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The stock market has seemingly found some stability in early November after a big October rout. But, investors shouldn't consider stocks out of the woods just yet. Trade issues still linger. The Fed remains largely hawkish. Auto and housing demand aren't improving yet. Rates are still creeping higher. Earnings guidance hasn't been the best. Granted, valuations have taken a leg lower to account for these risks. But, if any of these risks worsen over the next several weeks, the stock market could be due for some more volatility. That is why investors should consider adding value stocks to their portfolios.
Value stocks tend to perform better during times of volatility. Specifically, value stocks that are trading at a discount to their normal valuation and the market valuation tend to be less susceptible to market risk than other stocks. Meanwhile, stocks with bigger than average dividend yields also benefit from the same luxury. As do stocks that haven't really gained much ground over the past several years while the market has roared higher.
Overall, then, when looking for value stocks to de-risk a portfolio, I look for three technical aspects: 1) a lower than normal valuation, 2) a higher than average yield and 3) a stock that hasn't rallied with the market. In addition, you want to see strong fundamentals which support growth from current levels, and a nice moat against macro market risks.
With that in mind, here's a list of three value stocks that I think check off all five of those boxes, and are worth considering amid recent market volatility.
Source: Baron Valium via Flickr
Global media giant Disney (NYSE: DIS ) has been one of Wall Street's least favorite stocks over the past few years. But, this lack of favoritism among Wall Street pros makes the stock an attractive value pick amid recent volatility.
The valuation on DIS stock is quite attractive. This stock trades at just 15.8X forward earnings. That is roughly in-line with the market-average multiple and markedly below the five-year average forward multiple of over 17.
Meanwhile, the yield on DIS stock is also attractive in a historical context. On its face, DIS stock's 1.5% yield isn't all that great. But, considering the five-year average yield is closer to 1.3%, today's 1.5% yield looks relatively attractive.
Also, DIS stock hasn't really gone anywhere over the past three years. Three years ago, this was a $116 stock. Today, it's a $117 stock. While DIS stock has inched higher by less than a percent over the past three years, the S&P 500 has rallied 30%.
Yet, despite these deep value characteristics, Disney is still one of the most recognized and powerful brands in the world. This is a company that produces consistently stable top-line growth, healthy earnings and big cash flows, and owns some of (if not the) most valuable and timeless content assets in the world. Plus, this company's global relevance, reach and earnings power is getting a big boost thanks to the recent acquisition of media assets from Twenty-First Century Fox (NASDAQ: FOX ).
Why the recent weakness? Everyone is concerned about cord-cutting headwinds destroying this company's Media Networks business, which has become Disney's cash cow. But, that won't happen. While weakness in that segment will persist, it should be largely offset by streaming growth once Disney launches its own DTC streaming service.
Meanwhile, as a media giant, the company is largely shielded from trade war risks. Plus, higher rates also won't kill growth, because of the largely small-ticket nature of Disney's offerings (outside of theme park visits, which are largely planned in advance anyways).
Broadly speaking, then, DIS stock seems relatively safe here, while also having nice potential upside through streaming growth.
L Brands (LB)
Wall Street hasn't liked Disney stock over the past few years. But, more than not liking, Wall Street has hated L Brands (NYSE: LB ) during that same stretch.
L Brands, the parent company behind Victoria's Secret (VS) and Bath & Body Works (BBW), has struggled mightily over the past several years thanks to a huge and rapid slowdown in the VS business. But, at current levels, LB stock looks like a bargain.
LB stock features a forward multiple of just 14. The five-year average forward multiple is up at 18. Meanwhile, the stock did feature a 20-plus forward multiple back in 2013-15. Also, the entire apparel retail sector trades with a forward multiple of around 18 today . Thus, across the board, L Brands stock is cheap.
Meanwhile, the current dividend yield is way up at 7%. That is really high for any company. Granted, the payout ratio is also pretty high at 75%, so investors are worried about a forthcoming dividend cut. But, with a current yield of 7%, LB stock can handle a dividend cut. The five-year average yield, after all, is just 3.6%.
Perhaps most importantly, while the market is trading near all-time highs, L Brands stock is trading right around five-year lows.
As mentioned earlier, the woes in LB stock can be attributed to major weakness in the VS business. But, VS is an enduring brand with a ton of demand and popularity. It is tough to see VS, which has emerged as the market's go-to and trusted lingerie retailer, being phased out permanently. Thus, this is just a recent adverse trend.
This trend appears to be reversing course. VS sales showed marked improvement in September, with comparable sales growth jumping into positive territory for the first time since May, and doing so against a much more difficult lap. Meanwhile, LB's other business, BBW, is doing very well and posting multi-year best comparable sales growth.
LB stock also seems largely protected from macro trade war risks, and it's tough to see higher rates materially dampening lingerie and candle spend, considering they are both small ticket purchases in the big picture.
Overall, LB stock seems like a safe investment at current levels, with tons of potential upside in the event VS turns things around this holiday season.
Source: Rosana Prada Via Flickr
Another value stock that hasn't really gone anywhere for several years and features attractive low volatility fundamentals is packaged food giant Kellogg (NYSE: K ).
At current levels, the valuation on Kellogg stock is quite attractive. Kellogg stock trades below 15X forward earnings. The five year average forward multiple is 17. The whole market trades at a 15 forward multiple, while the consumer staples sector trades above 18X forward earnings.
Meanwhile, the dividend yield is also attractive at current levels. Kellogg stock currently has a yield of 3.5% on a payout ratio of just 40%. Thus, the dividend is sustainable, and the yield is far above the five-year average of below 3%.
Much like Disney stock, Kellogg stock hasn't gone anywhere over the past several years, either. Over the past five years, while the S&P 500 has rallied nearly 60%, Kellogg stock essentially hasn't gone anywhere.
A big part of this weakness is because Kellogg has struggled to consistently grow revenues and earnings amid rising competition from healthier, organic packaged foods. These struggles will persist. Recent quarterly earnings include a big cut to the company's profit guide outlook as cost-saving initiatives are turning into investments that are necessary for Kellogg to grow and stay relevant in a hyper-competitive packaged foods market.
But, growth is still there, and longer term, I see this story playing out much like Coca-Cola (NYSE: KO ). Much like Coca-Cola managed to diversify its product portfolio away from sugary carbonated drinks and align that portfolio with emerging health trends, Kellogg will gradually do the same, and operations will be fine long term.
Also, Kellogg stock is relatively less at-risk to tariffs than the broader market, and slow economic growth won't materially dampen demand for packaged foods.
Thus, Kellogg stock seems relatively stable at current levels, with potential upside through product portfolio diversification reinvigorating revenue and profit growth.
As of this writing, Luke Lango was long DIS and LB.
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