Numerous times during the long bull market, the market mavens and pundits have declared that it was time for value stocks to take the lead, as growth and momentum stocks were overbought and overvalued. Each time the value stocks became the value trap and investors got burned. In what is a classic Wall Street expression, “This time may be different.”
By definition, a value stock is a security trading at a lower price than what the company’s performance may otherwise indicate. Investors in value stocks attempt to capitalize on inefficiencies in the market, since the price of the underlying equity may not match the company’s performance.
A new Goldman Sachs research piece acknowledges that value stocks have given the market head fakes numerous times over the past few years, and the analyst concedes that the best of the best is probably the place to look. The report noted this:
Fast forward another year, and Value as a factor continues to languish. Indeed, even as the market surged to start the year and Value had a nice gain in the first few trading days, the trend quickly reversed and Value once again is the worst performing factor across our Investment Profile (IP) suite. On the back of the weak performance, Value continues to trade cheaply even relative to its own history, which is unique across the factors we track. However, valuation in itself is not a catalyst, and we could have made a similar comment numerous times in recent history only to have it not work.
The report also noted that higher two-year and 10-year yields are possible positive factors for value, and it also said this regarding valuations:
What is even more significant in our view is if you isolate only those companies that screen as cheap value that have had positive EPS momentum, the performance of the factor looks completely different and would have even outperformed on a net basis over the past few years.
The Goldman Sachs team screened its Buy-rated value stocks with upside potential to current estimates. A dozen stocks made the cut, but here we zeroed in on five that have the best name recognition for investors.
This top security company is a well-known protector of homes and businesses. ADT Inc. (NYSE: ADT) is the largest residential and second-largest commercial security monitoring company in North America. The company serves over 7 million customers, installing over a million systems per year. Roughly 94% of revenue is generated in the United States, with the remainder from Canada.
The company reported good first-quarter results with revenue and adjusted EBITDA both slightly ahead of estimates, and solid free cash flow. Guidance for 2019 was maintained and calls for 0% to 2% year-over-year adjusted EBITDA amid investments in do-it-yourself, branding and commercial.
Goldman Sachs has a giant $12 price target on the shares, while the Wall Street consensus target is lower at $9.75. The shares closed on Thursday at $6.00.
This could be a solid play for more conservative accounts looking to the mining segment. Alcoa Corp. (NYSE: AA) produces and sells bauxite, alumina and aluminum products. The company offers aluminum sheets for the production of cans for beverage and food.
Alcoa also engages in the aluminum smelting, casting and rolling businesses; generation and sale of renewable energy; as well as provision of ancillary services. Formerly known as Alcoa Upstream, the company changed its name to Alcoa in October 2016.
The Goldman Sachs price target is set at $36, while the consensus target is $35.25. The shares closed at $23.13 on Thursday.