After several months of gains, the S&P 500 index hit a stall over the last month. It's clear that some investors have started to adjust their holdings as stocks reach higher valuations. Growth stocks have had a good run year to date, but this might be a great time to add some balance to your holdings with a few value stocks.
Two stocks that trade at much lower price-to-earnings (P/E) ratios than the market averages are Hanesbrands (HBI 4.30%) and Kroger (KR -1.22%). Here's why these stocks could outperform over the next few years.
Hanesbrands' net sales declined just 1% year over year last quarter. But excluding the exit of the C9 Champion program at Target and the DKNY intimate apparel license in 2019, adjusted sales grew 6% year over year. Most importantly, Hanesbrands remains a profitable business, reporting adjusted earnings per share (EPS) of $0.60 last quarter for an increase of 58% over the year-ago quarter.
The second-quarter results were credited to performance in apparel and the new personal protective equipment (PPE) business. Hanesbrands announced the launch of the PPE business in April, and it has become a major sales contributor, generating over $750 million in revenue last quarter. Management expects sales of PPE products to generate another $150 million in the second half of the year.
PPE sales boosted growth within the innerwear segment, which comprises more than half of the business, with innerwear sales jumping 61% year over year. Strong demand helped lift the company's operating profit margin to 13.9% in the second quarter, up from 13% in the year-ago quarter.
Hanesbrands also saw healthy point-of-sale trends in its U.S. Basics and Champion products. Champion point-of-sales levels were down 14% in April but accelerated to an increase of more than 70% in June, driven by online sales.
These results are too good for a stock with a P/E of 11.8 at the time of this writing, which looks attractive relative to the S&P 500's average P/E of 31.
Moreover, Hanesbrands' dividend yields an above-average 3.48%, with a relatively low cash dividend payout ratio of 28.5%. With solid earnings performance and stable sales, Hanesbrands is a safe, undervalued dividend stock.
Grocery store chains have an inherent competitive advantage in serving loyal customers across a large footprint of local stores. Kroger operates 2,800 grocery stores, 35 manufacturing plants, and 44 distribution centers nationwide. Last year, Kroger generated $122 billion in sales, and it's increased its dividend by 50% cumulatively over the last five years.
Kroger is enjoying strong sales performance during the pandemic. After seeing sales grow at a slow pace in recent years, management expects sales growth excluding fuel to accelerate to 13% for the full year, with adjusted EPS up between 45% and 50%.
For the fiscal second quarter, total sales increased by 14% year over year excluding fuel, with digital sales surging 127%. Management has been investing to deliver more value and personalized rewards for customers, in addition to stocking more quality products. The Restock Kroger initiative has led to cost savings of over $1 billion in each of the last two years. That's significant given that the business reported $1.6 billion in net income in fiscal 2019.
Other advantages for Kroger are its data collection efforts and private label brands, which are quite popular with customers. Kroger's loyalty program provides valuable data and insights about its customers' shopping history. This helps the company make decisions to improve the shopping experience, which management believes is crucial to maintaining its competitive advantage.
It's unclear how long the double-digit growth trends will last beyond 2020. But with a P/E of 10.2, investors don't have much to lose. Kroger is a well-managed business with a durable competitive moat. At its current valuation, this value stock could have big upside.