Growth stocks have once again left value stocks in the dust in 2019, the same theme that has played out for most of the decade-long bull market. However, with global geopolitical uncertainty on the rise and growth stock prices looking extremely stretched, some analysts say value stocks may finally start to close the performance gap. The Bank of America analyst team keeps a running list of Value 10 stock picks, its 10 highest-rated value stocks in its coverage universe. The Value 10 screen includes stocks with the lowest earnings multiples and highest potential earnings upside relative to consensus estimates.
BB&T Corp. (ticker: BBT)
Analyst Erika Najarian says BB&T has less sensitivity to falling interest rates than peers, which is good news considering the likelihood of further Federal Reserve rate cuts. Once BB&T completes its buyout of SunTrust (STI), it will be the sixth-largest U.S. bank and can reposition and improve its balance sheet. Najarian says additional downside for U.S. banks is limited given their discounted earnings multiples. BB&T has a price-earnings multiple of 11.4 and a 3.9% dividend. Bank of America has a “buy” rating and $56 price target for BBT stock.
D.R. Horton (DHI)
D.R. Horton is the largest U.S. public homebuilder. Analyst John Lovallo says DHI is the gold standard among homebuilder stocks given its size and scale, its focus on the entry-level housing market, and the optionality that its acquisition of land developer Forestar provides. Lovallo is projecting $4.20 in EPS in 2019 and 19% EPS growth in 2020. His $5.90 2021 EPS estimate is 35% above Wall Street consensus. D.R. Horton has a P/E ratio of 11.8. Bank of America has a “buy” rating and $55 price target for DHI stock.
General Dynamics Corp. (GD)
Analyst Ronald Epstein says defense contractor General Dynamics is also a global leader in business aviation thanks to its Gulfstream segment. Epstein says combat systems has been a strong segment in 2019, providing upside to both revenue and operating margins. Looking ahead, the company’s pristine balance sheet and strong cash flow provide financial flexibility for both potential acquisitions and increased capital returns. Bank of America is projecting 9% EPS growth in 2020 and 2021. General Dynamics has a 16.7 P/E ratio. Bank of America has a “buy” rating and $220 price target for GD stock.
Value stocks have lagged the market and the global auto industry has been in a slump, but you wouldn’t know it by looking at CarMax stock. Shares of the used vehicle retailer are up 32.5% year-to-date, and analyst John Murphy says there’s plenty more upside ahead. Murphy says CarMax is one of the few auto stocks currently experiencing cyclical growth drivers, including a record number of off-lease and trade-in vehicles hitting the market in 2019 and beyond. CarMax has a 16.4 P/E ratio. Bank of America has a “buy” rating and $150 price target for KMX stock.
Lennar Corp. (LEN)
Like larger competitor D.R. Horton, Lovallo says there are plenty of things to like about homebuilder Lennar. He says the company’s “everything’s included” strategy differentiates it from other homebuilders and helps the company decrease build times and maximize production. In addition, its well-executed land development has helped it beef up margins. Lovallo says Lennar’s aggressive 2019 guidance is hinging on a big fourth quarter, which creates some risk in the near-term. Lennar has a P/E ratio of just 7. Bank of America has a “buy” rating and $55 price target for LEN stock.
Noble Energy (NBL)
Oil and gas producer Noble Energy is one of the higher-risk stocks on the Value 10 list given its lack of profitability. However, analyst Doug Leggate says Noble has a huge company-specific bullish catalyst ahead in its Leviathan project in the East Mediterranean, which should begin production by the end of 2019 and could be valued at $3 billion. In addition, U.S. onshore operations should be self funding by 2020. Noble has a forward P/E ratio of 35.2. Bank of America has a “buy” rating and $41 price target for NBL stock.
Travelers Companies (TRV)
Analyst Jay Cohen says Travelers is one of the best-managed insurance companies under his coverage and projects 12.5% return on equity over the next two years. A second-quarter earnings miss was due in part to higher-than-expected weather-related claims, a factor Cohen says is temporary. He says Travelers has a clean balance sheet, and aggressive buybacks help support EPS growth of 22.6% in 2019 and 12.3% in 2020. Travelers has a 14.6 P/E ratio. Bank of America has a “buy” rating and a $165 price target for TRV stock.
United Rentals (URI)
United Rentals is the largest equipment rental company in the world. Analyst Ross Gilardi says equipment rental is a secular growth market and the pricing outlook for the industry appears to be stable. He says United’s aggressive recent acquisitions of regional rental competitors is a bullish sign that management sees solid demand in the next couple of years. Gilardi is projecting EPS growth will ramp from 16.8% in 2019 to 26% in 2021. United Rentals has an 8.2 P/E ratio. Bank of America has a “buy” rating and $15 price target for URI stock.
Valero Energy Corp. (VLO)
Valero is the largest independent oil refiner in the U.S. Leggate says Valero’s exposure to heavy oil, its diversified operations, its excess free flow, its aggressive capital returns and discounted valuation make it an excellent defensive play within the refiner group. Valero management has committed to returning between 40% and 50% of cash flow to shareholders in 2019 and beyond. Valero has a P/E ratio of just 12.9 and a dividend yield of 4.6%. Bank of America has a “buy” rating and $110 price target for VLO stock.
Cimarex Energy (XEC)
Leggate says Cimarex is one of the most attractive stocks within the energy sector due to its valuation, its well-managed balance sheet and its impressive asset portfolio. Cimarex appears to be ahead of schedule on its full-year goal of 80 new wells. Leggate says 2019 is a transition year as management navigates bottlenecks, but free cash flow yield should improve in 2020 and beyond. Cimarex has the lowest P/E ratio of and stock on the Value 10 list at just 6.5. Bank of America has a “buy” rating and a $75 price target for XEC stock.
Best value stocks to buy now:
- BB&T Corp. (BBT)
- D.R. Horton (DHI)
- General Dynamics Corp. (GD)
- CarMax (KMX)
- Lennar Corp. (LEN)
- Noble Energy (NBL)
- Travelers Companies (TRV)
- United Rentals (URI)
- Valero Energy Corp. (VLO)
- Cimarex Energy (XEC)