20 Long-Term Value Stocks With Hulking Upside
In the value stocks versus growth stocks tug-of-war, growth stocks have been the unequivocal winner for the past several years. But that may change soon.
Many are calling for a reversal into value stocks over the next several years. The argument is quite simple: Near-zero interest rates allowed for a near-decade long run in stocks wherein valuations were allowed to run amok. In that environment, growth was rewarded. Value was punished.
Now, though, interest rates are on the rise. And that may put an end to the run in growth stocks. Higher interest rates put pressure on equity valuations and may cause a big shift in money from big multiple growth stocks to low multiple value stocks.
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With that in mind, here’s a list of 20 value stocks that have outsized growth potential in the medium- to long-term.
Long-Term Value Stocks With Hulking Upside: Dicks Sporting Goods Inc (DKS)
Source: Shutterstock
Key Metrics: 12-times forward earnings, 2% dividend yield
The Bull Thesis: When it comes Dicks Sporting Goods Inc (NYSE:DKS), you have a deep value stock that has been beaten up over the past several years due to a misunderstanding regarding the staying power of wholesale distributors in the athletic retail world.
From 2016, DKS stock soared because everyone else in their industry was closing shop, implying huge market share gain potential for DKS. But in 2017, DKS stock dropped like a rock because those market share gains were smaller than expected. Everyone blamed Amazon.com, Inc. (NASDAQ:AMZN) and threw in the towel on DKS and all sporting goods retailers.
But now, DKS is bouncing back. The numbers are improving. The company is building out a private-label division that is doing really well. And Nike Inc (NYSE:NKE) and other athletic brands continue to send DKS a bunch of premium product because DKS remains one of the most important and irreplaceable parts of the athletic retail product distribution model.
As such, DKS has proved its staying power in this industry. At just 12-times forward earnings, DKS stock isn’t priced like a company with staying power. And that is the opportunity in this name.
Long-Term Value Stocks With Hulking Upside: Skechers USA Inc (SKX)
Source: Shutterstock
Key Metrics: 14-times forward earnings, 16.5% revenue growth last quarter
The Bull Thesis: Sticking in the athletic retail world, another misunderstood value stock with big upside potential is Skechers USA Inc (NYSE:SKX). Despite being in the same game as Nike (28-times forward earnings), Skechers trades at just 14-times forward earnings.
Why? Because Skechers is viewed by the market as less cool than Nike. And reasonably so. Nike is everyone’s favorite athletic apparel brand. Skechers? Only little kids and old people wear Skechers, right?
Wrong. Skechers is actually growing more quickly than Nike, and that has been the case for several years now. Most of this big growth is powered by international expansion, but the company’s domestic business is also showing healthy growth.
In other words, Skechers is no longer a brand just for little kids and old people. The company has re-invented itself, and the numbers show that this re-invention is working. From this perspective, at 14-times forward earnings with 16.5% revenue growth last quarter, SKX stock is just too cheap to ignore at present levels.
Long-Term Value Stocks With Hulking Upside: Foot Locker, Inc. (FL)
Source: Mike Mozart via Flickr
Key Metrics: 13-times forward earnings, 2% dividend yield
The Bull Thesis: The last, but not least important, athletic retail name on this list is Foot Locker, Inc. (NYSE:FL). Much like Dicks, Foot Locker has been banged up on Amazon and e-commerce encroachment concerns.
But also like Dicks, Foot Locker has proved its staying power in this dynamic industry. Owing to its large reach and differentiated brand, Foot Locker has been able to bounce back from a rough 2017 to report improved numbers to start 2018. FL stock has responded positively to these operational improvements.
These improvements are here to stay. And considering Foot Locker trades at just 13-times forward earnings versus a market multiple of nearly 17, it looks like the rebound in FL stock has more firepower.
Long-Term Value Stocks With Hulking Upside: Target Corporation (TGT)
Source: Mike Mozart via Flickr (Modified)
Key Metrics: Traffic growth +3.7% last quarter (strongest in 10 years), 15-times forward earnings, 3% dividend yield
The Bull Thesis: Moving on from athletic retail to general retail, Target Corporation (NYSE:TGT) stands out as an undervalued name with improving fundamentals.
The stock is pretty cheap at just 15-times forward earnings and with a 3% dividend yield. Accompanying that attractive valuation are Target’s best operating results in several years. Mostly due to big investments into omnichannel capability and grocery, Target reported 3.7% traffic growth last quarter (the company’s best mark in a decade) and 28% digital sales growth (versus 21% in the year-ago quarter, so the digital business is actually getting stronger).
In other words, Target is an ideal case of strong and improving fundamentals converging on a still-cheap valuation. That combination should lead to Target stock being an outsized winner over the next several quarters, or until valuation catches up to the company’s improving fundamentals.
Long-Term Value Stocks With Hulking Upside: Macy’s Inc (M)
Source: Shutterstock
Key Metrics: Positive comparable sales growth, 10-times forward earnings, 4% dividend yield
The Bull Thesis: In case you haven’t noticed, it’s not just Target. All of retail has been bouncing back recently thanks to general improvements in traditional retailers’ ability to succeed in today’s retail environment through enhanced omnichannel capabilities.
At the heart of this retail resurgence is Macy’s Inc (NYSE:M), the mall stalwart that got killed when mall traffic disappeared in 2015-16. But as mall traffic trends have improved in the back-half of 2017 and into 2018, Macy’s has reported much-improved results. In a sharp turn of events, Macy’s is reporting not just positive comparable sales growth again, but also operating margin expansion.
My theory is that this retail resurgence will continue as Macy’s and other traditional retailers continue to grow their omni-channel businesses. From this perspective, Macy’s stock looks too cheap at just 10-times forward earnings with a 4% dividend yield.
Long-Term Value Stocks With Hulking Upside: Kohl’s Corporation (KSS)
Source: Hailey Pollard via Flickr
Key Metrics: 3.6% comparable sales growth, 14% profit growth, 14-times forward earnings
The Bull Thesis: Macy’s and Target are doing well. But off-price, off-mall retailer Kohl’s Corporation (NYSE:KSS) is doing arguably even better.
Last quarter, Kohl’s reported comparable sales growth of 3.6%, gross margin expansion of 50 basis points, and profit growth of 14%. Those are about as good of a number as you’ll find in the big retail sector. And it is mostly because Kohl’s has a unique value prop through its off-price offerings, off-mall locations and its wide selection of goods.
It also helps that Kohl’s has a partnership with Amazon which is helping drive traffic.
In the big picture, then, things are actually really good at Kohl’s right now. But you wouldn’t guess it by looking at the valuation on the stock. KSS stock trades at just 14-times forward earnings with a 3% dividend yield.
This cheap valuation against a healthy growth backdrop is an opportunity for long-term investors.
Long-Term Value Stocks With Hulking Upside: AMC Entertainment Holdings Inc (AMC)
Source: Shutterstock
Key Metrics: 0.4-times trailing sales, 5% dividend yield, Q1 records in admissions and food & beverage revenue
The Bull Thesis: Let’s step away from retail for a second. Another segment where there is a serious resurgence happening is in the movie theater business, where movie houses are re-inventing themselves as multi-purpose entertainment destinations.
At the heart of this resurgence is AMC Entertainment Holdings Inc (NYSE:AMC), America’s largest theater operator who is doing everything to capitalize on what has recently been a blockbuster movie line-up. AMC has upgraded seats, enhanced the viewing experience, expanded the food and beverage offerings, and included a bar area in some theaters.
These improvements are driving strong results. Last quarter, AMC reported record-highs in both admissions revenue and food & beverage revenue.
In other words, theaters are far from dead. AMC stock, though, is dirt-cheap at 0.4-times trailing sales and with a 5% dividend yield. Thus, as theaters to continue to come back into favor, AMC stock could rocket higher.
Long-Term Value Stocks With Hulking Upside: Signet Jewelers Ltd. (SIG)
Source: Elizabeth Murphy via Flickr
Key Metrics: 14-times forward earnings, improving comparable sales trends
The Bull Thesis: Stepping back into the retail sector for a moment, another value stock standout is Signet Jewelers Ltd. (NYSE:SIG).
Signet has been dropping for a while now. Jewelry and diamond demand has been weak because younger consumers are pushing off marriage to travel, and when they have decided to drop into a jewelry store, they have gone to Tiffany & Co. (NYSE:TIF).
That prompted Signet to launch a huge turnaround plan earlier this year which would make the company more relevant to today’s jewelry buyers. That meant big investments in marketing, re-branding and omnichannel sales capability. Those big investments, naturally, were expected to weigh on profitability, and SIG stock dropped like a rock.
But Signet stock is back now. The turnaround appears to be on track, and Signet looks positioned for several years of growth ahead of it. Yet, Signet stock trades at just 14-times forward earnings, a multiple often reserved for zero-growth stories.
Long-Term Value Stocks With Hulking Upside: Fossil Group, Inc. (FOSL)
Source: Joe King via Flickr (Modified)
Key Metrics: huge smartwatch growth, stock still ~80% off all-time highs
The Bull Thesis: Traditional watch giant Fossil Group, Inc. (NASDAQ:FOSL) found itself in a similar situation as Signet over the past several years. Traditional watch demand was waning due to smartwatch ramp, and that caused Fossil’s core watch business to decline by a whole bunch.
But during this shift Fossil was building out a portfolio of hybrid smartwatches combining smartwatch technology with traditional watch aesthetic. These hybrid smartwatches have started to gain traction, and Fossil’s business is turning around as a result.
Fossil stock has already had a big rally, but it is still a sub-$30 stock. This was once a $130 stock, so if you assume that Fossil’s new smartwatch business can reclaim at least half of the lost traditional watch business, then Fossil stock still looks materially undervalued at $30.
Long-Term Value Stocks With Hulking Upside: AT&T Inc. (T)
Source: Shutterstock
Key Metrics: 10-times forward earnings, 6% dividend yield, huge growth with DirecTV Now
The Bull Thesis: Telecom giant AT&T Inc. (NYSE:T) has been weighed down by cord-cutting concerns for the past several years, and that plunged this stock into deep value territory (10-times forward earnings / 6% dividend yield).
But the company is now finally cleared to acquire Time Warner Inc (NYSE:TWX), and in so doing, is prepared to make a huge pivot into the streaming markets.
Over the next several years, AT&T will build on its early success with DirecTV Now, and further build-out streaming capabilities with Time Warner content assets. These moves will lead to big growth in the company’s streaming business, and that growth should be big enough to more than offset wireline user churn.
In this sense, AT&T is transitioning away from the headwind-plagued cable industry to the tailwind-propelled streaming industry. That transition will force the market to re-rate AT&T stock, and that re-rating could be quite drastic considering the presently depressed valuation.
Long-Term Value Stocks With Hulking Upside: Walt Disney Co (DIS)
Source: Baron Valium via Flickr
Key Metrics: 15-times forward earnings, Disney streaming in 2019
The Bull Thesis: Much like AT&T, media giant Walt Disney Co (NYSE:DIS) has been weighed down by cord-cutting concerns recently. These concerns have been so big that they’ve overshadowed what has been red-hot results from Disney’s park and movie businesses.
But Disney is prepping a huge move into streaming with the launch of ESPN-Plus this year and the projected launch of a Disney streaming service in 2019. Because Disney has the most robust content portfolio in the world, Disney’s 2019 streaming service will have huge demand, and the Disney growth engine will get going again.
In other words, just like AT&T, Disney is transitioning away from the headwind-plagued cable industry to the tailwind-propelled streaming industry.
That transition will force the market to re-rate Disney stock, and that re-rating will be big considering the presently depressed valuation (15-times forward earnings).
Long-Term Value Stocks With Hulking Upside: Apple Inc. (AAPL)
Source: Shutterstock
Key Metrics: 16-times forward earnings, 31% Services revenue growth
The Bull Thesis: You might be surprised to see tech giant Apple Inc. (NASDAQ:AAPL) on this list, but at just 16-times forward earnings, Apple stock is essentially a value stock.
And the growth potential in the business is exciting. Granted, the hardware side of Apple isn’t that great right now. Apple Watch sales are red-hot, but Mac, iPad and iPhone growth are largely maxed out due to market saturation. While we might get some price increases in there to drive positive growth, Apple’s hardware business won’t be a big grower over the next several years.
Instead, the big growth will come from the company’s high-margin Services business, which is essentially the sum of services that Apple has created to monetize the company’s giant ecosystem (App Store, iTunes, etc). Last quarter, Services revenue growth was an astounding 31% on an $8-9 billion base.
That is impressive. And continued growth in Services isn’t priced into Apple stock at 16-times forward earnings. As such, Apple stock could continue to be a big winner into the foreseeable future.
Long-Term Value Stocks With Hulking Upside: Gilead Sciences, Inc. (GILD)
Source: Gilead Sciences
Key Metrics: 12-times forward earnings, 3% dividend yield
The Bull Thesis: Biotech giant Gilead Sciences, Inc. (NASDAQ:GILD) has struggled mightily over the past several years due to a confluence of headwinds ranging from shrinking demand in the formerly big Hepatitis C Virus (HCV) market to concerns over price-gouging.
While these concerns are legitimate, the big-picture on GILD stock is still positive. This is a huge biotech with a ton of resources, the sum of which the company will continue to use to both develop new drugs and jump into new drug development pipelines (see the company’s recent acquisition of Kite Pharma). Because of this, GILD’s growth may be lumpy based on drug development timing, but the overall growth trajectory should be upward and outward.
GILD stock isn’t priced for this. The stock trades at just 12-times forward earnings with a 3% dividend yield. Once growth comes back into the picture with the development of a new drug, the valuation will expand, and GILD stock will head higher.
Long-Term Value Stocks With Hulking Upside: General Electric Company (GE)
Source: Shutterstock
Key Metrics: 15-times forward earnings, stock has bottomed at $13
The Bull Thesis: Industrial conglomerate General Electric Company (NYSE:GE) has been the poster-child for how NOT to run a company. Due largely to mismanagement and an inability to maintain growth synergies between the company’s different operating segments, GE stock has dropped like a rock from $30 in early 2017 to $13 today.
Fortunately, there is still a lot of underlying value at GE. Namely, GE Healthcare and Aviation are huge, valuable businesses with healthy long-term growth prospects. Thus, once new management figures out what to do with the rest of GE’s moving parts, GE stock should roar higher because those businesses alone are worth more than $13 per share.
The stock appears to have bottomed around $13, as it has held that level for several months now. As such, now looks like a good time to buy this cheap stock for a long-term rally higher.
Long-Term Value Stocks With Hulking Upside: Gap Inc (GPS)
Source: Shutterstock
Key Metrics: 6 consecutive quarters of positive comparable sales growth, 12-times forward earnings
The Bull Thesis: Back to retail, one of the most successful names amid the retail resurgence has been Gap Inc (NYSE:GPS). Due mostly to steady growth at Gap, red-hot growth at Old Navy, and a surprising bounce-back at Banana Republic, GPS has now reported six consecutive quarters of positive comparable sales growth.
Margins retreated last quarter, but the longer-term trajectory for margins is a healthy, multi-year rebound. Thus, the GPS story is one defined by healthy comparable sales growth and margin expansion.
GPS stock trades at just 12-times forward earnings. That is a multiple usually reserved for zero-growth stories. But earnings at GPS are expected to grow 20% this year, according to consensus Street estimates.
Consequently, GPS stock looks dramatically undervalued here and now.
Long-Term Value Stocks With Hulking Upside: NetApp Inc. (NTAP)
Source: Shutterstock
Key Metrics: 19-times forward earnings, nearly 20% earnings projected this year
The Bull Thesis: It is rare to find a value play in the cloud world, but hybrid cloud data services provider NetApp Inc. (NASDAQ:NTAP) is about as close as it gets.
NTAP stock has been a big winner over the past several years because the company is thriving in the overlap of the cloud and data revolutions. Neither of these revolutions will slow down by much over the next several years, and as such, NTAP’s growth won’t slow down much, either. Revenue growth is pegged at 5% this year, while margin improvements are projected to propel nearly 20% earnings growth.
But NTAP stock trades at just 19-times forward earnings, which seems anemic for a cloud company.
Consequently, the present upward trajectory in NTAP stock is here to stay. Big growth in cloud and data will continue to power strong numbers for NetApp, and that will inevitably result in share price appreciation through earnings growth and multiple expansion.
Long-Term Value Stocks With Hulking Upside: Micron Technology, Inc. (MU)
Source: Shutterstock
Key Metrics: 5-times forward earnings, 100%-plus profit growth
Bull Thesis: Chipmaker Micron Technology, Inc. (NASDAQ:MU) has been on fire over the past two years, jumping from $10 to $60 as the supply/demand fundamentals in the company’s core DRAM and NAND markets have become exceptionally favorable.
Put simply, the mainstream emergence of automation, AI, the Internet-of-Things (IoT), data centers and cloud computing has created a surge in demand for MU’s chips.
Meanwhile, supply is constrained due to limited chip production capacity against the backdrop of this demand surge. Big demand, short supply means huge profits for MU.
Investors are concerned that these good times won’t last, and that a supply ramp could kill profits. That is why MU stock trades at just 5-times forward earnings.
But this bearish thesis misunderstands the magnitude of MU’s demand catalysts through big data. Regardless of a supply ramp, demand is so big that it will outstrip supply into the foreseeable future, and the supply/demand fundamentals will remain favorable.
As such, MU stock is materially undervalued here and now trading at just 5-times forward earnings.
Long-Term Value Stocks With Hulking Upside: Intel Corporation (INTC)
Source: Intel
Key Metrics: 14-times forward earnings, 2% dividend yield, 10%-plus profit growth
Bull Thesis: Tech giant Intel Corporation (NASDAQ:INTC) is benefiting from the same big data and AI demand tailwinds as MU. It is also being hurt by the same concerns that the good times won’t last forever.
That is why Intel stock trades at just 14-times earnings despite consistent 10%-plus profit growth and broad exposure to secular growth markets like big data and AI.
Just as MU stock will eventually re-rate higher and benefit from both earnings growth and multiple expansion, Intel stock will do the same. As such, this stock projects to be a big winner over the next several years.
Long-Term Value Stocks With Hulking Upside: Zumiez Inc. (ZUMZ)
Source: Shutterstock
Key Metrics: 8.3% comparable sales increase last quarter, big margin expansion, 16-times forward earnings
Bull Thesis: Another big winner in the recent retail resurgence is Zumiez Inc. (NASDAQ:ZUMZ). The company is coming off a quarter that had 8.3% comparable sales growth, 160 basis points of gross margin expansion, and 270 basis points of operating margin expansion.
Those are some great numbers. And they are expected to continue. Thanks to improving mall traffic trends, Zumeiz management projects this trend of positive comparable sales growth and margin expansion to persist.
ZUMZ stock, though, trades at just 16-times forward earnings, which seems anemic next to 5%-plus comparable sales growth and several hundred basis points of margin expansion. I fully expect this stock to keep grinding higher.
Long-Term Value Stocks With Hulking Upside: Kroger Co (KR)
Source: Shutterstock
Key Metrics: 13-times forward earnings, 2% dividend yield, positive comparable sales growth
Bull Thesis: Everyone is worried about grocery operators thanks to Amazon acquiring Whole Foods and Target and Walmart Inc (NYSE:WMT) making big moves into expanding grocery offerings.
But at the end of the day, Kroger Co (NYSE:KR) is America’s biggest grocery operator by a mile. And that isn’t going to change anytime soon. There is still a stigma against buying groceries at Walmart and Target, and Whole Foods prices, even the Amazon Prime reduced versions, are still way higher than Kroger prices.
Consequently, Kroger will remain America’s biggest grocery operator by a mile. This is a big moat business with stable long-term growth prospects through enduring demand.
And at 13-times forward earnings, Kroger isn’t priced appropriately for these realistic growth prospects.
As of this writing, Luke Lango was long DKS, AMZN, SKX, TGT, M, AMC, FOSL, T, DIS, AAPL, GILD, GE, MU, and INTC.
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