It has been more than 10 years since value has outperformed growth on a relative basis, but there are some on Wall Street that feel that in an aging bull market, there could be demand for value stocks in 2018. Remember, value stocks tend to trade at a lower price relative to its fundamentals, typically dividends, earnings and sales. Common characteristics include a high dividend yield, low price-to-book ratio and low price-to-earnings ratio.
We screened the Merrill Lynch research universe looking for companies that have value characteristics, are rated Buy and also pay dividends. We found four companies that fit the bill pretty well. All make good sense for stock investors looking to lower risk in a market that is trading at about 18 times forward earnings.
This iconic blue chip industrial was a huge laggard in 2017, and after cutting its dividend the most since the Great Depression it may be offering long-term investors a very promising entry point. General Electric Co. (NYSE: GE) is a highly diversified, global industrial company. Its businesses are organized broadly under these segments: Power, Renewable Energy, Energy Connections, Oil & Gas, Aviation, Healthcare, Transportation and GE Capital.
The company’s products and services include power generation equipment, aircraft engines, locomotives, medical equipment and compressors. Over half of the business is tied to service and aftermarket support.
The road back for GE can be a long one, but the chances of the company ever going out of business are very remote. Merrill Lynch said this after the company held its analysts day back in November:
We lower our price objective to $23 (based on updated sum of the parts) but we maintain our Buy for the following reasons: 1) The dividend cut is now behind us; 2) While the company’s lower 2018 outlook versus our and consensus’ forecast was not expected, we view the current outlook as the “true reset”; 3) GE is pre funding $6 billion of its pension obligations in 2018 by issuing debt, ameliorating some of the concerns about off-balance-sheet liabilities; 4) GE did not provide a lot of detail on potential spins/divestitures beyond highlighting part of Healthcare IT, Current & Lighting, Transportation, and its stake in Baker Hughes (BHGE); however, we continue to think that the portfolio optionality goes well beyond that. 5) Our sum of the parts of $23, while lower, still points to 20%+ upside relative to the current stock price.
GE investors are now paid a 2.75% dividend. The Merrill Lynch price objective of $23 compares to the Wall Street consensus price target of $21.99. The shares traded early Tuesday at $17.65 apiece.
This domestic car company could continue to benefit from the environmental disasters dating back to last summer. General Motors Company (NYSE: GM) is the world’s largest automaker, with annual volume of almost 10 million units. The company reports its operations in four regions: North America, Europe, South America and International. And it now relies on only four core brands in its key North American segment (Chevrolet, GMC, Buick and Cadillac).
General Motors also sells vehicles to dealers for consumer retail sales, as well as to fleet customers, including daily rental car companies, commercial fleet customers, leasing companies and governments. In addition, it offers connected safety, security and mobility solutions, and information technology services. The company, through its subsidiary, General Motors Financial Company, provides automotive financing services.
Trading at an ultra-low 6.97 times estimated 2018 earnings, the stock makes good sense for investors looking for solid value.
Shareholders in GM are paid a very solid 3.51% dividend. Merrill Lynch has a $57 price target, and the consensus target for the stock $46.70. The shares traded at $41.35 Tuesday morning.