Are you ready? JP Morgan is predicting a sizable shift in investing. According to the firm’s chief US equity strategist, Dubravko Lakos-Bujas, style positioning remains primed for a rotation to Value from Momentum/ Low Volatility.
He made the call last week after the market experienced one of the largest 3-day Momentum-Value rotations in over 30 years. The trigger: better than expected economic data, monetary and fiscal stimulus, easing trade tensions, and stabilization in yields. In the current rotation ~5 months of Momentum outperformance was given back in only 3 days, noted Lakos-Bujas.
“The correlation between Value and Momentum is near 30-year lows, signaling extremely oversold positioning for Value” he writes, adding that history suggests that Momentum sell-offs of similar magnitude are on average followed by prolonged Momentum underperformance, Value outperformance, and a flat to higher equity market.
So with this outlook in mind, which value stocks should you consider adding to your portfolio now?
The Value Portfolio
Here we take a closer look at three hot stocks in the Top 10 holdings of JP Morgan’s Large Cap Value Fund. To come up with these holdings, the firm analyzes company prospects for as long as five years, to gain insight into a company's real growth potential. Its goal: to identify the most undervalued securities in each sector
“Looks for attractive valuations as well as catalysts for stock price increases, higher potential reward versus risk, and temporary mispricing caused by market overreactions” writes the firm. With this strategy in mind let’s dive into three of the portfolio’s key holdings.
1. Marathon Petroleum Corp
Marathon Petroleum (MPC– Get Report) is an independent petroleum product refiner, marketer and transporter headquartered in Ohio. It’s the largest refiner in the US, with over 3 million barrels per day of capacity across 16 refineries. At the same time, MPC also is the general partner of a midstream partnership, MPLX LP (MPLX), and has a network of nearly 4,000 company-owned retail stations.
“We continue to favor coastal refiners (OW-rated MPC, PSX and VLO), who have an opportunity for modestly wider coastal differentials for both light (MEH/LLS) and heavy (Maya/WCS) crudes” cheered JP Morgan analyst Phil Gresh on September 10. He has just reiterated his buy rating with a $62 price target (16% upside potential). According to Gresh, MPC trades inexpensively on a sum-of-the-parts basis, “around which we hope that the company will look to unlock value soon.”
Indeed, the Street as a whole has a bullish outlook on Marathon Petroleum. The stock shows a Strong Buy consensus with a $67 average analyst price target.
For instance, RBC Capital’s Brad Heffern reiterated his buy rating following the company’s latest earnings results. He notes that MPC recently acquired ANDV, and achieving a $1.4 billion synergy target would be a major catalyst. “In our opinion, Marathon's retail business, Speedway, is the most attractive retail franchise in our coverage universe, and the extension of the Speedway model to the acquired ANDV stores could provide meaningful upside” the analyst wrote.
2. Comcast Corp
Telecoms giant Comcast (CMCSA– Get Report) is the number 1 holding in JP Morgan’s Large Cap Value portfolio (at 4.3% of the portfolio). The firm’s Philip Cusick recently singled out CMCSA as one of his top picks in the cables industry, calling it undervalued based on the company’s strong free cash flow.
Encouragingly, this ‘Strong Buy’ stock has received only buy ratings from the Street in the last three months. And you can also add to the mix a rare Conviction Buy rating from Goldman Sachs’ Brett Feldman. That’s with an average analyst price target of $53 (12% upside potential). Bear in mind shares have already surged 38% year-to-date.
Five-star Oppenheimer analyst Timothy Horan is one of 10 analysts currently bullish on Comcast. He upgraded CMCSA on September 5, explaining: “We think cable can become a 50%-plus EBITDA margin business on lower CAPX, while still growing broadband share and pricing with superior service.”
“CMCSA has 1 gig availability in nearly 100% of its network, and we expect CMCSA to continue to increase ARPUs 4% per year. Negatively, we expect carriers to roll out 5G aggressively, which adds competition but not until 2021 or later” Horan wrote. His $54 price target stands marginally above the average analyst price target.
3 Cigna Corp
Health insurance stock Cigna (CI– Get Report) is the joint third largest holding in the JP Morgan Large Cap Value Fund. Like Comcast, the stock shows 100% buy ratings from the Street with 8 bullish calls from analysts over the last three months. Meanwhile the $214 price target translates into sizable upside potential of 33%.
Five-star Oppenheimer analyst Michael Wiederhorn believes that CIGNA remains one of the most attractive areas to invest for the long-term and continues to offer some of the most compelling value.
In particular, the Street is keeping a close eye on the massive $67 billion merger with Express Scripts which closed at the end of last year. The deal, which paired a health insurance giant with the US's largest pharmacy benefit manager, should pay strong long-term returns for shareholders. That’s thanks to a compelling opportunity to cross-sell services, alongside a more equity-friendly capital structure.
“Given the stock's attractive valuation, we believe long-term holders will ultimately be rewarded. As a result, we maintain our Outperform rating and would continue to be buyers” commented Wiederhorn. Even though regulatory pressure affects all ends of the pharmaceutical supply chain, he believes that the stock’s depressed multiples are well overdone.