BANK OF AMERICA: Buy these 29 high-quality value stocks primed to cash in on the economic recovery

  • A group of Bank of America strategists make a compelling case for value-centric stock picks in the wake of a US economic recovery.
  • The strategists bolster their picks by pointing to positioning, economic activity, historical evidence, and proprietary measures.
  • In total, the strategists provide 29 value-centered stock picks and provide additional commentary to express their reasoning.
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There's no denying that value-centered investment approaches have seen better days.

Depending on how you carve it up, for about a decade now, investment strategies focused on stocks that are cheap relative to fundamentals have underperformed growth-oriented strategies by a considerable margin. The Vanguard Growth ETF has gained 370% over the past 10 years, besting its value equivalent by nearly 200 percentage points. 

Renowned value investors such as Seth Klarman, the billionaire manager of the hedge fund Baupost Group, and Cliff Asness, the billionaire cofounder of AQR, have vehemently expressed heartache and frustration over the strategy's prolonged difficulties, and expect a redemption for their beloved strategy in due time. 

As of today, growth stocks continue to garner the majority of the market's attention. 

But just because investor affinity has tilted in favor of high-flying, growth oriented issues doesn't mean that value is dead forever. And a group of strategists at Bank of America thinks that these value investors may soon have their day in the sun.

"Following an exuberant August for Growth (the Russell 1000 Growth Index outperformed the Value index by 6ppt), Value started to see signs of life in September, reversing the trend by 4ppt MTD," the strategists said. "Despite the recent rotation, we still see more room to run for several reasons."

Those aforementioned reasons include:

  • The economy — "Various macro indicators point to an economic recovery."
  • Historical evidence — "Value also outperformed coming out of 14 of the last 14 recessions for at least three months."
  • A proprietary reading — Bank of America's "US Regime Indicator has officially entered into a recovery phase, where Value outperformed 100% of the time by over 20ppt on average during this phase."
  • Positioning — "On almost any measure, and among almost every investor group, Growth is over-owned and Value is neglected."

In order to provide visual context to their argument, the strategists provided an array of charts and tables backing up their claims.

Here's a look at value's performance juxtaposed with that of the S&P 500 when coming out of a recession. Clearly, value outperforms the broader market in this type of scenario.

And here's a look at Bank of America's proprietary US Regime Indicator. According to the strategists, the metric has officially entered a recovery phase, providing a tailwind to value-centered approaches. 

What's more, investor affinity towards growth stocks is approaching a fever pitch, potentially setting the stage for a sharp turnaround.

Although the backdrop for a value-centered approach is currently auspicious, the strategists are quick to note that the fervor that propelled growth oriented strategies and stocks to new heights may not have run dry yet. 

"Despite our Value preference, there is still a number of compelling arguments supporting Growth's continued leadership," they said. "The Fed put (FANG stocks have been the ultimate beneficiaries of monetary stimulus), Tech disruption and the rise of ESG investing favor Growth over Value. A potential second wave also does not bode well for Value."

With all of that under consideration, the strategists compiled a list of 29 high-quality value stocks that stand to benefit from a robust economic recovery. Additional commentary is included to provide background on the strategists' recommendations.

1. ATT

Ticker: T

Sector: Communication Services

Analyst Commentary: "Excluding buybacks, we are looking for $3.28 in '21 EPS vs. consensus of $3.22. This leaves AT&T at a historical record-low PE of 8.7x and record-high yield of 7.3% in a record low interest rate environment that is likely to stay this way for some time."

Source: BofA Global Research

2. Comcast

Ticker: CMCSA 

Sector: Communication Services

Analyst Commentary: "Comcast's cable operations have largely benefited from the shift towards work/school-from-home with accelerating residential broadband growth, wireless share gains, and recovering small-to-medium business operations. Additionally, NBCU has been well-managed through the COVID-19 crisis (with cost controls partially offsetting unprecedented headwinds and new business models in development – Peacock/Premium Video on Demand)."

Source: BofA Global Research

3. Goldman Sachs

Ticker: GS

Sector: Financial

Analyst Commentary: "GS trades below book value, but has the potential over the next few years to achieve an ROE >13%, rising earnings, and a P/B multiple rising 20-30%, given the correlation of ROE to PB."

Source: BofA Global Research

4. Citigroup

Ticker: C

Sector: Financial

Analyst Commentary: "We view Citi as having the most disconnected valuation relative to its growth and return profile at P/TBV of 0.61x (vs. 1.07x for peers). While Citi has always traded at a discount to peer banks, we continue to think that at current levels, there remains more upside than downside, and see the risk/reward as skewed attractively."

Source: BofA Global Research

5. East West

Ticker: EWBC

Sector: Financial

Analyst Commentary: "We view EWBC as among the rare group of banks that has the potential to deliver strong topline revenue growth despite the zero interest rate backdrop. Lastly, mgmt. has previously discussed the potential for M&A coming out of an economic downturn."

Source: BofA Global Research

6. First Horizon

Ticker: FHN

Sector: Financial

Analyst Commentary: "Improved clarity on core earnings power and comfort with deal-integration, following the recently closed merger of equals-MOE with Iberia bank-IBKC, should serve as a catalyst for a re-rating higher in the stock in our view."

Source: BofA Global Research

7. Allstate

Ticker: ALL

Sector: Financial

Analyst Commentary: "Despite headwinds, Allstate shares seem attractive. For a number of reasons, we think 2020 seems a lot like 1999-2020. The market is enjoying a stark repositioning to growth/technology stocks and away from balance sheet-intensive financials, while auto insurance share leader State Farm is flexing its dominance with double-digit price cuts against the backdrop of rising P&C industry commercial pricing trends. Amidst these fundamentals in both 2000 and today, Allstate is trading a 60% P/E multiple discount to the S&P 500."

Source: BofA Global Research

8. Arch Capital

Ticker: ACGL

Sector: Financial

Analyst Commentary: "The other stock that [w]e think has not gotten a proper lift due to the growth-over-value trade is Arch Capital (ACGL). However, what is interesting and a little inexplicable is that the mortgage insurers (covered by Mihir Bhatia) have had a good month, while Arch has lagged. If we had to guess, Arch announced that it would buy-in its third-party asset management vehicle WatfordRe (WTRE), and we think the market tends to dislike accretive financial buy-outs."

Source: BofA Global Research

9. Boston Properties

Ticker: BXP

Sector: Real Estate

Analyst Commentary: "BXP has substantially underperformed REITs and now trades at a 21% discount to NAV, 12.8x '20 consensus FFO vs 21.6x for REITs and has a 4.5% distribution yield versus 3.3% for the sector. While the COVID-19 mandated shutdowns and work from home (WFH) headlines have impacted BXP and office REITs stock performance this year, we believe BXP's high quality portfolio and blue chip tenants will help it outperform as tenants return back to the office and leasing momentum picks up."

Source: BofA Global Research

10. KIMCO Realty

Ticker: KIM

Sector: Real Estate

Analyst Commentary: "We like KIM as a value play.  KIM currently trades at a 10.5x 2020 FFO multiple vs. shopping center peers at 12.5x and for all REITs at 21.5x. KIM also trades at a -10% discount to NAV. KIM recently re-instated its quarterly cash distribution at an annualized yield of 3.1%. With rent collections also improving (84% for July and 86% for August) and 97% of Kimco's tenants now open for business, we believe KIM's quality makes it an attractive Buy rating."

Source: BofA Global Research

11. Essex Property Trust

Ticker: ESS

Sector: Real Estate

Analyst Commentary: "ESS has been hit hard due to its concentration in the West Coast, regulation in California, and migration out of coastal cities. While urban apartments are facing challenges today, over the long term we still like ESS for its high quality portfolio."

Source: BofA Global Research

12. Medical Property Trust

Ticker: MPW

Sector: Real Estate

Analyst Commentary: "MPW currently trades at a 11.4x 2020 FFOx vs healthcare REIT peers at 14.5x and for all REITs at 21.5x. MPW's focus on hospital real estate has led to sector leading rent collections throughout the duration of the pandemic. Looking ahead, MPW will be able to capitalize on health system's need for capital. Pre-pandemic MPW had a robust acquisition pipeline and we expect the pandemic will increase sourcing opportunities."

Source: BofA Global Research

13. Alaska Airlines

Ticker: ALK

Sector: Industrials

Analyst Commentary: "Despite having the best liquidity runway of the airlines (into 2023), Alaska Airlines trades at one of the least expensive valuations in airlines on 2022 EBITDAR estimates (just 4.1x) and at the low end of historical ranges (domestic-oriented airlines have typically traded at 4-6x). ALK has a quality management team that has a sharp focus on cost controls and conservative balance sheet (sub-1x net leverage coming into the pandemic)." 

Source: BofA Global Research

14. Parker Hannifin

Ticker: PH

Sector: Industrials

Analyst Commentary: "Parker Hannifin manufactures motion and process controls (50% of revenue), engineered materials (30%), and aerospace components (20%). The company's FCF has proved to be resilient over economic cycles and less cyclical than revenue/earnings. Return on tangible assets has improved to 20%, well above multi-industrial peers at 15%. Given diverse industry exposure, revenue is tied to US industrial production."

Source: BofA Global Research

15. AGCO Corp

Ticker: AGCO

Sector: Industrials

Analyst Commentary: "We expect shares to re-rate higher as the company lays out more details on its precision agriculture offering under new CEO Eric Hansotia.  AGCO is also a weak USD beneficiary with 70% of operating profit coming from EMEA and every 0.05 strengthening of the EUR:USD boosting annual EPS by $0.15-$0.20."

Source: BofA Global Research

16. KHC

Ticker: KHC

Sector: Consumer Defensive

Analyst Commentary: "We expect management/strategy change to drive fundamental improvement in sales, profits and capital allocation which is not being priced in at current levels (13x PE/5.0% dividend yield)."

Source: BofA Global Research

 

17. Cracker Barrel

Ticker: CBRL

Sector: Consumer Cyclical

Analyst Commentary: "Cracker Barrel owns the majority of its real estate, a lever that could be monetized over time but in the near-term provides a liquidity lever that protects against downside risk scenarios. The top-line growth for the Cracker Barrel brand is not substantial (1-2% per year) but the brand is expanding its off-premise capabilities, testing a new alcohol program and should emerge from the other side of Covid with better margins given a re-evaluation of the cost structure in our view."

Source: BofA Global Research

18. Medtronic

Ticker: MDT

Sector: Healthcare

Analyst Commentary: "Why we are bullish: MDT's brand new CEO Geoff Martha is a significant part of our bullish call on MDT. He has an acute awareness of what has caused MDT's inconsistent performance over the last 5 years and he is taking significant and immediate action."

Source: BofA Global Research

19. LabCorp

Ticker: LH

Sector: Healthcare

Analyst Commentary: "While most companies that supply COVID-19 related testing products have seen significant multiple expansion over the last 6 months, DGX and LH are currently trading below their 10 year historical PE averages on both a one and two year forward basis."

Source: BofA Global Research

20. Mylan

Ticker: MYL

Sector: Healthcare

Analyst Commentary: "Mylan (MYL, Buy, $8bn market cap) is a leading generic pharmaceutical company that is near closing its merger deal with Pfizer's Upjohn unit, which we believe creates an attractive combined entity (that will be named Viatris). However, MYL trades at a historically low valuation levels (~5.6x EV/EBITDA) vs its own trading history, while peer group trades at 6-8x."

Source: BofA Global Research

21. Jazz Pharmaceuticals

Ticker: JAZZ

Sector: Healthcare

Analyst Commentary: "JAZZ trades at ~9x our '20E EV/EBITDA, which is a ~55% discount to its 2016 valuation levels. JAZZ's leading product Xyrem (narcolepsy, 76% of '20E sales) is facing loss-of-exclusivity (LOE) in the 2023-2026 timeframe; JAZZ's ability to offset any Xyrem LOE is a key area of focus for investors. However, we believe JAZZ offers attractive returns over the long term since – 1) new product cycle: JAZZ is launching four new products in 2020-2021 across its Sleep and Oncology franchises that we expect to contribute 40-45% of the company's 2022E revenue."

Source: BofA Global Research

22. Entergy

Ticker: ETR

Sector: Utilities

Analyst Commentary: "Shares have traded off relative to the peer group since the start of Q2 – principally on fears of lost or declining electric sales from the large industrial customer base (oil & gas, petrochem, chlor-alkali) in the Gulf served by the company. We view this as unwarranted as the company has given a series of updates in which it has flagged increasing confidence that its existing + its pipeline of new industrial customers remains intact, despite near-term impacts in '20 which the company in managing via cost cutting and maintenance deferral."

Source: BofA Global Research

23. Exxon

Ticker: XOM

Sector: Energy

Analyst Commentary: "The US oils are not a value trap. What they are is a call on a cyclical commodity facing headwinds on multiple fronts – weak demand, oversupply and business models from US E&P's that have pursued unnecessary growth while being subsidized by lower cost producers."

Source: BofA Global Research

24. Chevron

Ticker: CVX

Sector: Energy

Analyst Commentary: "The US oils are not a value trap. What they are is a call on a cyclical commodity facing headwinds on multiple fronts – weak demand, oversupply and business models from US E&P's that have pursued unnecessary growth while being subsidized by lower cost producers."

Source: BofA Global Research

25. Occidental Petroleum

Ticker: OXY

Sector: Energy

Analyst Commentary: "The US oils are not a value trap. What they are is a call on a cyclical commodity facing headwinds on multiple fronts – weak demand, oversupply and business models from US E&P's that have pursued unnecessary growth while being subsidized by lower cost producers."

Source: BofA Global Research

 

26. Diamondback Energy

Ticker: FANG

Sector: Energy

Analyst Commentary: "The stock presently yields ~4.5% at current prices, which we believe is sufficiently protected by cash flows which are well hedged. With a leading sustaining capex profile, cost leadership, superior execution and operational flexibility, we believe FANG's FCF profile and long runway (>20 year inventory) is under-appreciated."

Source: BofA Global Research

27. Parsley Energy

Ticker: PE

Sector: Energy

Analyst Commentary: "Parsley is solving for FCF, and expects >$350mm in FCF this year. We believe free cash will grow by at least $100mm next year even in a flat commodity price environment as capex resets lower and Parsley remains well hedged in with 76% of expected oil production hedged. PE stock is presently yielding ~2% and we believe the company is well placed to grow the dividend from here."

Source: BofA Global Research

28. National Fuel Gas

Ticker: NFG

Sector: Energy

Analyst Commentary: "NFG operates an exceptional vertically integrated business model that is different from traditional pure play natural gas E&Ps. The E&P segment (~50% of annual EBITDA) offers upside to commodity prices while the Midstream (Pipeline & Storage, Gathering) and Utility segments offer stability to cash flows and underwrites a ~4.5% dividend payout."

Source: BofA Global Research

29. Kinder Morgan

Ticker: KMI

Sector: Energy

Analyst Commentary: "We see fair value at ~10.5x 2021E EV/EBITDA leading to our $19 PO, which together with ~8% yield implies >50% total return. With a solid mid-BBB credit ratings and #1 ESG ranking in the midstream sector (per Sustainalytics), we view KMI as a high quality value pick."

Source: BofA Global Research

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