Investing

J.P. Morgan Sees Nine Value Stocks Outperforming Growth Stocks in 2014

With time quickly running out on a fantastic year for investors, the 24/7 Wall Street staff is busy scouring through the research of the firms we cover. After the best year for the S&P 500 since 1997, we wanted to find out which firms had a different angle on investing for next year.

Most of the firms are generally bullish, and many are touting cyclicals, especially technology. We have been looking for ideas that are outside the proverbial investing box.

In a new research report, the equity strategy team at J.P. Morgan has come up with outside-the-box ideas for investors that we have not seen from other big Wall Street houses. They think that value stocks could outperform growth stocks in 2014. They anticipate Gross Domestic Product (GDP) growth to broaden in 2014, and this implies that growth will be less scarce in terms of companies achieving better revenue profiles. Therefore investors may very well less willing to chase traditional growth stocks.

They have identified nine “value” stocks to buy that fit the following criteria:

  1. In the S&P 500 Pure Value Index
  2. Market cap above $3 billion
  3. Buy rated by J.P. Morgan analysts
  4. Positive upside to J. P. Morgan price targets

Best Buy Co. Inc. (NYSE: BBY) makes the list and had a fantastic 2013. The stock more than tripled as the company met its rivals head-on with price-matching policies that largely eliminated the advantages of its competitors. More importantly, its store-within-store formats for makers of popular mobile devices and computers have drawn interest from major manufacturers, letting Best Buy take advantage of its retail space to give it competitive advantages that online retailers cannot match. Investors are paid a 1.7% dividend. The J.P. Morgan price target for the stock is $49. The Thomson/First Call estimate is at $48. Best Buy closed Friday at $40.17.

Capital One Financial Corp. (NYSE: COF) is a top financial name to meet the standards. With a focus on a very strong credit card and retail banking business, the company is expected to continue to post strong growth even after the Volcker Rule starts to take effect. The bank pays investors a 1.6% dividend. The J.P. Morgan price target is $80, the same as the consensus target. Capital One closed Friday at $75.78.

Ensco PLC (NYSE: ESV) is a top energy name that fits the bill. The company recently took delivery of ENSCO 121, the second of four ultra-premium harsh environment jackup rigs in its ENSCO 120 Series. ENSCO 121 is an enhanced version of Keppel’s proprietary KFELS Super A Class design. The rig has been contracted in the North Sea at a day rate of approximately $230,000. Shareholders are paid an outstanding 5.5% dividend. The J.P. Morgan price target stands at $70, and the consensus is posted at lower at $62. Ensco closed Friday at $56.59.

FedEx Corp. (NYSE: FDX) had a rough holiday delivery season like its peers. The delivery debacle aside, FedEx is poised to see solid growth as economies around the globe are expected to gain traction in 2014. Investors are paid a small 0.4% dividend. The J.P. Morgan price objective is $152, while the consensus figure is at $152.50. FedEx closed Friday at $143.43.

Harman International Industries Inc. (NYSE: HAR) is a top consumer discretionary name to make the list. With a strong return of 91.9% over the past year, positive estimate revision trends and long-term expected earnings growth rate of 20.5%, Harman looks like an attractive investment opportunity. Investors are paid a 1.4% dividend. J.P. Morgan has a $97 price target, and the consensus is posted at $90.50. Harman closed Friday at $83.36.

Mondelez International Inc. (NASDAQ: MDLZ) manufactures and markets snack food and beverage products worldwide. The primary branded portfolio includes Oreo, Nabisco and LU branded biscuits; Milka, Cadbury Dairy Milk and Cadbury branded chocolates; Trident branded gums; Jacobs branded coffee; and Tang branded powdered beverages. Shareholders are paid a 1.6% dividend. J.P. Morgan has set a $37 target, and the consensus is at $36. The stock closed Friday at $34.91.

Peabody Energy Corp. (NYSE: BTU) has had a rough two years and may be poised to turn the corner in 2014. Demand from China is expected to increase in 2014. Peabody announced it has entered into a strategic partnership with China’s Shenhua Group, which is the largest coal distributor in the world. Shenhua and Peabody will form a joint venture that will begin supplying coal in 2014. Investors are paid a 1.9% dividend. J.P. Morgan has a strong $27 price target, and the consensus is at $24. Peabody closed Friday at $19.25.

Phillips 66 (NYSE: PSX) is another top energy name on the list. Spun off from former parent company ConocoPhillips, Phillips 66 has 15 refineries with a net crude oil capacity of 2.2 million barrels per day, 10,000 branded marketing outlets and 15,000 miles of pipeline systems. Shareholders receive a 1.90% dividend. J.P. Morgan has set an $81 price target. The consensus price target is $69. The stock closed Friday at $74.75.

Tenet Healthcare Corp. (NYSE: THC) rounds out the list of value names that could outperform growth in 2014. The company owns and operates acute care hospitals, ambulatory surgery centers, diagnostic imaging centers, urgent care centers and related health care facilities in the United States. J.P. Morgan has a $50 price target, and the consensus figure is set at $50 as well. Tenet closed Friday at $40.89.

The J.P. Morgan value over growth call for next year is somewhat contrarian, and it makes sense. Growth has outperformed for the past six years, but has underperformed this year. Investors are looking for names that, plain and simple, are not as pricey. Rotating some portfolio capital to value may be a very smart move after a huge 2013.

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