Value stocks are en vogue again.
As recently as the end of May, stock prognosticators were calling for the Dow Jones Industrial Average to hit 30,000. Some suggested the Dow would reach that number by the end of 2018. Growth looked in, and slow-but-steady value picks were out.
That was until October's bout of nauseating volatility. Thanks to a trade war with China, higher interest rates, problematic technology earnings and worries that a decade-long bull market is primed to lose its legs, the Nasdaq hit correction mode and the Standard & Poor's 500-stock index came close. Growth stocks - especially smaller companies - have been hammered, while large-cap value stocks have gained favor among investors looking for a little protection to go with their upside potential.
Here are 10 large value stocks to buy now, with the expectation that they should thrive compared to their growthy brethren in a tumultuous environment.
Market value: $539.8 billion
Dividend yield: N/A
Forward price-to-earnings ratio (P/E): 18.7
Analysts' opinion: 4 buy, 0 overweight, 4 hold, 0 underweight, 0 sell
A watershed moment came in July for Berkshire Hathaway (BRK.B, $216.24) shareholders.
The company's board made a significant change to its share repurchase program that changes how CEO and founder Warren Buffett, along with vice chairman Charlie Munger, decide when to buy back shares. Before the July announcement, Berkshire Hathaway would pay no more than a 20% premium above its book value per share, making it almost impossible for the company to repurchase its shares. Now, if Buffett and Munger believe the repurchase price is significantly below its intrinsic value but above 1.2 times book value, the company can buy back its stock.
In August, after the board revised the rules for buying back its stock, Warren Buffett said he purchased a little Berkshire Hathaway stock - likely at prices around 1.4 times book value, about 17% above the former price ceiling.
"Today I believe is the first time that Buffett has ever disclosed that they have bought back any shares above 1.2 times book," Whitney Tilson, the former head of Kase Capital, told CNBC. "And I think this is a major, material new piece of information."
We recently found out just how much Berkshire bought back: $928 million worth. Prices have come up a bit since then, but the Buffett buy signal is hard to ignore.
Market value: $15.6 billion
Dividend yield: 0.5%
Forward P/E: 12.8
Analysts' opinion: 1 buy, 0 overweight, 2 hold, 0 underweight, 0 sell
Loews (L, $47.15) - not to be confused with home-improvement retailer Lowe's (LOW) - is a New York City holding company that got its start in 1946 when Laurence Tisch and his brother Bob borrowed money from their parents to buy a hotel in New Jersey. Today, Loews owns or controls hotels, insurance companies, oil businesses, a packaging business and a $2.1 billion stock portfolio.
Since 2014, Loews has repurchased 15% of its stock for $3 billion, reducing its share count from 373 million to 317 million. Going all the way back to 2008, Loews has retired 40% of its stock, giving the Tisches a bigger piece of the pie. Even farther back to 1970, it has reduced its share count by 75%.
Its 89% ownership of CNA Financial (CNA) generates a majority of the company's net income each quarter. In the third quarter, CNA made a $300 million profit from $2.6 billion in revenue. Loews' overall profit was $278 million.
Over the past 50 years, Loews has delivered an average compound annual return of 17%, compared to 10% for the S&P 500.
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Market value: $13.0 billion
Dividend yield: 2.5%
Forward P/E: 7.5
Analysts' opinion: 8 buy, 1 overweight, 19 hold, 1 underweight, 0 sell
Viacom (VIAB, $32.41) is the parent of TV media brands such as MTV, Nickelodeon, Comedy Central and many others. National Amusements Inc., the Redstone family holding company, holds 80% of the votes but only 10% of the economic interest. The same situation applies to CBS Corp. (CBS), its former stablemate. The two companies were separated in 2006 after merging only six years earlier.
Today, it looks as though the two may reunite.
CBS CEO Les Moonves was forced out as chief executive in September after sexual harassment and assault allegations came to light. Moonves did not want the merger to happen, but Shari Redstone, who runs National Amusements, is in favor of reuniting the two firms.
"We simply do not see a buyer for CBS beyond Viacom, which is why it would make sense for CBS to proactively propose a Viacom transaction sooner than later as scale is becoming increasingly critical in the media industry," BTIG analyst Rich Greenfield wrote in a September note to clients.
VIAB, at less than eight times analysts' estimates of future earnings, is a good value stock.
Market value: $12.4 billion
Dividend yield: 3.2%
Forward P/E: 12.9
Analysts' opinion: 3 buy, 1 overweight, 10 hold, 1 underweight, 4 sell
Once upon a time, J.M. Smucker (SJM, $107.98) was all about peanut butter (Jif) and jelly (Smucker's) sandwiches. Then it acquired Folgers coffee for $3 billion in 2008; Big Heart Pet Brands, the maker of Meow Mix and Milk-Bone, for $5.8 billion in 2015; Ainsworth Pet Nutrition, the maker of Rachel Ray's pet food brand, for $1.9 billion in April of this year.
Almost $11 billion and a decade later, Smucker generates 61% of its revenue from coffee and pet food. It has transformed into a major player in two of the fastest-growing segments of the consumer goods sector.
In addition to the acquisitions mentioned above, SJM announced in July that it is selling its U.S. Baking business, which includes Pillsbury, for $375 million to a private equity firm - a move that further cements its commitment to coffee and pet foods.
"This transaction allows management to continue to execute on its strategy of increased emphasis and resource allocation to the large and growing coffee, pet food, and snack food businesses," William Blair analyst Jon Andersen wrote shortly after the deal's announcement.
Market value: $78.3 billion
Dividend yield: 2.7%
Forward P/E: 10.1
Analysts' opinion: 18 buy, 0 overweight, 5 hold, 0 underweight, 0 sell
Vertical mergers are defined as when "two or more firms, operating at different levels within an industry's supply chain, merge operations." CVS Health (CVS, $73.69) combining with health insurer Aetna (AET) is an example of a vertical merger.
Like all big mergers, the CVS/Aetna tie-up went through an antitrust review by the Justice Department. The DoJ ruled that the deal could go ahead as long as Aetna sold its private Medicare drug plans - a small price to pay to become a dominant force in healthcare.
"Investors should view this deal as an offensive move by both companies," RBC Capital analyst George Hill said last November after the announcement of the $69 billion merger. "A vertically-integrated, consumer-centric value-based care model makes strong strategic sense and is not a short-sighted response to fears of Amazon entering the pharmacy space."
"Go big or go home" appears to be the motto in healthcare. CVS shareholders should ultimately benefit from its size and scale. The stock is well off its 52-week low of $60.14, so momentum clearly is building. CVS, which trades around 10 times earnings estimates, certainly belongs in any list of high-potential value stocks to buy.
Market value: $11.2 billion
Dividend yield: 4.1%
Forward P/E: 10.3
Analysts' opinion: 4 buy, 0 overweight, 12 hold, 1 underweight, 3 sell
The Macy's (M, $36.75) Thanksgiving Parade is an annual tradition like no other, where thousands of New Yorkers and out-of-town visitors line up along the parade route to see some amazing floats and Santa Claus. It will enjoy its 94th edition this year.
Macy's, the business, hasn't had nearly as smooth a ride, but it appears CEO Jeff Gennette has got the department store moving in the right direction. The retailer even is spending $200 million in 2018 on its top 50 stores. In 2019 and beyond, it plans to take the renovations to other locations outside its "Growth50."
The company's second-quarter earnings report was a mixed bag, with flat sales and good profits combined with a stronger outlook for the second half of the year. Confident consumers should translate into a good holiday shopping season. Macy's, which trades around 10 times forward earnings, is one of the better retail value plays at the moment.
"(Macy's is) very cheap here," Metropolitan Capital Advisors CEO Karen Finerman told CNBC on Oct. 30. "I believe in the American consumer."
Market value: $19.4 billion
Dividend yield: 2.5%
Forward P/E: 13.2
Analysts' opinion: 6 buy, 0 overweight, 17 hold, 1 underweight, 3 sell
Toys "R" Us is closing all its U.S. stores. Sears (SHLDQ) is operating under bankruptcy protection and has proposed closing 142 stores in a proposed Oct. 15 filing, though it wouldn't be a shock if it closed more. The big question: How much business can Best Buy (BBY, $71.10) take from the two companies?
Best Buy is expanding its toy inventory to grab a share of the $10.5 billion that Toys "R" Us left on the table when it permanently closed its doors at the end of June. Although it has sold tech-related toys in the past, 90% of its expanded inventory at the more than 1,000 U.S. stores will be new products for the retailer.
Approximately 86% of Best Buy stores are located within 15 minutes of a Sears. Experts suggest Best Buy's appliance business could gain as much as a quarter of a percentage point in same-store sales growth from Sears' demise.
Christmas can't come soon enough.
Market value: $29.2 billion
Dividend yield: 1.2%
Forward P/E: 10.6
Analysts' opinion: 10 buy, 4 overweight, 4 hold, 0 underweight, 1 sell
Investors have speculated about Warren Buffett buying Southwest Airlines (LUV, $51.42) at various times throughout 2018. At the end of June, Berkshire Hathaway owned approximately 56.6 million shares of the Texas airline. The $2.9 billion holding is one of the company's most prominent equity positions.
Buffett himself is on record saying he wouldn't rule out owning an airline. Considering that, and fact that Berkshire Hathaway has money to burn, it's understandable for investors to jump to this conclusion. Regardless of whether Buffett buys Southwest, it's a well-run company.
LUV will continue to look for growth in a business environment where fuel and non-fuel expenses alike are rising; it expects the cost per available seat mile to increase by as much as 3% in 2019.
"Management indicated that its goal is to increase margins y/y in 2019, but the stock will come down as models update to reflect higher costs," Stifel managing director Joseph DeNardi wrote in a note to clients. "The silver lining perhaps: a greater sense of urgency on Southwest's part to be proactive on pricing to offset the higher (cost per available seat mile)."
Market value: $20.4 billion
Dividend yield: N/A
Forward P/E: 14.1
Analysts' opinion: 12 buy, 3 overweight, 12 hold, 0 underweight, 0 sell
Dollar Tree (DLTR, $86.08) is a discount chain with dual personalities.
First, you've got the legacy brand, which continues to grow and prosper. Its most recent Q2 2018 report saw same-store sales increase by 3.7%. Unfortunately, Family Dollar - the chain it acquired in 2015 for $9.1 billion and still operates under that name - experienced flat same-store sales. That knocked DLTR shares off by 15% in August.
"Family Dollar remains the weaker part of the business," Neil Saunders, managing director at GlobalData Retail, said in an investor note published in May. "It is more of a needs-based experience which caters for customers' basic, everyday requirements. A far higher proportion of its shopper base goes there out of necessity rather than because they particularly want to."
Carl Icahn, the activist investor who made more than $200 million on Family Dollar back in 2015, has taken a position in Dollar Tree. Although he hasn't revealed his plans for his investment, it's likely he'll push for the sale of Family Dollar.
Tariffs are hitting Dollar Tree's business in a big way - 40% of its products come from China - so the faster it can sell or revitalize Family Dollar, the better. The time to buy is now while investors are gloomiest.
Market value: $14.6 billion
Dividend yield: 0.4%
Forward P/E: 6.8
Analysts' opinion: 16 buy, 1 overweight, 3 hold, 0 underweight, 0 sell
Business is so good for Lennar (LEN, $44.39) at the moment that it's selling all of its non-core businesses to focus on being a pure-play homebuilder.
Lennar announced on Oct. 29 that it was selling Rialto Investment and Asset Management to Stone Point Capital for $340 million. Rialto specializes in providing a vertically integrated commercial real estate platform from the sourcing of investments to their purchase and ultimately to their profitable sale. Rialto Mortgage Finance will remain with Lennar, getting rolled into the company's financial services unit, which exists to help Lennar buyers finance their homes.
"While national economic data has pointed to higher prices and rising interest rates causing slower overall sales, the basic underlying fundamentals of the housing industry of low unemployment, higher wages and low inventory levels remain favorable and are likely to support longer-term strength in the housing market," Executive Chairman Stuart Miller said in October after reporting strong Q3 2018 earnings.
Homebuilder stocks have struggled in recent months, providing investors with an excellent buying opportunity. Business is good. Don't be fooled by their temporary weakness.
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Copyright 2018 The Kiplinger Washington Editors