Investing in value stocks always makes sense, and now more than ever
- Weakness and long-term fear make investing in value stocks a strong idea right now.
- Target (TGT): Earnings have been strong and Target is fundamentally strong.
- D.R. Horton (DHI): Forces are in place for this home builder to continue to perform very well.
- Deere (DE): Has plenty of tailwinds as well as built-in upside.
- AbbVie (ABBV): Increased guidance and rock-solid dividend make AbbVie a buy.
- Berkshire Hathaway (BRK-A, BRK-B): The value investing world will always consider the ever reliable Berkshire Hathaway.
- Procter & Gamble (PG): In tough times consumer staples giants including Procter & Gamble are often strong bets.
- Coca-Cola (KO): Coca-Cola makes sense for many of the same reasons as Procter & Gamble.
There’s a strong case to be made that value stocks are back to being a smart choice. Growth stocks have proven incredibly volatile in an environment of rising interest rates. According to one source, tech giants, part of the tech sector that largely defines growth stocks, shed more than $1 billion in value over the period from May 6 to May 9.
The impetus for the sell-off was of course the Federal Reserve’s decision to raise its benchmark rate. Each time the Fed raises its benchmark rate, tech receives another blow. Fears about this relationship began to crop up at the end of 2021 when inflation fears initially surfaced.
Those fears galvanized a pivoting away from growth stocks and tech in particular. That meant and continues to mean there is an opportunity for value stocks afoot.
It has proven to be a relatively stable stock throughout 2022 although it is down from $231 to $216. Let’s look at it from both a growth perspective and a value perspective in order to understand why it makes sense to invest right now.As I write this, on May 12, the Dow Jones continues its downward slide, falling by more than 1%. But big-box retailer Target (NYSE:TGT) is proving to be a bright spot amid the continued bad news. It has risen by more than 1% on the day.
From a growth perspective, Target has consistently shown over the past four quarters that it has the ability to surprise. In each of those past four quarters the Minneapolis-based company has bested consensus earnings-per-share (EPS) expectations. In fact, in the last quarter Target surprised the market with EPS figures that outpaced expectations by 11.54%. There are strong indications that the company could surprise positively again on May 18 when it releases earnings again. Thinking more broadly, Target is a prime pick among value stocks because its EPS expectations indicate that it will continue to grow through at least 2026.
From a fundamental value perspective, there’s also a good reason to invest in TGT stock: its current price-to-earnings (P/E) ratio of 15.46 is better than the current P/E ratio of the S&P 500 which stands at 15.97.
D.R. Horton (DHI)
D.R. Horton (NYSE:DHI) Is a firm with a fairly straightforward business model: it buys land, builds residential homes on that land, and sells them.
Given that housing prices are undergoing a boom it makes sense to consider DHI stock. However, interest rates are rising and that means that there is potential for a slowdown in the market.
Granted, D.R. Horton does face a significant headwind that will very likely be affected negatively in the near term. However, there are a few important counterpoints to this idea.
First of all, back at the end of April, the company raised its sales forecast citing the strong housing market. Although that news was given prior to the most recent interest rate increase the company was clearly aware that rate hikes were coming.
That positive forecast came on the heels of a second-quarter earnings beat by the company. D.R. Horton posted $4.03 EPS figures, well ahead of the $3.38 the market was anticipating.
The other reason to be positive on DHI stock is that thinking longer-term, the building boom is unlikely to taper despite rising interest rates. According to data from Realtor.com, the U.S. was short 5.24 million homes in September of 2021. that figure was up roughly 1.4 million from 2019. That strongly indicates that builders, including D.R. Horton, are going to have plenty of work even as the Fed raises interest rates.
That’s good news for smart investors seeking a value-oriented home building stock.
Deere (NYSE:DE) stock is slightly up throughout 2022, having risen from $350 to $357 at the time of writing. that is certainly strong news given that the S&P 500 is down more than 19% year-to-date.
Farmers are looking to maximize their yields as food prices continue to soar. And given that Bank of America (NYSE:BAC) considers Deere to be the leader in precision agriculture the company has a reasonably strong catalyst.
In other words, Deere should see strong demand for its products as farmers seek to maximize yields and increase their bottom lines.
That said, the argument in favor of DE stock isn’t clear cut: It does have a P/E ratio of 19.86, higher than the S&P 500 P/E ratio of 15.97. However, DE stock has significant upside priced into current consensus target prices of $445.64 as it trades at $357.
AbbVie (NYSE:ABBV) is a pharma giant that was spun out of its former parent firm, Abbott Laboratories (NYSE:ABT).
One of the primary reasons to consider investing in AbbVie stock is its strong dividend. The quarterly dividend currently sits at $1.41 and hasn’t been reduced since the company was spun out from Abbott Laboratories back in 2013.
The dividend was raised in January of this year from its previous payout of $1.30. That dividend increase and the company’s history of dividend payments should inspire confidence that the future is bright for AbbVie.
Otherwise, investors have another reason to be confident in the future of the company. In its latest earnings report the company was confident enough to Increase its full-year EPS guidance to between $14 to $14.20 from a previous range of $13.92 to $14.12.
Berkshire Hathaway (BRK-B)
If value is the name of the game, then Berkshire Hathaway (NYSE:BRK-A NYSE:BRK-B) stock is about as logical of a choice as there is. Of course, investors are well aware that the company is headed by Warren Buffett and his longtime business partner Charlie Munger. Investors are also aware that value guides their investment principles.
Despite the fact that most analysts currently rate the company’s shares as a hold, there’s reason to believe in the stock. For one, there’s plenty of upside baked into current prices. Berkshire Hathaway shares trade around $310 but consensus target prices place it at $365.
Beyond that, there’s the company’s rock bottom 8.35 P/E ratio. That’s a reasonably solid indication of the investment principles of Buffett and Munger. The other reason that investors ought to be interested in Berkshire Hathaway currently is the fact that the company has outpaced EPS expectations in each of the last two quarters. Value's back, and few if any stock better represents value than Berkshire Hathaway.
Procter & Gamble (PG)
It was only a few weeks ago that consumer goods giant Procter & Gamble (NYSE:PG) reported historical quarterly sales gains.
The company noted that despite inflation woes and fears of a recession consumers were still willing to pay premium prices for its products. Despite higher costs and the company reported that organic sales rose by 10% in the quarter. The company also caveat add that news, noting that ongoing economic trouble could cause consumers to switch to lower-priced brands.
Since those April 20 results were released share prices have fallen roughly $10. But there’s little to substantiate the idea that consumers are exiting for generic brands rather than Procter & Gamble products. That implies that the company could again see bumper earnings in the following quarter.
Part of the inherent value in investing in Coca-Cola (NYSE:KO) stock is the fact that it consistently produces strong returns. Case in point: the company has exceeded EPS guidance in each of the past four quarters.
Even so, it trades at around $65, near the analyst low target price of $64. But history shows that the company trades in a tight range and if you can purchase it anywhere near a low price then returns are a near certainty. KO stock definitely puts the “value” in value stocks.
At the end of April, the company reported higher quarterly sales on strong demand. That demand was strong enough to outpace an increase in prices for inputs in its products, suggesting that the company is weathering the current storm well.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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