While stocks have been trending higher so far in 2023, the path to gains has been anything but smooth. The first half of March brought an historic series of bank failures, including the shocking demise of both SVB Financial Group and Signature Bank. It’s been a wake-up call for any investors who were complacent about the real risks that the Federal Reserve’s aggressive rate hikes would pose to the broader economy.
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While the headlines may have been scary, they coincide with great opportunities for value stock investors. The conservative valuations thrust upon banking and financial shares lately have been applied a bit too broadly, and there are bargains showing up in other parts of the economy as well. This leaves value stock investors in a great position heading into the rest of 2023.
These 10 value stocks look particularly compelling:
— Alphabet Inc. (ticker: GOOG, GOOGL)
— Pfizer Inc. (PFE)
— Johnson & Johnson (JNJ)
— JPMorgan Chase & Co. (JPM)
— Wells Fargo & Co. (WFC)
— Verizon Communications Inc. (VZ)
— BP PLC (BP)
— LyondellBasell Industries NV (LYB)
— MetLife Inc. (MET)
— Interactive Brokers Group Inc. (IBKR)
Is Alphabet a growth stock or a value stock? Arguably, it qualifies as both. Analysts expect the company to earn $6.07 per share in fiscal year 2024, putting the stock at just 17 times next year’s earnings. Meanwhile, after a slower year of revenue growth, analysts expect Alphabet to return to double-digit annualized revenue growth in 2024. So why are shares trading this low? A lot of it appears to be due to concerns around artificial intelligence.
Rival Microsoft Corp. (MSFT) has rushed to deploy ChatGPT into its search engine and other related products. This has caused some analysts to speculate that Alphabet’s search monopoly could come under serious fire. However, it’s far from clear that AI-powered queries are really an apples-to-apples replacement for or improvement on traditional search. In the meantime, Alphabet has massive investments in AI and other cutting-edge technologies of its own. And don’t forget about the fast-growing Google Cloud business either. AI is a threat to some extent, but the current panic over Alphabet’s outlook seems overdone.
Pfizer Inc. (PFE)
Pharmaceutical giant Pfizer was trading for around $40 per share prior to the onset of COVID-19. Today, the stock is still going for about $40 per share. It’s a pretty remarkable fact that Pfizer shares have failed to hold any of their gains whatsoever despite the company seeing a massive upturn in business over the past few years. It’s understandable to a degree that the market has sold off pandemic-related stocks now that most of those revenue streams have declined sharply. Still, it seems like this might be a classic overreaction.
Analysts are projecting Pfizer to bring in roughly $70 billion in revenues in both 2023 and 2024. That’s way up from the approximately $40 billion the company generated annually prior to the pandemic. And the company has plenty of other products spanning many treatment areas that have nothing to do with COVID. Shares are going for 11 times projected 2024 earnings and offer a 4% dividend yield.
Johnson & Johnson (JNJ)
Pfizer isn’t the only pharmaceutical stock currently stuck in the penalty box. Johnson & Johnson shares have dropped from $177 to around $162 since the start of the year. This is a notable decline for such a venerable blue-chip company.
Current fears around talc liability lawsuits along with the health care pricing environment are largely to blame. Additionally, Johnson & Johnson is planning to spin off its consumer wellness products business, Kenvue, later this year. That will change J&J’s approach after decades of having pharmaceutical, medical devices and consumer products under one roof. However, the market clearly hasn’t been giving Johnson & Johnson much credit for its internal diversification in recent years. So the Kenvue spin-off could generate significant shareholder value once that process is complete. For now, JNJ stock sells for 15 times forward earnings and offers a 3% dividend yield.
JPMorgan Chase & Co. (JPM)
Several prominent banks including Silvergate Capital Corp., SVB Financial and Signature Bank have failed in recent months. Investors are suddenly waking up to duration risk. This is when a bank has a balance sheet that fails to properly match the length of its deposits and assets. Rest assured, as the top dog of American finance, JPMorgan Chase doesn’t have these problems.
As the spotlight turned to bank safety, JPMorgan Chase actually raked in $50 billion in net new deposits in the first quarter. Companies and high-net-worth individuals fled regional banks, shifting capital to too-big-to-fail national franchises, with JPMorgan Chase in line to collect a huge chunk of the newly available capital. This will be ideal timing for JPMorgan Chase, as there are tons of opportunities to deploy money into this higher interest rate environment. Winners keep winning, and JPMorgan Chase should be a prime example of that in the coming months.
Its first-quarter earnings report already evidenced these strengths, as JPM handily beat on both revenue and earnings expectations, with the stock jumping 7.6% on the news.
Wells Fargo & Co. (WFC)
Wells Fargo should be another bank that gains amid the recent financial drama. Counterintuitively, Wells Fargo’s recent scandals left it in a stronger situation for dealing with the current mess. Due to its Federal Reserve-imposed asset cap, Wells Fargo has struggled to grow its business for the past few years.
This left it with plenty of reserves and kept it from the temptations of hunting for growth in subpar opportunities. This weakness-turned-strength, combined with the firm’s tremendous retail deposit base, gives Wells Fargo an advantaged position for dealing with the current banking shakeout. While Wells Fargo doesn’t have the sterling reputation or credibility of JPMorgan Chase, it has the balance sheet flexibility to make shrewd moves during this opportune time. And the headline-grabbing collapses of Silvergate, SVB and others should make folks forget about Wells Fargo’s past sins. With the recent decline in bank stocks, WFC shares now go for about eight times forward earnings and offer a 2.9% dividend yield.
Verizon Communications Inc. (VZ)
Investors tend to turn to telecommunications stocks for their stable businesses and high dividend yields. AT&T Inc. (T) damaged that reputation with its recent dividend cut. The company had gotten away from its knitting after making a large and ill-fated media acquisition. However, investors have punished the sector more broadly, leaving Verizon Communications at an irresistible valuation today.
There are some concerns, to be certain. Increasing competition from the cable industry has limited pricing power. And the rollout of 5G has been expensive and has limited the amount of capital available for dividend increases and buybacks in recent years. Regardless, Verizon is still a good business that tends to be recession-resistant while generating billions in cash flow through thick and thin. Shares are currently selling for just less than nine times forward earnings while offering a 6.8% dividend yield.
BP PLC (BP)
Energy company BP has been in the doghouse for over a decade now. First it was the Deepwater Horizon disaster. Then the prices of oil and gas crashed. Then came BP’s investments into renewable power. The company went with the branding slogan “Beyond Petroleum” for a while, and that came up empty as its return on investment in renewables projects fell short of expectations. Even as BP has reported record profits this past year, its shares have appreciated far less than many of its energy industry peers. That may be set to change, however.
In February, BP announced it will be paring down its renewables investments while focusing more on its core strengths in traditional energy. That should be music to the ears of long-skeptical investors. In the meantime, the company is indeed earning record profits and is set to spread the wealth with its shareholders. BP is a true value stock at roughly six times forward earnings and a 3.6% dividend yield.
LyondellBasell Industries NV (LYB)
LyondellBasell Industries NV is a global specialty chemical company. It produces goods such as olefins, polymers, ethylene and many other such items. These go into a wide variety of products, including packaging, insulation and plumbing materials. Investors have sold off shares of LyondellBasell and other chemical stocks over the past year due to economic concerns.
Chemicals are historically a cyclical industry whose fortunes are closely tied to the broader economy. That’s still true. However, the economy has remained stronger than many analysts expected. Meanwhile, LyondellBasell has made plenty of hay while the sun was shining. Shares trade for about 10.5 times forward earnings and pay a 4.9% dividend yield. As if that weren’t enough, LyondellBasell has been aggressively repurchasing its shares at these depressed prices, which should significantly bolster its earnings per share in future years.
MetLife Inc. (MET)
One way to steer clear of the issues with banking stocks is to invest in life insurers. An insurer like MetLife has a dramatic advantage in the current environment. A policyholder’s premiums are locked in until payout comes at some date far in the future. This means it is virtually impossible to replicate a run on the bank against an insurance company. The security of its funding base means MetLife has the financial traction to stick with its investments now, regardless of mark-to-market fluctuations, while taking advantage of the sharply higher interest rate environment.
Remember that higher interest rates are usually a boon to financial companies, allowing them to earn fatter spreads between their funding costs and their asset books. MetLife will get to see that through, unlike some banks that got caught in a liquidity squeeze. MetLife shares have dropped 14% in 2023 through April 19, which puts the stock at less than eight times forward earnings today.
Interactive Brokers Group Inc. (IBKR)
The recent bank losses have created an opportunity in the brokerage industry as well. That’s because giant Charles Schwab Corp. (SCHW) has a huge pile of unrealized losses on fixed-income securities it purchased. Schwab also operates a major bank franchise as part of its overall operations and could see capital flight given its relatively less-firm balance sheet position. That’s music to the ears of Interactive Brokers, which is known for its vault-like balance sheet. Interactive’s founder and chairman, Thomas Peterffy, is not one for taking financial risk.
The firm’s equity capital of $12.2 billion far exceeds regulatory requirements. The firm owns no collateralized debt obligations or mortgage-backed securities, instead concentrating its holdings on short-term government securities with minimal duration or credit risk. Interactive has no long-term debt and enjoys an A- rating from S&P Global Ratings. This financial strength should attract new clients fleeing Schwab and other more aggressive brokers.
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10 Best Value Stocks to Buy Now originally appeared on usnews.com
Update 04/20/23: This story was published at an earlier date and has been updated with new information.
