If you aren't a growth investor, you're probably scouring the market for value stocks. These are the stocks that have temporarily fallen out of favor with investors to the point that they are trading at a discount on the basis of fundamental valuation.
It's not easy to find classic value stocks these days, with a rare combination of indexes near record highs and continued global economic challenges dragging down corporate profits. The cap-weighted forward price-to-earnings (P/E) ratio for the S&P 500 is currently around 38, which is high compared to historical levels.
Nonetheless, there are a handful of strong operators with clear growth catalysts that are trading at attractive valuations compared to the market. If you're willing to put in some effort to look around, you might stumble upon these compelling value stocks.
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Cognizant
Cognizant Technologies (CTSH 0.68%) is an enterprise tech consulting company. Through consulting engagements and long-term outsourcing, Cognizant supports digital transformation at some of the world's largest companies. Its clients are spread across numerous industries, and they require support to design and implement strategies to adopt cloud computing, process automation, data analytics, AI, and various forms of enterprise software. It's fair to expect that non-tech companies will continue requiring assistance with digital transformation.
While Cognizant isn't a high-growth story, it does boast solid demand drivers and a positive outlook for the next year. Current forecasts call for 5% sales expansion and 10% earnings growth next year. Investors who like this type of stock will be very pleased to see Cognizant's relatively cheap valuation. The stock trades at a very attractive forward P/E ratio of 20, and an enterprise-value-to-EBITDA ratio under 12. The company maintains a low-risk capital structure and produces great cash flow with its operations. It's hard to find cheap stocks with decent outlooks in the current market, so this is a nice opportunity for value investors.
Ingevity
Ingevity (NGVT +0.90%) produces specialty chemicals and activated carbon materials that are used in automobiles, food and beverage production, raw material extraction, civil construction, agriculture, and industrial applications. Results suffered in 2020 due to disruptions from coronavirus as well as reduced oil production in response to tanking energy prices. Ingevity shares took a beating last year, dropping further than the S&P 500 during the first-quarter bear market, and never recovering to the same extent as market-leading tech and consumer discretionary stocks.
It's not clear if 2021 will offer a full rebound for Ingevity, with the pandemic continuing to cause problems and the energy sector still experiencing turmoil. Still, things have incrementally improved each quarter for the company, and nearly double-digit growth is expected for the full year. Before last year's challenges, Ingevity had been averaging 12% sales growth with a diversified product portfolio. It's a small company experiencing some challenges, but its 13.4 forward P/E ratio is fairly eye-popping with the sorts of valuations we're seeing elsewhere in the market. This isn't a great growth story, but there aren't too many stocks that can deliver double-digit earnings growth at these sorts of valuations.
The Ensign Group
Ensign (ENSG 1.02%) operates over 200 facilities that provide healthcare services including skilled nursing, assisted living, rehabilitation, and physical therapy. COVID-19 has presented challenges for Ensign to provide a safe and healthy environment for patients while remaining financially strong. Fewer people sought elective medical procedures last year, which weighed on demand for some of the company's therapy services. Nonetheless, demand for most of the relevant services depends more on demographics than economic conditions. Telehealth may threaten some of Ensign's outpatient activities in the long term, but inpatient and more acute care won't be susceptible to that disruption.
Ensign's sales and net profits are expected to grow faster than 10% in 2021, owing to higher volumes at existing locations and recent acquisitions of several new facilities. Even with this stable demand and strong short-term outlook, the market is not piling into Ensign Group shares. The stock is available at a forward P/E ratio of only 22.4 and EV/EBITDA of 19.5. These are all characteristics that value investors love to see, and Ensign looks like a promising buy for bargain hunters.
