Value stocks are always in fashion. But after nearly 18 months where investors could find growth in usual and unusual places, value stocks got crowded out. This time, they said, was different.
It wasn’t and it isn’t. If the recent market selloff has taught investors anything it’s that fundamentals matter. And fundamentals are where value stocks thrive. You can ask 10 investors and get 10 different definitions of what defines a value stock. But all investors agree that value stocks are stocks that are undervalued by whatever measure they use.
That’s where things get tough. Even though some stocks have dropped in value by 20% or more, many are still overvalued by traditional metrics. But if you know what you’re looking for you can still find value stocks in many sectors.
The following are seven stocks that are undervalued. Like most value stocks, these are mature companies many of which pay dividends:
- Target (NYSE:TGT)
- Dick’s Sporting Goods (NYSE:DKS)
- AbbVie (NYSE:ABBV)
- Ford (NYSE:F)
- Rent-A-Center (NASDAQ:RCII)
- Winnebago (NYSE:WGO)
- Darden Restaurants (NYSE:DRI)
The economy received a bit of good news when the U.S. Census Bureau delivered their Advanced Monthly Sales Report that showed retail sales increased 3.8% in January over the seasonally adjusted December number. Now Target investors will see if that’s enough to reverse the downward trend that has put TGT stock down 22% since mid-November.
Retail stocks were in a bit of a Santa Claus rally that got reversed with disappointing December data. But this better-than-expected news may allow investors to focus on Target’s fundamental strength. One of the categories that showed significant month-over-month growth was “non-store sales.” This includes digital sales and Target was already well-positioned for omnichannel sales prior to the pandemic.
Target has a price-to-earnings ratio of 15.21x, which suggests a fair valuation. However, its price-to-earnings-to-growth ratio (which compensates the P/E ratio for growth) suggest TGT stock is undervalued. Combined with growing revenue and earnings, along with a safe dividend, Target stock is looking like a good value stock.
Dick’s Sporting Goods (DKG)
Dick’s Sporting Goods is another company that is likely to benefit from the boost in retail sales. The company was a strong stock during the pandemic as people bought exercise equipment and apparel to work out at home. The trend continued in 2021 as youth sports reopened.
As trends go, Americans are likely to continue prioritizing their health and fitness. This sets up well for Dick’s which has improved its digital footprint that now includes a youth sports app (where was that 10 year ago?).
And after falling 25.8% in mid-November, DKG stock appears to have found a level of support. The stock has a price-to-earnings ratio of 8.42x, which is below the industry average. And Dick’s is a financially healthy company that pays a sustainable dividend that is line with its peers.
Analysts give DKS stock an upside of 20% with a price target of $130.89. However, in January, the company got favorable upgrades, including price targets that are higher than the consensus.
As value stocks go, there aren’t many that fit the description better than AbbVie. In late August, ABBV stock gave up most of its 2021 gains. But when the flight to value hit in November, investors moved back into AbbVie in a big way.
So with ABBV stock up 36% since mid-September is there any growth left? The consensus opinion of analysts suggests no. However, after delivering a mixed earnings report (the company beat on earnings but missed on revenue), JPMorgan boosted its price target for AbbVie to $180, which would be a gain of nearly 25%.
However the report wasn’t really bad at all. AbbVie showed strong margins that allowed it to beat on the bottom line by 3 cents. Furthermore, the company issued guidance for earnings growth that will be above the consensus opinion of analysts for 2022.
Even with less growth, many investors buy AbbVie for the reliable dividend. The company is part of the elite Dividend Aristocrat club having increased its dividend for the last 50 years.
By most fundamental metrics such as P/E ratio and PEG ratio Ford is slightly undervalued compared to its peers. F stock currently has a 10% upside, which is most likely being kept down over concerns about the company’s earnings which did not meet analysts’ expectations. However, investors seem willing to give CEO Jim Farley the benefit of the doubt as he executes his cost-cutting initiatives.
Ford stock didn’t get swept up in the electric vehicle (EV) mania of early 2021. However, since the air has come out of that bubble, investors are taking another look at Ford. And they like what they see on the EV front.
Specifically, as a legacy auto manufacturer, Ford is likely to be able to deliver on its pledge to electrify its fleet. It’s already seeing good sales on its Mustang Mach-E and the company had to stop pre-orders for the company’s F-150 Lightning. That’s always a nice problem to have.
If you’re of a certain age, then inflation is giving you that déjà vu feeling, If you lean into that groove, you can see why Rent-A-Center is having a resurgence. When inflation gets high, as it was in the late 1970s and early 1980s, items like furniture and electronics become out of the reach of middle to low-income households.
Personal finance professionals may hate the business model, but the pay-as-you-go model is a practical way for many consumers to furnish homes and apartments. And that’s not the only catalyst. Many Americans have decided to move to other areas and that may also mean temporarily furnishing their new homes until they settle in.
RCII stock has been falling since mid-August despite the company delivering two solid earnings reports. Investors may be concerned about the slowing pace of growth. But with inflation likely to stick around, Rent-A-Center looks like a bargain near its 52-week low. This is particularly true because the company pays out a dividend that, on a yield basis, is significantly better than the average of S&P 500 companies.
Recreational vehicle (RV) manufacturers were big winners during the pandemic. As Americans looked for safe and socially distant ways to travel, a home on wheels looked very appealing. Companies such as Winnebago had back orders to fill and continue to do so.
At some point, you might expect demand to regress back to historic levels. And the company’s revenue and earnings projections are expected to be lower in the next five years than they have been in the past five years. However, for now, WGO stock has room to run. The company’s P/E ratio of 7.13x is lower than the industry average of 9.92x.
Winnebago has been trading in a defined, albeit fairly wide range, since summer 2021. That being said, the stock is trading at the low end of that range and analysts have a $91.57 price target for the stock, which represents 35% upside. That should help investors compensate for a dividend that is reliable, but not among the highest in the industry.
Darden Restaurants (DRI)
Last on our list of value stocks is Darden Restaurants. The Wall Street Journal recently reported on a recent Kastle analysis of industry statistics that showed restaurants were nearly three-quarters as full as before the pandemic. Darden has been one of the largest beneficiaries, but like the recovery, the 24% gain in DRI stock has been marked by peaks and valleys.
While the company’s P/E ratio puts it a little on the expensive side, that should be offset by the company’s strong growth in earnings and revenue, which is likely to continue as mask mandates and vaccine requirements continue to be dropped.
Plus, after cutting its dividend sharply at the onset of the pandemic, the company has now raised the dividend by 25% over its pre-pandemic level. That’s a pretty tasty reward for shareholders even though analysts only give DRI stock a 13% upside from its current level.
Originally published on InvestorPlace.com
On the date of publication, Chris Markoch 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.
Chris Markoch is a freelance financial copywriter who has been covering the market for eight years. He has been writing for InvestorPlace since 2019.
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