For years, Wall Street analysts and equity strategists have anticipated the return of value stocks as the market has moved higher, and for years those stocks have continued to underperform growth stocks. However, that may be ready to change in 2020, as almost every metric from valuations to earnings for the growth arena may be ready to roll over.
Value stocks typically are defined as shares of a company with solid fundamentals that are priced below those of its peers, based on analysis of price-to-earnings ratio, yield and other factors. The Merrill Lynch Value 10 portfolio is quantitatively generated and is based on the firm’s proprietary Merrill Lynch versus consensus earnings surprise model, plus three additional screening criteria. The universe the analysts use is the S&P 500.
We screened the Value 10 portfolio for the five stocks with the lowest price-to-earnings ratio on a trailing 12-month basis. We found five top picks that could be big 2020 winners. All are rated Buy at Merrill Lynch.
D.R. Horton
This is one of the highest volume builders in the United States and a top pick at Merrill. D.R. Horton Inc. (NYSE: DHI) is the largest public builder by closings in the country, delivering roughly 52,000 homes in 2018. It is positioned in 79 metropolitan markets in six major regions and develops single-family homes, primarily for first-time and move-up buyers.
Approximately 80% of revenue comes from the Southeast, South Central and West regions, all of which continue to see very solid growth. The company also provides mortgage financing and title agency services to homebuyers.
The company boasts some of the highest quality and fastest growth potential via entry-level exposure and competitively advantaged market share, and it can weather cost pressures with strong free cash flow. Most on Wall Street see upside to estimates from the usage of its $1 billion operating cash flows per year. The company’s priorities are share buybacks, debt reduction and bolt-on mergers and acquisitions. At 12.8 times trailing earnings, the stock looks like a bargain.
Shareholders receive a 1.26% dividend. The Merrill Lynch price target for the shares is $65, while the Wall Street consensus target is much lower at $53.09. The stock closed Wednesday’s trading at $55.34 a share.
E*Trade Financial
This top discount brokerage firm could be offering investors a solid entry point. E*Trade Financial Corp. (NASDAQ: ETFC) is a financial services firm that offers competitively priced brokerage, investing and banking solutions to individuals. The firm has expanded its brokerage and trading offering to banking products, via E*Trade Bank, and investing products and solutions.
E*Trade offers its services online, at branches and through its network of representatives, investment professionals and advisors. The firm has grown organically and via acquisitions throughout its history. The rising market could be a huge boon for the company and investors, and the company’s consistent ad campaigns have helped to drive new customers.
The recent consolidation in the industry also could be a tailwind for the company, as other financial giants look to expand their offerings and increase assets under management.
The stock trades at 10.7 times earnings and yields 1.24%. Merrill Lynch has a $45 price target, while the posted consensus target is $43. The shares were last seen trading at $45.26 apiece.
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