Jefferies Top Value Buys May Be Safe Options for a Dangerous Summer
During the more than 10-year run of this bull market, one thing has been painfully obvious to long-time investors: value stocks have woefully underperformed growth stocks. Value stocks are those that tend to trade at a lower price relative to their fundamentals (including dividends, earnings and sales). Given the market uncertainty, most of which is directly tied to the current trade issues, it makes sense to look at value and perhaps shift some capital there.
Each week, Jefferies presents some of its top value ideas, and this week’s selections are chock full of well-known companies that, for a variety of reasons, have landed in value territory. They all make sense for accounts looking to stay in equities despite being nervous about the current market turmoil.
Advance Auto Parts
This top stock has been hit hard this spring and now offers a great entry point. Advance Auto Parts Inc. (NYSE: AAP) is the second largest auto parts retailer in the United States, Puerto Rico and the Virgin Islands. It operates more than 4,000 stores under the Advance Auto Parts brand, as well as nearly 200 AutoPart International locations. It sells to both do-it-yourself customers and professional installers.
The stock has been hammered despite a report in May of better than expected quarterly earnings that were higher year over year. The Jefferies team likes the current setup and noted this:
We recently spent the day with management and come away from our discussions confident that the company is on track to see operating margin improvement (we model 9.8% in fiscal year 2020 vs. 7.8% in fiscal year 2018) from enhanced supply chain management, merchandising initiatives and operating efficiency. That said, management also noted that a slower transition to typical Spring weather is likely to create some regional softness.
Advance Auto Parts pays investors a tiny 0.16% dividend. The Jefferies price target for the stock is a lofty $195, while the Wall Street consensus target of $193.56 is not far off. The shares ended Monday’s trading at $153.17 apiece.
Many on Wall Street love this firm’s growth potential near term and especially long term. BlackRock Inc. (NYSE: BLK) is the largest asset manager in the world, with more than $5 trillion in assets under management. Its acquisitions of Merrill Lynch Investment Management and iShares transformed it from a fixed income manager into a multi-product and multi-channel giant, with roughly 40% of its assets under management overseas. It has leading franchises in exchange-traded funds (ETFs), institutional fixed income, alternatives and cash. It also operates Solutions, a leader in risk analytics.
The company’s strong historical and prospective dividend growth is underpinned by the high-quality and diversified business model. Dividends have increased 18% annually over the past 10 years. Dividend growth likely will moderate but remains solid in the low teens, consistent with expectations for earnings growth in the years ahead.
Shareholders of BlackRock receive a 3.14% dividend. Jefferies has a price objective of $491, and the posted consensus target price is higher at $512.67. The stock closed at $419.90 a share on Monday.