Value stocks are boring.
Holding value stocks these past two years has felt like pulling up to a parking lot full of Teslas in a 2006 Toyota Camry.
The pandemic brought in a wave of brand-new investors… and they don’t want Toyota Camrys. They want Teslas and Ferraris.
Something shiny and flashy, however, doesn’t always translate into a solid investment.
Of course, growth stocks can produce positive returns. After all, highfliers get that designation for a reason.
But they don’t always have the fundamentals to justify their high prices. So you end up paying more than they’re worth, betting that they’ll live up to their potential eventually.
When they don’t… you can lose your shirt in the free fall.
Value stocks may not be the sexy sports cars of the investment world, but they’re reliable and they work.
They can produce receipts – share prices built off actual earnings and not just promises.
Growth stocks might seem more exciting, but are you looking to skydive with a parachute that may have a hole in it… or are you looking to make serious money and build your wealth?
If the latter, you’ve come to this market at a great time.
In 2023, boring is better.
We’re about to see a serious shift this year – one that you can prepare for (and benefit from) as long as you load up on some value stocks.
Here’s what’s happening and how you can play it…
The Perfect Value Storm
When new investors entered the market during the pandemic, they came in at a great time for growth stocks.
The Fed had just cut interest rates to historic lows…
When interest rates are low, businesses are more likely to borrow money to fund future growth – perfect for stocks that hang their worth on future prospects.
Now, though, things are changing.
Take a look at the performance of growth stocks versus value stocks last year…
The VTV is the Vanguard Value Index ETF, and the VUG is the Vanguard Growth Index ETF.
As you can see, both saw gains throughout 2021 and made similar moves.
But while the VTV dipped only slightly during the market correction, the VUG went into a nosedive.
In 2022, inflation rates are high… and the Federal Reserve will fight this by raising interest rates.
Present valuations of growth stocks are based on expected earnings and calculated using current rates. When rates go up, those valuations go down, and shares lose value.
On the other hand, value stocks are perfectly suited for times of inflation and higher rates.
Profits from value stocks come sooner, and these companies have established track records of sustainable financials.
And value stocks have the ability to improve margins and cut costs during times of inflation. But for growth stocks, if they aren’t making any money, there isn’t any room to cut costs… Their expenses go up, and their revenue remains flat.
The market naturally cycles between these two different kinds of stocks, but at the end of the day, value stocks are what they say they are – valuable.
Since the correlations between interest rates and value stocks and between interest rates and growth stocks have been demonstrated time and time again, investors are likely to hop back into value stocks sooner rather than later.
So to get ahead of the curve, let’s look at three of the best value names you should consider adding to your portfolio.
No. 1 – Citigroup
As one of the largest banks in the country, Citigroup (NYSE: C) is well-known among investors.
Based in New York City, Citigroup has been serving customers for more than 200 years.
Like its peers, the company offers loans in addition to banking, wealth management and brokerage services.
But unlike its peers, it has had a rough go of it recently.
In 2020, Citigroup was hit with a $400 million fine for mismanagement and flaws in its system that led to huge financial errors.
This is a mature company, though. And when things aren’t going in the right direction, it has room to pivot.
So that’s what Citigroup did.
It appointed a new CEO – Jane Fraser – who has already put a strategic plan in place to get the bank back to its former glory.
Under her guidance, the company has invested $1 billion into improving its internal controls and addressing weaknesses in its systems.
She also exited 13 markets that had the lowest growth rates, shifting resources to stronger areas.
The business has also been recognized by Global Finance magazine as the world’s best digital bank. In an increasingly digital world, this is a great spot for Citigroup to find itself.
The market has been staying away from Citigroup because of its controversies. All the while, however, Citigroup has been putting up consistent earnings – beating analyst estimates throughout 2021.
When it comes to quality… the bank delivers.
For starters, it is a great value. It is currently trading at just over six times earnings. Not to mention, its price-to-book (P/B) ratio is 0.74, so it’s trading below the value of its assets.
Plus, it has a solid operating margin of 27.4% – which means after expenses are extracted, it makes that percentage in profit from every dollar.
Because of the restructuring, Citibank has reported pretty flat revenue. But the turnaround is happening fast, and the company should find itself in a solid position from here on out.
Don’t forget that, like many other value stocks, Citigroup pays a dividend. Its yield is 3.15%.
So while you wait for shares to go higher, the company will pay you for your patience!
And since it’s exceptionally cheap right now, there’s no better time to pick up this stock.
No. 2 – KB Home
Next up on our value stock list is KB Home (NYSE: KBH).
KB Home is a U.S. homebuilder with operations in Arizona, California, Colorado, Florida, Nevada, North Carolina, Texas and Washington.
And it couldn’t be a better time to be a homebuilder.
An estimated 7 million homes were sold in 2021, the highest total in 15 years (and the second-highest total during that span was recorded in 2020).
A good chunk of those homes were purchased by first-time homebuyers.
However, the housing market was hard to crack for many.
More than a quarter of would-be first-time homebuyers were unsuccessful at purchasing a home in 2021, compared with just 15% of all homebuyers.
Because so many would-be buyers put their purchases off in 2021, 72% of these prospective first-time buyers aim to buy this year.
This creates an exciting opportunity for homebuilders like KB Home.
It ended 2021 with a backlog of 10,544 homes, up 35% from 2020.
And potential housing revenues from backlog grew 67% since the prior-year period, reaching $4.95 billion – the highest fourth quarter level since 2005.
KB Home increased its revenue from $4.2 billion in 2020 to $5.7 billion in 2021.
It is currently trading at just over nine times earnings – far lower than the S&P 500 average of 29 times earnings.
And its forward price-to-earnings ratio is only 4.2…
It pays out a dividend, which it has increased twice in the last two years.
KB Home is a profitable company reporting strong growth. And the real estate market is projected to get even hotter in 2023… a sign that KB Home won’t stay undervalued for long.
No. 3 – Renewable Energy Group
Caring for the environment has become a global and governmental issue.
This has spurred superpowers like the U.S. to strike up more clean energy deals than ever before.
The amount of renewable capacity added in the next five years is expected to be 50% higher than the amount added in the last five years.
Green is here to stay.
That brings me to my final value stock… Renewable Energy Group (Nasdaq: REGI).
Renewable Energy Group develops and distributes biofuels and renewable chemicals globally.
While the world transitions to clean energy, biofuels will offer a comfortable middle ground between fossil fuels and full-blown electric power.
The company owns and operates 13 biorefineries in the U.S., as well as a handful in Europe.
It hopes to further expand that reach with its recent buyout of diesel and gasoline company Amber Resources.
Amber Resources was based in Southern California – one of the most renewable-focused areas in the world.
The acquisition added 60 million gallons per year of diesel sales to Renewable Energy Group’s portfolio, as well as new distributors.
This should help the company open new revenue streams, and we expect to see an improvement in its fundamentals.
Renewable Energy Group already trades at 11 times earnings.
Its price-to-sales ratio is only 0.72, lower than the industry average of 1.13. Price to sales is a good measure of how much the market values every dollar of a company’s sales.
The lower this ratio is, the more valuable the company would be in the event of a turnaround (which is exactly what we’re expecting from Renewable Energy Group this year).
The government has every incentive to keep investing in clean energy.
And Renewable Energy Group has placed itself in the perfect position to benefit from the world going green… making it a good value stock to add to your portfolio.
Boring Is Beautiful
The market counted value stocks out.
But while the market was distracted with trending names, these value stocks were strengthening their businesses, making money and investing for the future.
And the three value stocks we pointed out today have been beaten down unfairly… Now they’re ready to ride higher.