Some of the biggest stocks driving the market higher right now are tech stocks showing high levels of growth. That leaves most of the market ignored and unloved. Following the doctrine of value investing, today’s traders have an opportunity to pick up a number of great companies that trade at a compelling discount to the overall market.
Remember, value investing isn’t just about the stock price of a company. It’s about its price ratios, or the price of shares relative to other metrics that makes for a value or growth play.
We’ve tracked down a number of the best value stocks to buy right now… and all are companies that any Chief Investment Officer at one of the value funds or ETFs on Wall Street might find a place for in their portfolio.
Best Value Stock #1: American Express Company (AXP)
Trading at just 13 times earnings, American Express (AXP) is a powerful brand. It’s part of an oligopoly in the credit card network space. And compared to peers, American Express focuses on more upscale customers. While they tend to spend less during an economic downturn, they tend to be the first to ramp their spending back up.
- This Industry is Exploding Faster Than It Has in 15 Years
1,700 people are moving to Central Florida every week.
And the numbers are only increasing as more and more people are banking the end of the pandemic drawing near.
And one company, which just received critical approval to list on a prestigious public exchange, could be on the verge of going on a huge run.
While many stocks in the broader market are pushing the market price to all-time highs, shares of American Express are still off by 26 percent. That’s in spite of strong cash flows, even as the company reported substantially reduced earnings on lower consumer spending in the first half of 2020. American Express has endured a number of economic conditions and recessions, and it has the balance sheet to last through current woes and thrive again.
Investors who buy shares now can pick up a world-class company at a value price, as well as a 1.8 percent dividend that the company has a history of regularly increasing every year.
Best Value Stock #2: AT&T (T)
Although best known as a telecom company, AT&T (T) has spent the past few years building itself out into a content creation and delivery firm.
Its recent acquisitions include Time Warner, which provided the company with content to send out on its telecom platform, as well as DirecTV, giving it a place beyond the telephone market. As the market doesn’t see much growth ahead, shares now trade at an attractive valuation relative to the market.
Although these acquisitions have been a bit pricey, that hasn’t kept the company from reducing its dividend, or from making small increases to it nearly every year.
Currently, shares pay out $2.08 per year for a nice 6.8 percent dividend yield. While the growth in the dividend may be low, the high starting yield helps make up for the slow growth.
Over the next few years, the company’s focus on using free cash flow to repay debt will likely keep that dividend growth low. But as the company doesn’t foresee any new, big acquisitions in the coming years, the balance sheet should get cleaned up.
Once that happens, higher dividend growth and share buybacks are likely to fuel a price move higher. Until then, shareholders will get paid pretty handsomely to wait, making this a high-yield value play right now.
Best Value Stock #3: ViacomCBS (VIAC)
Another media-type play, this is a value play on content and delivery, without the infrastructure and telecom legacy of AT&T.
In 2019, Viacom and CBS merged into their current form. The company offers local media programming, a publishing division, and cable networks as well as an entertainment and a sports division.
This offers a variety of entertainment content, which can often be a high-margin product. The company’s foray into streaming is showing signs of solid growth.
Right now, the company is going through its post-merger blues, trading at less than half their prior peak, making for quite the undervalued stock.
Even while that was happening, however, the company did report a strong earnings beat in the first quarter of 2020 backed by strong cash flow. The company also announced that it was redeeming some of its debt ahead of schedule, which will help clean up its balance sheet.
Besides trading at just seven times forward earnings, about a third that of the overall stock market right now, the March selloff helped push up the company’s dividend to 3.9 percent. That makes it one of the highest dividends in the media space.
As the new entity has a limited dividend history, we don’t yet know how it will change over time. But chances are the company will attract investors if it is able to steadily grow its dividend payout over time in addition to the share appreciation as prices rise.
Best Value Stock #4: Universal Display Corporation (OLED)
A value play in the technology space that trades on the Nasdaq? Absolutely!
This maker of organic light-emitting diodes (OLEDs) trades at a value price relative to other names in the industry. The company holds over 5,000 patents, which are a powerful asset in the tech space that can be used to create royalty revenue by other companies.
OLED researches, develops and manufactures various technologies, including those for lighting, thin-films, and vapor jet printing technology. Shares of this tech name are off 25 percent in the past year, yet the company still sports a 33 percent profit margin and saw revenue growth of 28 percent in the past year.
With over $13 per share in cash on the balance sheet, and nearly no debt, this is a tech stock showing growth but at a value price. The company has also recently upped its modest dividend from $0.45 annually to $0.60, a pretty hefty boost, but still backed by the company’s earnings and rising cash flow. That’s the kind of dividend jump associated with a company shifting from growth to value, but OLED still offers both.
Best Value Stock #5: Bar Harbor Bankshares (BHB)
Small and regional banks can often be viewed as value stocks. That’s because banks can be measured by how they trade relative to the value of all the loans on their books, also known as the book value. And, because the banking space is consolidating over time, smaller banks tend to get bought out by bigger banks. When that happens, it tends to occur at a premium to book value.
Founded in 1887, Bar Harbor Bank is one such bank. It provides typical banking services such as accounts, mortgages, and other loans and lines of credit, as well as estate and tax services. Shares currently trade at about a 10 percent discount to their book value, and fears of a widening financial crisis may lead to an even bigger discount.
Although bank stocks can be vulnerable during a financial crisis, investors who wait to buy shares of a bank at a discount to the book value should fare well over time, whether they get acquired or not.
What is the Difference Between Growth and Value Stocks?
A value stock is a company that trades at some kind of a discount to the overall market. That means it’s a company that has a low price-to-earnings ratio, or a company that has some assets that make it more valuable per share than the market currently recognizes. Value investors also focus on financial metrics like cash flow, and try to calculate a company’s current intrinsic value before making a buy.
In contrast, growth stocks are companies that are rapidly expanding their operations, typically measured by sales. They may trade at a premium to the market based on earnings, and may not even make a profit at all, but are expected to be far larger in the future. Their shares tend to experience much higher volatility as a result.
Overall, earnings are usually the metric used to find cheap stocks against expensive stocks, before looking at earnings growth to find the best growth opportunities. The lines between the two can blur at times, so there’s no specific value index or growth index to point to.
Should I Buy Value or Growth Stocks?
That depends on your investment strategy. A value investor is looking for a reasonable price going in, looking to avoid losses, and possibly pick up some income via dividends along the way. A growth investor is looking for a company that can beat the overall market, but will likely be volatile in doing so.
Many investors take a blended approach, investing in both value and growth stocks, to take advantage of what both have to offer. That’s prudent investment advice for any portfolio. There are ETFs that focus on all these strategies.
Is it Time to Invest in Value Stocks?
Value stocks can exist at any time and under any market condition, so there’s never really a bad time to invest in value stocks. During a recession, when share prices are repressed, there may simply be more stock picks that fit into the value camp, making for more opportunities to find the best value stocks, or buy a value-themed ETF. And some value stocks are related to asset classes that may be moving at different times, particularly those in a commodity-related business.
Do Value Stocks do Better in a Recession?
Value stocks tend to perform better at the start of a recession, when there’s a bear market. That’s because value stocks tend to drop less on a percentage basis than growth stocks.
As a recession continues, both value and growth stocks tend to trade in ranges, and value stocks, which tend to also pay dividends, offer some extra returns there. When it appears that a recession is ending and stocks have started a new bull market, growth’s outperformance will be notable, although value stocks will rally too. Make sure when investing for your portfolio you know where in this cycle you’re at to avoid being blindsided!