Value investing has rarely been more out of favor on Wall Street after badly lagging behind growth styles so far this year.
Investment strategies have gone in cycles during the past century and the multiyear underperformance of value could mean a turn is coming. So far this year, the iShares Russell 1000 Value exchange-traded fund (ticker: IWD) is about 30 percentage points behind the iShares Russell 1000 Growth ETF (IWF)—a huge gap.
If value comes back in vogue, so could one of the classic value strategies—buying stocks with low price/earnings multiples.
Barron’s screened the S&P 500 index using FactSet for the 10 stocks with market values of $10 billion or more and with the lowest price to earnings ratios based on projected 2021 earnings. These 10 stocks trade for six to seven times projected 2021 earnings, against a price/earnings ratio of about 20 times for the S&P 500.
We are using 2021 estimated earnings because it could be a more normal year, following the disruptions this year caused by the pandemic. Many of the 10 stocks also look cheap based on low price to book ratios.
The screen turned up some well-known companies including Prudential Financial (PRU), ViacomCBS (VIAC), American International Group (AIG), General Motors (GM), Citigroup (C), and AbbVie (ABBV).
As a group, these 10 stocks have done poorly this year with an average decline of 28%, and only one, AbbVie, in the black.
Many investors now view a low price/earnings ratio as a sign of an inferior business, rather than an opportunity. But that is reflective of the current growth-stock mentality. Plenty of concern is already discounted in current valuations, with the 10 trading for six to seven times projected 2021 earnings.
Barron’sdid a similar screen of low P/E stocks in the S&P 500 in June with a $5 billion cutoff. Those 10 stocks—of which three overlap with the current 10—have lagged behind, gaining about 4% on average since then, against a 7% rise for the index.
E=Estimate
Source: FactSet
Among the current 10, General Motors, at around $32, looks cheap based on 2021 P/E of around seven and some valuable businesses, notably electric vehicles and autonomous driving, that don’t appear to be fully reflected in its stock price. Its recent deal with Nikola (NKLA), which is developing hydrogen-powered trucks, doesn’t look as favorable following the departure of Nikola’s founder and executive chairman, Trevor Milton. But the deal isn’t critical for GM.
Citigroup has the distinction of being the first top U.S. bank to name a woman, Jane Fraser, as CEO, but she will have plenty to tackle when she takes over in February 2021. Citi shares are down 43% so far this year, to a recent $45, one of the worst showings among its peers. Citigroup hasn’t been as well managed as rivals like JPMorgan Chase (JPM), which was underscored when it mistakenly sent $900 million to a group of lenders recently.
But Citigroup is well capitalized and trades for only seven times projected 2021 earnings and just 65% of tangible book value of $71, the lowest ratio among its rivals. It yields 4.5%. Wells Fargo analyst Mike Mayo, who has an Overweight rating at $66 price target, thinks pressure may build to break up the company.
AbbVie, at around $90, is one of the cheapest major drug stocks, trading for just seven times 2021 projected earnings and it yields 5%. The stock is a favorite of J.P. Morgan analyst Chris Schott, who calls it a “long-term value play” after its merger with Allergan earlier this year.
There are five insurers on the list: AIG, MetLife, Prudential, Principal Financial Group (PFG), and Hartford Financial Services (HIG). The out-of-favor group is being hurt by low rates, which dampen investment returns, and Covid-19, which has led to higher life insurance and property and casualty claims, as well as some sales disruptions.
ViacomCBS has been hit by Covid-related declines in advertising sales, but a bright spot is its streaming services, which experienced a 74% gain year-over-year in subscribers to 16.2 million in the second quarter. At around $30, the stock trades for under seven times earnings and the company is an acquisition candidate.
Hewlett Packard Enterprise (HPE), the hardware and cloud services provider, is one of the cheapest major tech stocks. At around $10, it trades for under seven times projected 2021 earnings.
MetLife, at around $39, trades for about six times projected 2021 earnings and for about 75% of a conservative measure of its book value. Credit Suisse analyst Andrew Kligerman likes the company’s recent $1.7 billion purchase of an insurer providing vision insurance and the resumption of Met’s buyback program. He has an Outperform rating and $46 price target.
AIG, a major property casualty and life insurer, at around $29, trades for under seven times projected 2021 earnings and for just over half its adjusted book value. The company, like other P&C insurers, is benefiting from stronger pricing.
Prudential Financial also has a rock-bottom valuation, reflecting in part investor concerns over its low-return U.S. life business and variable annuities. At around $69, the stock trades for six times 2021 earnings and for 75% of a conservative calculation of book value.
Principal Financial, a provider of investment, retirement, and life insurance products, is also cheap, trading around $41, or seven times estimated 2021 earnings.
Hartford Financial, which offers property and casualty insurance and investment services, changes hands around $38, also seven times projected 2021 earnings and about 85% of a conservative measure of book value.
Write to Andrew Bary at andrew.bary@barrons.com
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September 22, 2020 at 07:59PM
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General Motors, ViacomCBS, and 8 Other Cheap Stocks to Consider Buying - Barron's
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