Growth stocks have most definitely had their time to shine over the past decade of this market expansion, but there has been a place for good, old-fashioned value stocks as well. Value picks are made for the long haul. With lower valuations, value stocks can help limit the downside potential.
Many value stocks outperform the broader market over the long term. To that end, finding good value stocks with long term growth potential can be very lucrative to the patient investor. Three names that I like are General Dynamics (NYSE:GD), United Rentals Inc. (NYSE:URI), and the coveted Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B).
1. General Dynamics: Defense contractors never go out of style
General Dynamics has made its name by being a supplier of choice to one of the most consistent customers in the world -- the U.S. military. Over the long haul, this stock has beaten the S&P 500 by a handsome margin. Since 1977, an investment in General Dynamics has gained 2,263% compared to the S&P 500's 1,183% gain over the same time frame. The defense contractor's specialty is making machines, including tanks, submarines, and communications equipment. The company also builds Gulfstream jets.
For the just-completed fourth quarter, General Dynamics reported an earnings beat, bringing in a diluted EPS of $3.51 and net earnings that improved by 12.2% year over year to $1 billion on $10.8 billion in overall revenue. For the full year, diluted EPS was up 6.8%. The company's revenues over the long term have produced consistent growth.
While United States military spending does deviate through time and international conflicts, demand for defense contractors seems very unlikely to diminish over the long term. A name like General Dynamics is going to continue to be a part of that story. The company's track record of beating the market is demonstrative of the strength.
2. United Rentals: The world's largest equipment renter
United Rentals Inc. is a giant renter of industrial/construction equipment and tools. Revenue has grown sequentially at double-digit rates over the past three years. Earnings growth has been a bit up and down more recently, which accounts for the stock's stagnation since 2018, not to mention the general market downturn at the tail end of that year.
Since its IPO in 1997, the stock has outpaced the S&P 500 by a wide margin. United Rentals shares have gained 866% in that time frame, whereas the S&P 500 has gained 248%.
Fiscal 2019 earnings of $15.11 per diluted share give United Rentals a trailing P/E ratio of 9.9 times earnings, making it a pretty cheap play. The recent fourth quarter included revenue growth of 6.5% and $4.49 per diluted share versus last year's earnings of $3.80 per diluted share. Weaker gross margins of 39.9% dampened enthusiasm for the earnings release.
Going into 2020, the company is forecasting total revenues of $9.4 billion to $9.8 billion. On the liberal end of that guidance, it would mark around 4.8% growth from 2019's $9.35 billion. That's a slower rate of growth than the few previous years, but the low valuation of the stock, coupled with the historic performance, make it an appealing play. Overall, this company has done well long-term. Currently trading at about 10 times 2019 full-year earnings, this is a cheap stock to get in on.
3. Berkshire Hathaway: The tried and true
Buying Berkshire Hathaway is essentially investing in the best value fund of all time. The investment conglomerate is focused on value stocks and offers exposure to a large array of enterprises.
Since 1996, Berkshire Hathaway shares have crushed the S&P 500; growing 786% relative to the S&P's 279%. Some might criticize the company's ill-timed 2015 investment in Kraft Heinz, and CEO Warren Buffett's bow out from newspapers just this year, but that's not where the investment magic resides for Berkshire Hathaway. The insurance businesses it operates are what make the company a real value for investors. The cash flow from premiums gives the company a lot of ammo to play with on other investments.
Estimates for full-year 2019 earnings are calling for $10.41 per share (in terms of BRK.B shares). If that's accurate, shares are trading at 21.7 times full-year earnings. That's a pretty cheap premium for a company that plays the game better than anyone.
Factor in the fact that the company held $128 billion in cash reserves at the end of the third quarter, and this is a super appealing play. That kind of capital gives the investment conglomerate a lot of ammo to take advantage of the next economic downturn. While we haven't seen a recession in a long time, eventually it will happen. When it does, Berkshire Hathaway has extreme amounts of capital to put to use investing in future winners. Warren Buffett used large capital reserves in the 2008 downturn to gain large positions in names like Goldman Sachs, Dow Chemical and Bank of America.