During our current bull market, so-called “value” stocks have been undervalued.
These are slower-growth companies with reliable sales and profits, many of which pay dividends. Like their market peers, plenty of these companies were hammered by the COVID-19 pandemic. But even those that sailed through on quarantine tailwinds are selling at reasonable prices.
Likewise, investors who profited off the tech boom this year are sitting on big returns, and value stocks offer one way to protect those gains. Especially if you’re near or at retirement age, like me, your focus needs to shift from getting rich quick to staying solvent for life.
With that in mind, here are 7 value stocks to buy today and hold tomorrow:
- Pfizer (NYSE:PFE)
- Caesar’s Entertainment (NYSE:CZR)
- General Motors (NYSE:GM)
- Bed, Bath and Beyond (NASDAQ:BBBY)
- Papa John’s (NASDAQ:PZZA)
- IBM (NYSE:IBM)
- Cisco (NASDAQ:CSCO)
Value stocks offer dividends that keep you from depleting your principle. Stocks that suspended dividends should regain their footing as the pandemic fades. It’s a good time to look at the value stock wreckage.
Value Stocks to Buy: Pfizer (PFE)
In 2020, investors have paid huge premiums on sales for the promise of a COVID-19 treatment or vaccine.
But you can still buy Pfizer at a reasonable price.
Pfizer was trading at $37 per share on October 8. That makes for a market cap of $203 billion, based on 2019 sales of $51.75 billion. The price-to-earnings ratio was just 14.5 and the $0.38 per share dividend yielded 4.1%, at a time when 30-year government bonds were trading at 1.5%.
Pfizer is the manufacturing muscle behind a COVID-19 vaccine effort built on technology from BioNTech (NASDAQ:BNTX) of Germany. Analysts say the partnership is among the leaders in that race. But while the market will be worth billions, the price is likely to be controlled by governments.
Pfizer is interesting for reasons beyond COVID-19. The company is replenishing its drug pipeline by working on vaccines, immunology and rare diseases. Pfizer’s best-known vaccine Prevnar is for pneumonia and saw sales of $5.85 billion last year. The company recently told analysts it has 3 more vaccines in development, whose sales could equal that figure by the end of the decade.
Since becoming CEO, Bourla has sought to pull Pfizer away from its “patent cliff.” For value investors this is a warning that the dividend may decline. Drugs like Viagra and Lipitor, which have lost patent protection, are being spun out along with UpJohn from Mylan (NYSE:MYL) into a new company called Viatris. However, the pandemic delayed that spinoff, so income investors can still get in by buying Pfizer.
Caesar’s Entertainment (CZR)
But the secret sauce is VICI Properties (NYSE:VICI), a Real Estate Investment Trust (REIT) originally created by Eldorado. Separating casino real estate from operations cuts costs and creates tax-advantaged dividends out of rent. The resulting REIT gets steady cash flow from which it’s required to pay dividends, currently yielding 5.6%.
VICI gives Caesar’s a ready buyer for assets like the Caesars Forum Conference Center, on which VICI recently gave a $400 million mortgage, a five-year note at 7.7% that VICI can call in three.
VICI means Caesar’s has the cash to buy Hill, a British bookmaker that came to the U.S. to escape a crackdown on its U.K. betting terminals. The lure was a 2018 Supreme Court decision legalizing sports betting, previously done only in Nevada and New Jersey, in any state which wanted it. Caesar plans to sell Hill’s non-U.S. assets, which Truist (NYSE:TFC) analysts have estimated are worth between $2 billion and $4.5 billion. The “digital transformation of a giant” would combine the nationwide network of casinos with online gaming and sports betting.
But Caesar’s is gambling that physical casinos, once they come back, will deliver far more profit than online gambling alone. If you agree with that assessment, you can win big by buying VICI, which owns the real estate they sit on.
General Motors (GM)
“Bin Laden is dead but General Motors is alive” was a key campaign message back in 2012.
A decade ago, General Motors was threatened by the Great Recession. Now it faces a different threat, the rise of Tesla (NASDAQ:TSLA).
GM opened for trade October 7 at about $30.75/share, a market cap of $43 billion, after 2019 sales of $137 billion. Since the start of 2020, shares are down 11%. The June quarter was a disaster, but analysts now expect sales of $37 billion in the September quarter report November 5, and net income of $1.35/share. Tesla is now worth 9 times more than GM, despite having less than one-fifth its sales.
In 2020, former Vice President Joe Biden has again put GM, and its union workforce, at the center of his rhetoric. He announced his economic plan in front of a former GM plant. His “Buy American” plan could assure a steady flow of government contracts.
Biden’s policy would support GM’s efforts to compete, with investments in charging stations, tax credits, and new fuel economy standards. Such policies could give GM the time and money needed to bring its electrics to market, retooling factories and rebuilding supply chains.
If you believe that, then GM is a very cheap stock.
GM has been hammered in 2020. The dividend is gone. The stock is down. Tesla has blown past it.
But there’s still value in GM. Politicians don’t want it to go away. They have the means to keep it in the game against Tesla. Defense contracts, purchase incentives, and “buy American” plans for batteries and assembly plants may get GM through its present difficulties. If they can, there’s no reason why GM stock should still be selling for one-fourth sales while Tesla sells for 20 times sales.
Bed, Bath and Beyond (BBBY)
A short squeeze nearly doubled the value of Bed, Bath & Beyond over recent weeks. But shares are still cheap.
With 19% of volume being sold short, short-sellers were unpleasantly surprised by August’s quarterly earnings beat. The home goods chain earned $218 million, $1.76 per share, on sales of $2.69 billion. Revenue nearly equaled 2019 levels. Analysts had been expecting a loss.
I have been expecting a turnaround at BBBY ever since CEO Mark Tritton was hired away from Target (NYSE:TGT), where he had been chief merchandising officer. The plan always was to replace the national brands now being stocked with new store brands, with higher quality, controlled by the retailer. The only question was whether Tritton could get through the pandemic.
He has gotten through by selling real estate with leasebacks, which let him close stores fast when the crisis hit. He raised as much as $400 million between February and August, while debt dropped $300 million. Tritton also reduced inventory to save money.
Meanwhile Tritton has been building a new executive team. Wade Haddad has increased online sales, partnering with Shipt and Instacart on same-day delivery in urban zip codes. The latest move was to grab Anu Gupta, another former Target executive, for chief strategy officer. She had been chief operating officer of Jyve, an on-demand labor platform.
Our Luke Lango predicted BBBY could triple back in July, after May’s quarterly earnings report scared people off. That just means the stock has more room to run.
BBBY’s market cap is still barely one-quarter its estimated 2020 sales. Well-run retailers usually sell for half of sales, although the best sell for a lot more. As Tritton’s plans for store brands take hold, a $5 billion market cap means you’re nearly doubling your money from here.
Papa John’s (PZZA)
Papa John’s is moving to Atlanta, the third stage of CEO Rob Lynch’s turnaround of the pizza company.
The Atlanta move takes the company completely out of Schnatter’s orbit. It may even prelude a sale, either to privately-held Inspire, to Restaurant Brands (NYSE:QSR), which lacks a pizza franchise or to someone else.
The pandemic has been very good for Papa John’s. Earnings for the June quarter were spectacular. Sales were up 19% internationally and 28% in North America. Net income was $20.6 million, 48 cents per share, on revenue of of over $460 million.
The company was able to pay a 22.5 cent/share dividend. The momentum is continuing. Same store sales were up 24% year over year in August.
But there’s value here that may be worth more. At its October 6 opening price of $83, the company was worth $2.7 billion, against estimated 2020 sales of $1.8 billion . Restaurant Brands, by comparison, had a market cap of over $17 billion on 2019 sales of $5.6 billion.
Under Schnatter, the chain was considered a technology laggard. The company’s latest ad features people using their phones to order pizza. The next step is expansion. HB Restaurant Group, which only became a franchisee last year with 43 restaurants, now plans to open 49 more.
Papa John’s can still move much higher, but it’s still too small to resist a determined suitor. Atlanta puts it on a bigger stage, set to make big profits for investors.
International Business Machines was once the ultimate value stock. It paid reliable dividends and it bought back stock. Many of my neighbors growing up in the 1960s worked there. Later, so did kids I grew up with.
But by focusing on dividends and buybacks, IBM missed the cloud. IBM, which celebrated its 100th birthday in 2015, went from being the unquestioned technology leader to a runner up.
Virginia Rometty finally gave up the CEO chair in April to Arvind Krishna, then-running the company’s cloud operations. Krishna in turn named Jim Whitehurst from Red Hat, the cloud software outfit acquired in 2019, company President. In the months following, IBM stock barely budged, despite a $1.63/share dividend yielding more than 5%.
The problem was that IBM remained a hardware company. The solution was to take a suggestion I made back in July and break the company up. IBM announced in October it will spin out its legacy businesses and focus entirely on what it calls “hybrid cloud.” Here, enterprises retain their own data centers built to cloud standards, rather than arbitrage larger public clouds.
The strategy is being followed by other old tech companies. Oracle (NASDAQ:ORCL) is trying to generate cash flow for cloud by buying part of TikTok. Dell Technologies (NYSE:DELL) plans to spin-out its VMware (NYSE:VMW) software unit, which competes with Red Hat.
To survive, IBM needs to think outside the box its placed itself in. It has just begun doing that, and investors should celebrate. Buying now means the legacy business, which pays the dividend, can still be held. The remaining company can be held for capital gains.
Given IBM’s decision to break up with itself, Cisco Systems has become the ultimate tech value stock. At its October 9 price of $40, the company’s 36 cent per share quarterly dividend yielded 3.6%, a great return for income investors.
Of course, that isn’t super comforting when you’re losing your principal. In the most recent quarter, which saw revenue down 9% and non-GAAP earnings down 4%, CSCO shares dropped nearly 20% after quarterly earnings were released August 12.
CEO Chuck Robbins has what seems to be a reasonable strategy. He is shifting Cisco revenue from expensive networking gear to software subscriptions. But right now, it’s not working. The revenue run rate today is the same as it was in 2016 and profits have been uneven.
Cisco has made a half-dozen security acquisitions since Robbins took over. Cisco has announced 10 acquisitions since the start of 2019 , aimed at patching holes in the product line. The most recent is BabbleLabs, bought to improve its videoconferencing experience against Zoom Video (NASDAQ:ZM).
With the dividend secure and $29.4 billion of cash in the bank as of July, CSCO is in no danger. And when it does start taking risks again, more danger will mean more profits, on top of the healthy yield.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.
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