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Tech Rout Shifts Spotlight from Growth to Value: 5 Top Picks

Zacks

It’s time to discard growth and load up on value stocks. Investors have steered clear of tech behemoths that constitute the bulk of growth stocks on overvaluation concerns. Such stocks have soared into the stratosphere this year and investors are skeptical about their potential to scale further.

On the other hand, value stocks, led by financials and consumer staples, look enticing. While the recent Fed rate hike added shine to financial stocks, consumer staples are immune to uncertainties. Also, we shouldn’t forget that the tech trade collapse and a surprise U.K. election vote have already unnerved investors. Hence, value investing for the time being seems judicious.

Is This the Time for Value Stocks?

Growth verses value is one of the oldest investment styles known to us. While growth investing involves selecting stocks with earnings growth of above-average rates, value investing entails the buying of stocks that are underpriced. Value investing gained fame under Ben Graham and David Dodd. Their 1934 text book “Security Analysis” is mostly viewed as the bible of value investing.


It shouldn’t surprise you that the reason growth has outperformed value this year is largely because of the significant jump in big-cap tech stocks. After all, the top holdings in the S&P Growth Index, as per their weight, are Facebook Inc FB, Amazon.com, Inc. AMZN, Apple Inc. AAPL, Microsoft Corporation MSFT and Google parent Alphabet Inc GOOGL. These are the so-called “FANG” stocks along with Microsoft that everyone has been talking about this year.

However, investors ditched one of the most profitable tech trades of the year so far, after stalwarts like Facebook, Amazon, Apple, Microsoft and Alphabet lost ground following Goldman Sachs Group Inc’s GS declaration that these five companies’ recent outperformance was potentially overheated. The recent downgrade of tech giant, Apple by Mizuho Securities also sustained the tech sell-off.

Investors Dump Tech

Selloff in the largest tech companies deepened concerns that the high-value industry is in a bubble. Robert Bouroujerdi, chief investment officer at Goldman Sachs, warned that the “FANG” stocks along with Microsoft are overvalued. He said, “Facebook, Amazon, Apple, Microsoft and Alphabet – have added a total of $600m of market cap this year, or the equivalent gross domestic product of Hong Kong and South Africa combined”.

This tech slide wiped out billions of dollars from the net worth of Mark Zuckerberg, Bill Gates and Jeff Bezos, who was poised to become the richest person in the world. While Bezos lost $2.6 billion, while Zuckerberg’s worth was dented by $2 billion.

Brokers, in the meanwhile, downgraded Apple for a second time in two weeks, which slashed $30 billion from the company’s value. Mizuho Securities reduced its price target for the iPhone maker to $150 from $160 per share. Analyst Abhey Lamba added that “Apple has meaningfully outperformed on a year-to-date basis and we believe enthusiasm around the upcoming product cycle is fully captured at current levels, with limited upside to estimates from here on out”.

Play Smart: Buy Value Stocks

We are now seeinga shift from tech outperformers to value stocks. As a rule, value stocks are mostly financial along with consumer staples. And why not? The S&P Value Index’s biggest names are Berkshire Hathaway Inc. BRK.B, JPMorgan Chase & Co. JPM, Wells Fargo & Co WFC, while several consumer staple stocks also make up a significant portion of the index.

Financial stocks have been gaining ground after the Fed raised the funds rate by a quarter percentage point, while officials maintained their outlook for one more hike this year despite softening inflation. At the same time, they expect to gradually reduce the Fed’s massive holdings of Treasury and agency securities over a number of years.

Consumer staples stocks are always steady irrespective of market conditions since their demand doesn’t ebb even at times of uncertainty. As tech trade fizzled and Prime Minister Theresa May lost the majority along with the mandate to drive forward clear Brexit negotiations, bouts of volatility are expected to rattle the global markets.

5 Top Value Stocks to Buy Now

We have, thus, selected five solid value stocks from the aforesaid sectors that boast a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a Value Style Score of ‘A’ or ‘B’. Thanks to our new style score system, we have been able to identify such value stocks.

Cna Financial Corp CNA is an insurance holding company. The company’s segments include Specialty, Commercial, International, Life & Group Non-Core, and Corporate & Other Non-Core. Cna Financial has a Zacks Rank #1 and a Value score of ‘B’. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 13.91, lower than the industry average of 18.1. The company’s projected growth rate for this year is 13.7%, more than the Insurance – Property and Casualty industry’s expected gain of 3%.

East West Bancorp, Inc. EWBC is a bank holding company. The company's principal business is to serve as a holding company for East West Bank (the Bank) and other banking or banking-related subsidiaries. East West Bancorp has a Zacks Rank #2 and a Value score of ‘B’. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 17.11, lower than the industry average of 17.9. The company’s projected growth rate for this year is 15.9%, higher than the Banks – West industry’s expected gain of 11.6%.

Preferred Bank PFBC is a commercial bank. The bank provides deposit services as well as real estate finance, commercial loans and trade finance to small and mid-sized businesses and their owners. Preferred Bank has a Zacks Rank #2 and a Value score of ‘B’. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 17.02, lower than the industry average of 17.9. The company’s projected growth rate for this year is 19.2%, more than the Banks – West industry’s projected gain of 11.6%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Unilever plc UL operates in the fast-moving consumer goods market. The company operates through Personal Care, Foods, Home Care, and Refreshment segments. Unilever has a Zacks Rank #2 and a Value score of ‘A’. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 21.33, lower than the industry average of 24.4. The company’s projected growth rate for this year is 22.1%, more than the Soap and Cleaning Materials industry’s expected gain of 9.4%.

Energizer Holdings Inc ENR is a manufacturer, marketer and distributor of household batteries, specialty batteries and lighting products. The company has a Zacks Rank #2 and a Value score of ‘B’. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 17.92, lower than the S&P 500’s average of 18.7. The company’s projected growth rate for this year is 23.6%, more than the Consumer Products – Staples industry’s estimated gain of 10.8%.

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