With a few exceptions, value investing as a theme has underperformed growth investing for years, as we saw in 2022. In fact, the divergence between growth and value stocks is at its highest level since 1991.
Andrew Greenbaum, senior vice president of U.S. product management at Jefferies, sees opportunity in the record divergence between growth and value. The analyst, who recently spoke with MarketWatch, pointed to earnings corrections among constituents of the Russell 1000 Growth and Russell 1000 Value indexes to support his assertion.
Specifically, Greenbaum said, “We're getting to the point where there are fewer upward revisions in favor of growth, and there are more relative upward revisions in dollar terms than in the past,” which is a strong indicator of the future. It was pointed out that there is a tendency to In other words, value stocks can quickly outperform.
Notably, several once-growth companies are now mostly value stocks as they battle a severe economic slowdown. Amid the record divergence between value and growth stocks, I think two value stocks are worth buying: Ford Motor (F) and PayPal Holdings (PYPL).
Why PayPal is a stock worth buying
Just a few years ago, no one probably could have imagined that PayPal would be talked about as a value stock today. The company's revenue grew 20.7% and 18.3% in 2020 and 2021, respectively, and entered 2022 at a trailing-twelve-month (NTM) price-to-earnings (PE) multiple of 40x. We associate it with “value stocks.”
But things have changed. Shortening to 2024, PayPal achieved his second consecutive year of single-digit revenue growth. Analysts currently expect the company's sales growth to be below 10% in both 2024 and 2025.
PayPal stock closed in the red for the third year in a row. The company's shares are expected to post a year-to-date loss in 2024, following a sharp decline earlier this month after the fourth quarter results.
And PayPal continues to face some challenges. For example, digital payments companies are feeling pressure on their take rates (the fees they charge to process transactions) as competition increases. The company's branded business has been under particular pressure, with margins further compressed.
PayPal's 2024 guidance threatens the market
Amid the uncertain economic environment, PayPal did not provide full-year revenue guidance for 2024, but said it expects full-year adjusted earnings per share (EPS) to be similar to 2023. This forecast was significantly lower than street expectations.
The company has new management, with CEO Alex Criss driving profitable growth. But the turnaround could take time, and in the meantime, PayPal stock remains unpopular with analysts. Wall Street gave the stock a consensus rating of “fair buy” and an average price target of $69.17, 16.9% above Friday's closing price.
That said, with NTM's PE multiple of around 11.4x, I think the worst is priced in for PYPL stock, making it a good stock to buy and hold. Even with all the pessimism about growth and margin compression, the company's valuation is too low to ignore at this price.
Ford: Another cheap stock worth buying
PayPal is a recent entrant into the value space, but legacy automakers including Ford and General Motors (GM) have been known as value stocks for quite some time. For example, Ford's NTM P/E ratio is 6.52x, which is even lower than its three-year average price of 8.5x.
One of the main reasons Ford stock has fallen and is flat is because the company's profits have stagnated, and analysts don't expect this trend to improve anytime soon. Ford expects adjusted pretax profit of $10 billion to $12 billion in 2024, compared with the $10.4 billion announced in 2023. Wall Street analysts expect the Detroit giant's adjusted EPS to decline 7.5% in 2024 and remain unchanged in 2025.
There are concerns that Ford's profitability may be peaking, but CEO Jim Farley believes that's far from the truth. Speaking on the company's fourth-quarter earnings call, Farley called 2023 a “strong year,” but added, “Let's be clear: We are nowhere near Ford Motor Company's revenue potential.” he emphasized. And this year, we're also in a very good position in terms of revenue growth and profitability. ”
The CEO expressed a similar view during the company's third-quarter earnings call, but his claims did little to soothe sentiment among the analyst community. Ford has received a consensus rating of “Hold” from 17 analysts covering the stock. The average price target is $13.74, 13.1% above Friday's closing price, but the lowest price target is $10 and the highest price target is $21.
Why is Ford a good stock to buy?
Ford's electric vehicle (EV) business is eating into the huge profits generated by the company's other two car divisions, Ford Blue and Ford Pro. The company expects the deficit in its EV business to widen further in 2024, but said it is working on developing a new generation of EVs and believes it will be profitable within a year of its launch.
Overall, with a mid-single-digit P/E and nearly 5% dividend yield, I think Ford is a stock worth buying for value investors, especially those looking to include high-dividend stocks in their portfolios. I am.
As of the date of publication, Mohit Oberoi's titles were F, GM, PYPL. All information and data in this article is for informational purposes only. For more information, please see the Barchart Disclosure Policy here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
