After an impressive five-year run, growth stocks have taken a break, much like the once hard-charging Peloton. The maker of pricey interactive bikes and exercise equipment has seen its stock plummet 75% over the past year amid a sharp reversal in demand and sales as folks are getting out more, leaving their bikes behind.
Adding insult to injury, the company recently lost its chief financial officer and cut 2,800 jobs.
The meteoric rise and crash of Peleton shares is emblematic of the trend in growth stocks. Other big names like Google and Amazon helped drive growth well ahead of value in recent years. But the performance of growth stocks has trailed value in 2022. In January, the Russell 1000 Value Index outran growth by 6.2 percentage points, its best relatively monthly performance since 2001, noted Bank of America. And the outperformance is only accelerating. Growth stocks will eventually get back into the game. Till then, it appears to be value’s time to shine, as many analysts think the group is in the early innings of a long run.
What’s driving the shift to value? Value stocks are especially sensitive to a recovering economy and many analysts have been raising earnings estimates for value companies, which is fueling rising stock prices. Many analysts see GDP growing to a still robust 3.5% to 4% this year from 5.7% last year and to 3.5% in 2023. Value bulls like David Sekera of Morningstar also aren’t sweating the prospect of elevated inflation or rising interest rates. In fact, those factors are seen as economic tailwinds for value stocks. The value rally is being led by financials and energy as investors begin focusing on cash-flow generating companies.
Sekera sees inflation “continuing to run for the next several months” before moderating and settling in at around 3.6% by the end of the year, compared with its current 7%. And even if the Federal Reserve continues to raise rates as expected, possibly at least three to four times this year, rates would stay slightly below or above 1% federal funds rate.
“The value category coming into the year was the most undervalued and we still think it offers the most opportunities for investors in today’s market,” said Sekera. “The economic and inflation outlook that we have show that the value stocks should have good economic tailwinds for the next few years.”
Analysts like Sekera see plenty of intriguing opportunities in the value category, both here and abroad, that can offer returns of at least 25% over the long term. Some of the names investors are buying include AT&T, Liberty Media and Germany’s Fresenius. Importantly, these stocks have tangible catalysts that could propel them well above the expected returns of growth and the market returns, analysts say.
AT&T (T)
Morningstar’s Sekera thinks the telecom giant, trading at $24.13 a share, is “significantly undervalued” compared to his $36 fair value estimate. Shares of AT&T are down sharply over the past year. But Morningstar sees “a couple of catalysts that’ll help the company unleash that shareholder value,” he said.
Shares were roiled recently when management announced details of its plan to spin off its WarnerMedia unit, which houses HBO, in a $43 billion merger with Discovery (DISCA). Any merger comes with risks, of course, but income investors didn’t like that the company also slashed its annual dividend to $1.11 a share from $2.08.
But Sekera points out that AT&T’s yield, at more than 8%, remains fairly high. The analyst also argues that management’s moves to focus on AT&T’s traditional and strong communication business is a smart one, given, for example, his bullish view of the consumer broadband market. While overall fourth-quarter revenue for AT&T fell 10% year-over-year, telecommunication grew revenue 2.4% in the period.
AT&T is selling for 8.74 times trailing earnings, and analysts have an average price target of 29.14, according to Yahoo Finance.