Congratulations to The Prudent Speculator — a leading value oriented newsletter that has just celebrated its 44th Anniversary. Here, senior editor and money manager John Buckingham reviews 4 value stocks to consider now.
Despite what would seem to be more than a few tailwinds for equities in general and undervalued stocks in particular, we never forget that prices move in both directions.
We remain braced for downside volatility, especially as some gauges of investor sentiment have become a bit frothy, and we know that many are concerned about the prospects for increases in individual and corporate taxes, both scenarios in which Value historically has shined.
We think that a forward P/E ratio below 16 and a 2.2% dividend yield for our model portfolio are both very attractive, given the likelihood of robust EPS growth for our holdings this year and next and the still-very-low interest-rate climate.
The Prudent Speculator follows an approach to investing that focuses on broadly diversified investments in undervalued stocks for their long-term appreciation potential.
Broadcom designs and develops digital and analog semiconductors for a broad range of data center, networking, software and industrial markets. The company has been an acquisition machine, rounding up Brocade, CA Technologies and the enterprise security division of Symantec. Broadcom also tried but failed to acquire Qualcomm (QCOM) after the deal was blocked by the U.S. government.
AVGO shares have swelled over the past year. The supply chain challenges of 2020 have largely been resolved and the company has been seeing growing lead times and increasing end-market demand. As a result, analysts expect AVGO to grow core earnings from $22.16 in fiscal 2020 to more than $30 by 2023, which translates to what we think is a very reasonable 2023 P/E below 16.
We are fans of AVGO’s strong execution and regard the company’s diverse set of products, from enterprise security to wired- and wireless-networking components, as a valuable differentiator. The company also continues to buy back shares to offset employee option dilution, and it pays a hefty quarterly dividend of $3.60 per share (3.1% annual yield).
Cardinal Health (CAH)
Cardinal is one of the nation’s largest wholesalers of pharmaceutical products, handling roughly a third of global volumes. The remainder of the business entails the distribution of medical products and contract manufacturing. Shares rebounded some 48% since the low on March 23 last year, somewhat reversing a multi-year slid prior to the pandemic that was induced by fears of competitive pressures and lawsuits related to the opioid epidemic.
2020 offered little respite as COVID-19 ushered a slowdown in elective surgeries and a higher cost of goods. Despite these challenges, CAH resumed growth on a year-over-year basis in its most recent two fiscal quarters. We still think the company should benefit over the long term from demographic trends in the U.S. as the population continues to age and has greater health care needs.
Yes, headline risk remains, especially with the shift of power in D.C., but we think investors are overly pessimistic and the shares offer a very attractive price tag of 10 times estimated earnings. The company continues to generate strong free cash flow that supports acquisitions, stock buybacks and a well-covered dividend (the yield is 3.2%).
Leggett & Platt (LEG)
Leggett & Platt is a diversified manufacturer serving an array of industries including bedding (coils used in mattresses, specialty foam used in bedding and furniture, and mattresses), automotive, aerospace, and steel wire and rod. About two-thirds of L&P’s steel wire output is used in making its own products. Shares have been in consolidation mode since rallying 59% from a bottom last March through August.
Elaborating on the company’s Q4 results, CEO Karl Glassman said, “We expect continued recovery into 2021 as a result of strong consumer demand for home-related items and global automotive, and modest improvement in our businesses in industries that are experiencing ongoing impacts from COVID-19. We also expect continued supply chain constraints, inflation in commodity costs, and recovery of those higher costs through selling price increases.”
We like that LEG has a history of disciplined cash use and that the company is a leader in most of its markets, with few large competitors. We also appreciate that management is incentivized to enhance returns on capital employed and cash generation. L&P has increased its dividend for 49 consecutive years, and the yield is currently 3.5%.
Retail titan Walmart conducts domestic operations under numerous store formats, has an expanding international footprint and has made great strides in growing its online presence.
There is no doubt that competition is fierce within retail, but we applaud Walmart for its continuous transformation to build a customer-centric seamless omni-channel ecosystem. This includes integration of its ecommerce, grocery and general merchandising businesses, as well as the continued rollout of various ways for guests to shop.
In the past year, WMT has expanded same-day delivery locations from 2,000 to over 3,000 and launched Walmart+ to compete with Amazon Prime. Despite additional costs required to adapt to COVID-19, we note that the company increased its dividend for the 48th consecutive year (yield is 1.6%) and recently approved a new $20 billion share repurchase program.
We continue to think investments in Jet.com, Flipkart and JD.com, along with its foray into service sectors like Health Care, Fin-Tech and others lengthen the retailer’s runway for growth and diversify revenue. We also like that WMT continues to generate strong free cash flow.