit growth in 2023, and the company is already starting off of a massive profit and cash flow base. Biotech investing is always subject to a certain degree of luck depending on clinical trial outcomes. However, with earnings set to advance, Gilead looks attractive at 9 times forward earnings and with a nearly 5% dividend yield.
MetLife Inc. (MET)
Until a month ago, rising interest rates were many investors’ biggest concern. And insurance companies such as MetLife are one of the single best ways to hedge against higher interest rates. That’s because insurance companies invest a large portion of their premiums into fixed income assets such as corporate and government bonds. As interest rates rise, insurers like MetLife earn a higher yield and profits rise. After more than a decade of a perpetual zero-interest-rate environment, things are finally set to improve for the insurance industry. Right now, that interest rate story has gotten lost in the current events around Ukraine. However, if and when the market returns to focusing on inflation and the upcoming rate hike cycle, MetLife should start to surge. For now, shares trade at just 8 times earnings.
NVR Inc. (NVR)
NVR is one of the nation’s largest homebuilders. Homebuilders are the flip side of the coin from banks and insurance. In theory, rising rates should hit the housing market hard. And yet, the American housing market remains strong heading into 2022. Demographics, and in particular the large number of millennials still living at home or in apartments, should lead to above-average demand for new homes in coming years. Meanwhile, rising wages and large amounts of government stimulus over the past two years have put the American consumer on stronger footing to make large purchases. As for NVR specifically, its business model revolving around owning call options on land rather than land outright has insulated it from the boom-bust cycle that normally affects homebuilder stocks. NVR stock has pulled back 20% to start the year, pushing its price-earnings ratio down to 14.
10 Best Value Stocks to Buy for 2022
— Unilever PLC (UL)
— Meta Platforms Inc. (FB)
— Toyota Motor Corp. (TM)
— Citigroup Inc. (C)
— Goldman Sachs Group Inc. (GS)
— Verizon Communications Inc. (VZ)
— 3M Co. (MMM)
— Gilead Sciences Inc. (GILD)
— MetLife Inc. (MET)
— NVR Inc. (NVR)
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Update 03/09/22: This story was published at an earlier date and has been updated with new information.