3 Best Value Stocks to Buy in Bear Markets

April 27, 2022
By The Investing Insider Staff

Growth stocks have outperformed Value stocks in the last few years.

In 2022, however, investors are favoring Value stocks. The expected post-pandemic economic boom and the Fed rate hikes will support these stocks. Several tech companies, such as Meta (Facebook), NVIDIA, and Alphabet, have seen a drop in stock prices due to their high valuation levels, as their future earnings seem to have become uncertain.

Interest rates have a major influence on stocks. Unlike growth stocks, when future earnings are discounted, value stocks' earnings are less susceptible to rising interest rates.

Another issue that harms Growth stocks more than Value stocks is inflation. Value stocks can absorb the rise in input costs or pass it on to the consumers. A few sectors that investors may favor are Energy, Real Estate, and Financials.

Here are some of the Stocks trading at good valuations with high potential for growth

1. Verizon (VZ)

Investment Rationale

In recent years, telecom stocks have fallen out of favor as investors have favored names with greater growth potential in the technology and communications sectors. However, currently, investors are putting a premium on current earnings and cash flows above future growth. Verizon, with a price-to-earnings ratio of 10 and a dividend yield of 4.8 %, meets the demand. It also has high growth potential as the long-awaited 5G rollout cycle is expected to eventually bear results. The three leading businesses (Verizon, AT&T, and T-Mobile) are currently close to reaching a competitive equilibrium in this area.

Telecom carriers invest a remarkable amount of money in developing the networks they operate today; and will have to continue to invest heavily in Capex to stay up with technological advancements. However, the capital expenditures and infrastructural requirements create a significant barrier to entry.

Key Risks

VZ is heavily reliant on debt funding, with long-term debt of $140 billion. Ideally, a 1% increase in its interest rate should result in $1.4 billion in increased interest costs; However, Verizon's management stated that most of its debt is fixed-rate. Therefore, rising interest rates would have little impact on the company's debt obligations.

Source: VZ Investor Presentation

Verizon's robust free cash flows (which have varied around US$20 billion over the previous three years) are good enough to service its debt. As a result, Verizon's ability to pay its yearly dividends, which have typically been approximately US$10 billion, should not be jeopardized by debt payments.

Valuation

It has a P/E ratio of 9.29, which is higher than AT&T but lower than T-Mobile. On the other hand, Verizon has the highest ROCE (Return on Capital Employed) among its peers, at about 30%. Furthermore, VZ has a dividend yield of 5.09%.

 

2. Prudential Financial (PRU)

Investment Rationale

Insurance firms like Prudential are one of the finest businesses to protect yourself from rising interest rates. Insurance firms put a significant amount of their premiums into fixed-income assets like corporate and government bonds. The companies gain a larger yield and profit as interest rates climb. After facing a decade of a constant zero-interest-rate environment, things are finally looking better for these companies.

Source: Company Fillings

Key Risks

Catastrophic occurrences may raise claims, diminish assets values, or hurt Prudential's investment portfolio in other ways. If property prices rise owing to inflation, the severity of claims from catastrophic occurrences may increase.

Valuation

Price to Book value is usually used to compare financial companies. Prudential has a P/B value of 0.67, the lowest among its peers. Moreover, its ROE is 11.92%, which is more than the industry median. Prudential has also seen a 3-year CAGR revenue and net profit growth of 4% and 24%, respectively.

3. Safe Bulkers (SB)

Investment Rationale

Safe Bulkers generates revenue by carrying coal, grain, and iron ore throughout the world using a fleet of 40 bulkers. The company now has a total capacity of around 4.6 million DWT (deadweight tonnage). Safe Bulkers stock is expected to rise due to the favorable market environment and increased demand for cargo shipping. Infrastructure initiatives will be boosted by macroeconomic conditions, which will help the company. Dry bulk carriers are used to deliver raw materials for infrastructure projects.

Shipping firms are often heavily leveraged, and they develop over time by taking advantage of the industry's seasonality. Safe Bulkers, for example, took advantage of the unusually high freight rates seen in mid-2020 to cut their overall debt by 35% compared to 2020.

Source: Company Fillings

Key Risks

Since 2015, Safe Bulkers hasn't paid any dividend to its shareholders. The company will also be affected if the government infrastructure funds are diverted towards the war effort.

Valuation

SB is trading at 0.77 times its book value, the lowest amongst its peers. Its ROCE is 10.5%, and its net income has grown by an impressive 84% CAGR in the last three years!


-Investing Insider Staff
This article is informational purposes only and is not investment advice.  See full disclaimer here
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