Numerous times during the long bull market, the market mavens and pundits have declared that it was time for value stocks to take the lead, as growth and momentum stocks were overbought and overvalued. Each time the value stocks became the value trap and investors got burned. In what is a classic Wall Street expression, “This time may be different.”
By definition, a value stock is a security trading at a lower price than what the company’s performance may otherwise indicate. Investors in value stocks attempt to capitalize on inefficiencies in the market, since the price of the underlying equity may not match the company’s performance.
A new Goldman Sachs research piece acknowledges that value stocks have given the market head fakes numerous times over the past few years, and the analyst concedes that the best of the best is probably the place to look. The report noted this:
Fast forward another year, and Value as a factor continues to languish. Indeed, even as the market surged to start the year and Value had a nice gain in the first few trading days, the trend quickly reversed and Value once again is the worst performing factor across our Investment Profile (IP) suite. On the back of the weak performance, Value continues to trade cheaply even relative to its own history, which is unique across the factors we track. However, valuation in itself is not a catalyst, and we could have made a similar comment numerous times in recent history only to have it not work.
The report also noted that higher two-year and 10-year yields are possible positive factors for value, and it also said this regarding valuations:
What is even more significant in our view is if you isolate only those companies that screen as cheap value that have had positive EPS momentum, the performance of the factor looks completely different and would have even outperformed on a net basis over the past few years.
The Goldman Sachs team screened its Buy-rated value stocks with upside potential to current estimates. A dozen stocks made the cut, but here we zeroed in on five that have the best name recognition for investors.
ADT
This top security company is a well-known protector of homes and businesses. ADT Inc. (NYSE: ADT | ADT Price Prediction) is the largest residential and second-largest commercial security monitoring company in North America. The company serves over 7 million customers, installing over a million systems per year. Roughly 94% of revenue is generated in the United States, with the remainder from Canada.
The company reported good first-quarter results with revenue and adjusted EBITDA both slightly ahead of estimates, and solid free cash flow. Guidance for 2019 was maintained and calls for 0% to 2% year-over-year adjusted EBITDA amid investments in do-it-yourself, branding and commercial.
Goldman Sachs has a giant $12 price target on the shares, while the Wall Street consensus target is lower at $9.75. The shares closed on Thursday at $6.00.
Alcoa
This could be a solid play for more conservative accounts looking to the mining segment. Alcoa Corp. (NYSE: AA) produces and sells bauxite, alumina and aluminum products. The company offers aluminum sheets for the production of cans for beverage and food.
Alcoa also engages in the aluminum smelting, casting and rolling businesses; generation and sale of renewable energy; as well as provision of ancillary services. Formerly known as Alcoa Upstream, the company changed its name to Alcoa in October 2016.
The Goldman Sachs price target is set at $36, while the consensus target is $35.25. The shares closed at $23.13 on Thursday.
[recirclink id=556716]
Citigroup
This top bank stock was hit during the spring and still offers a very solid entry point. Citigroup Inc. (NYSE: C) has approximately 200 million customer accounts and does business in more than 160 countries and jurisdictions. It provides consumers, corporations, governments and institutions with a broad range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage, transaction services and wealth management.
Trading at a still very cheap 8.7 times estimated 2019 earnings, this company looks very reasonable in what remains a pricey stock market. A continuing stock buyback program at the bank also is a positive.
Citigroup investors receive a 2.68% dividend. The $77 Goldman Sachs price objective compares to the consensus price target of $80.44. Shares closed most recently at 68.15.
Expedia
This online travel leader is poised for a potentially big summer of 2019. Expedia Inc. (NASDAQ: EXPE) is the leading internet travel pure-play with exposure to online travel in the United States, Europe and Asia. The company’s portfolio of brands includes Expedia, Orbitz, HomeAway, Travelocity, Hotels.com, Trivago, Egencia, Hotwire, Wotif, Venere and Classic Vacations.
Top analysts see it as a story of improving execution, and they also think that the company is starting to finally match Priceline’s growth metrics. The company has raised the dividend and is buying back stock, and both are shareholder-friendly actions. The analysts noted this when discussing the company’s positive activities:
Expedia’s ongoing investments into expanding property selection in focus markets should contribute positively to growth in room nights, bookings and revenue. Overtime, we see room for better marketing efficiency in these markets as well from efficient customer acquisition.
Expedia investors receive a 1.00% dividend. Goldman Sachs has a $160 target price. The consensus target is $149.10, and shares closed at $130.14.
[recirclink id=557034]
Lumentum
This top company should continue to benefit big-time from the Microsoft Azure cloud service. Lumentum Holdings Inc. (NASDAQ: LITE) is a provider of optical and photonic products for a range of end market applications, including data communications and telecommunications networking and commercial lasers for manufacturing, inspection and life-science applications.
The Company operates in two segments. Products from its Optical Communications segment include a range of components, modules and subsystems to support and maintain customers in its two primary markets: telecom and datacom. Products from the Lasers segment serve customers in markets and applications such as manufacturing, biotechnology, graphics and imaging, remote sensing and precision machining, such as drilling in printed circuit boards, wafer singulation and solar cell scribing.
Goldman Sachs has set its price target at $69. The consensus target is $65.18, and shares closed at $52.43.
[wallst_email_signup]
These five stocks all have value characteristics and could be solid investments for investors looking to shift some of their capital away from growth and momentum. With earnings reports for the second quarter due soon, it may make sense to buy partial positions now and see how the results come in.
Top Gaining Stocks
Top Losing Stocks