Think fast: Which type of stock offers you the best long-term appreciation prospects? If you said value stocks, give yourself a pat on the back.
According to a 2016 analysis from Bank of America/Merrill Lynch that examined growth stocks versus value stocks between 1926 and 2016, growth stocks gained an average of 12.6% per year compared to 17% for value stocks. It goes to show that buying high-quality, cheap companies and hanging onto them over the long-term is a smart strategy.
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So, what value stocks should all investors consider adding to their portfolios for the long haul? After conferring with three of our Foolish investors, biotech blue chip Celgene (CELG), electronics manufacturer Sony Corporation (SONY -0.33%), and do-it-yourself home improvement chain Lowe's (LOW -0.14%) were the selections.
Growth stocks can be value stocks, too
Sean Williams (Celgene): Everyone's definition of "value" is a bit different. For many, a biotech growth stock like Celgene, with a trailing P/E of 52, wouldn't remotely be considered a "value stock." However, if we consider the PEG ratio, which takes into account its forward P/E and long-term growth rate, Celgene is unquestionably a value stock worth considering. Celgene sports a PEG of 0.9, and traditionally anything below 1 is considered to be "cheap."
What makes this biotech blue chip stock so special? For starters, it's mostly growing organically. Considering how much we've seen in the way of mergers and acquisitions in recent years, the simple fact that Celgene has mostly grown by organic means is impressive. Key to that has been the company's push of existing products into new labels.
Revlimid has also been a key component of Celgene's success. This multiple myeloma blockbuster drug is expected to produce $8 billion to $8.3 billion in sales this year, and it could be on track to become the best-selling drug in the world by early next decade. Revlimid has benefited from earlier cancer diagnoses, longer duration of use, strong pricing power, and its clear market share dominance. Best of all, Celgene settled litigation with generic drug producers in Dec. 2015 that'll essentially keep generics from flooding the market until the end of Jan. 2026. This gives Revlimid a decade-long massive cash flow runway.
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However, Celgene also benefits from its smorgasbord of collaborations, and its rare acquisitions. For example, it acquired Receptos back in 2015, getting its hands on next-generation anti-inflammatory drug ozanimod, which could net more than $4 billion in peak annual sales if approved to treat multiple sclerosis and ulcerative colitis. It also has dozens of ongoing collaborations that could allow it to license a number of first-in-class oncology and inflammation medicines.
Yes, Celgene is first and foremost considered a growth stock, because of its double-digit percentage growth rate. But growth stocks can be value stocks, too. And given its exceptionally low PEG, Celgene is my choice for the value stock that should be in every investors' portfolio.
This obvious bargain is probably sitting right in your living room
Rich Smith (Sony Corporation): Every investor knows Sony. Not every investor, however, may realize how great of a value stock Sony is.
Why do we know Sony? Investors of a certain age will certainly identify Sony Corporation as the company that invented the Walkman. Investors just a little bit younger will recall when Sony was the name to own in televisions. Since then, of course, Sony's Walkman has gone the way of the dodo, replaced by iPods, -phones, and even -pads. Korean electronics giants Samsung and LG have taken over the TV space. But there's still one realm where Sony reigns supreme:
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Sony's 14% global market share in consoles, powered by its flagship Playstation 4, is more than twice the market share of No. 2 player Microsoft. Gaming is now Sony's No. 1 business internally as well, boasting sales of $14.8 billion over the past 12 months (22% of company revenues) and pre-tax profits of $1.2 billion -- 47% of total company profits. And the way that razor-and-blade business models work, now that Sony has the lead in consoles, it also gets to sell more games and other services to make those consoles useful to consumers.
Result: Over the past year, Sony has generated a massive $4.3 billion in free cash flow from its business, much of it from console gaming. Weighed against the company's $51 billion market capitalization, that makes Sony stock a clear "value stock" at a valuation of less than 12-times free cash flow. With analysts predicting massive continued growth in profit at Sony -- 37% annualized over the next five years -- 12 times free cash flow is a cheap valuation to say the least.
Every investor needs to take a good hard look at Sony stock.
Bringing your profits home
Steve Symington (Lowe's): Being a homeowner isn't for everyone, but I think Lowe's stock can find a place in virtually anyone's portfolio. For one, the home improvement store chain has increased its quarterly dividend at least once every year since declaring its first payout in 1961. As it stands, that dividend yields a healthy 2.1% on an annual basis.
Image source: Lowe's.
And even with homeownership rates recently touching a fresh 50-year low, Lowe's latest guidance calls for revenue this year to grow around 5% from 2016, helped by a combination of 35 new locations and a healthy 3.5% increase in comparable-store sales.
What's more, the market appears to be discounting the growing possibility of an impending surge of homeowners as younger buyers finally begin to step in to the market. But if the actions of real estate-centric companies are any indication, that appears to be exactly what's about to happen. In May, for example, Zillow Group launched RealEstate.com, describing it as "a new consumer real estate brand tailored to first-time home buyers, many of whom are millennials."
More specifically, the new site uniquely helps new home buyers search for properties based on the monthly and down payments they can afford. And if Zillow succeeds in helping to spur prospective young home buyers into action, Lowe's will be one of the first businesses to reap the rewards.
With shares currently trading at under 15 times this year's expected earnings, I think Lowe's is a fantastic option for just about any value-seeking investor.
