Value Stocks with Room to Run

In sharp contrast to much of the last ten years, value appears to be in and growth out. With the performance of value stocks distancing itself from that of growth stocks in recent weeks, many investors are scrambling to reposition their portfolios to have more of a value bent.

Many value stocks have had a strong start to 2021 leaving some to wonder if they missed the boat. Fortunately, with the rotation into value still in the early innings, there are plenty of companies out there that can be had at bargain valuations. Here we highlight a few of the more interesting names that have good upside.

Is Honda Motor Stock Undervalued?

We start out in the eastern hemisphere with Japanese automaker Honda Motor (NYSE:HMC). The stock goes for roughly 12x forward earnings which is quite the distance from its trailing P/E ratio of 23.

Honda shares have rallied nicely off their pandemic bottom and are trading at their highest level since early 2019. But they are still well off their all-time high of ten years ago.

The company’s main business is manufacturing cars, SUV’s, minivans, and other automobiles which together account for about two-thirds of sales. After a dismal 2020 amid depressed global auto market conditions, Honda is in a good spot to benefit from a rebound in car buying activity especially in Japan and North America, its two largest markets. Analysts see earnings rebounding 22% this year and accelerating to 28% growth next year.

Most of this growth is expected to come from a stronger economic backdrop and increased consumer appetite for new automobiles. But what may be an underappreciated catalyst is Honda’s position as the world’s leading motorcycle manufacturer. Having this as a second growth engine could push results over the top.

Looking further down the road, Honda is positioning itself to participate in two of the industry’s biggest growth opportunities in electric vehicles and self-driving cars. So, based on Honda’s near and long-term growth prospects, valuation, and recently increased dividend, this stock has the fuel to motor back to the $40’s.

What is a Good Steel Recovery Stock?

Moving westward and digging deeper into the bargain bin, ArcelorMittal (NYSE:MT) is another name to put on the buy list. The Luxembourg-based company is the world’s biggest steel producer with mines and steel plants spread across North and South America, Europe, and other geographies.

While the business of producing steel is rather straightforward and some would argue mundane, Arcelor Mittal’s scale and exposure to diverse end markets are attractive investment attributes. Automobile manufacturing often comes to mind first when we think about steel, but it also has widespread use in construction, household appliances, and even packaging. This makes the stock a multifaceted play on the global economic recovery rather than one that is tied to a single industry.

Late last year, Arcelor Mittal wrapped up the $1.4 billion sale of its U.S. operations to Cleveland Cliffs. Aside from giving the company a nice chunk of change, it received cheap Cleveland Cliffs shares that have the potential to appreciate from significant cost savings and an improving steel industry backdrop. Plus, it strengthened an already healthy balance sheet that contains less debt than most of its large cap steel peers.

At 6x forward earnings and an EV/EBITDA of 5.9, shares of the world’s leading steel company are a steal. There is no dividend to speak of here, but as far steel stocks go the upside is substantial. Earlier this month, KeyBanc reiterated its ‘buy’ rating with a $31 price target.

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