For more than a decade, growth stocks have been virtually unstoppable. Historically low lending rates have allowed companies to aggressively borrow in order to hire, innovate, and acquire other businesses. But it might be time for value stocks to shine.
Back in 2016, Bank of America/Merrill Lynch released a report that examined the performance of growth stocks and value stocks over 90 years (1926-2015). The data showed that value stocks outperformed over the very long run (17% vs. 12.6%). What's more, value stocks have tended to perform much better than growth stocks during the early stages of a bull market, which is where we are now.
If you're looking for bargains to add to your portfolio in February that have all the tools needed to make you richer, consider the following three value stocks.
The idea of buying bank stocks right now probably doesn't sound palatable. The Federal Reserve has plans to keep its federal funds target rate at or near historical lows through 2023. The central bank is also buying Treasury bonds on a monthly basis in an attempt to drive down yields. This means weaker net interest income for banks at a time when loan delinquencies are on the rise.
But the funny thing about investing in bank stocks is that it's usually a smart idea to buy when things look the grimmest. That's why bruised and battered money-center bank Wells Fargo (WFC -0.27%) is worth adding to your portfolio.
Typically, cheap stocks are cheap for a reason, and Wells Fargo definitely has its flaws. The company is working its way back from a scandal in which 3.5 million unauthorized customer accounts were opened between 2009 and 2016. The company has since instituted more stringent oversight at the branch level and brought in former Visa CEO Charles Scharf to take the reins.
What's tended to separate Wells Fargo from a crowded banking industry over the years is its knack for attracting affluent clientele. Wealthier customers are less likely to be disrupted by economic contractions, and they're more likely to take advantage of multiple financial services offered by Wells Fargo, such as mortgage servicing and wealth management. Continuing to bring in these well-to-do clients will help Wells Fargo deliver superior return on assets.
Wells Fargo has also been investing heavily in digitization. Since it's considerably cheaper to serve its customers online or through its mobile app, the company has been able to consolidate some of its branches to reduce its noninterest expenses. It ended 2020 with 32 million customers banking digitally.
Patient investors who want to own a quality bank stock can buy Wells Fargo right now for a 25% discount to its book value.
Perhaps the industry with the most value stocks at the moment is gold mining. With gold prices soaring in 2020 and most gold stocks working to improve their balance sheets over the past half-decade, things are looking quite lustrous for the group -- especially Canada's Yamana Gold (AUY).
Part of the reason gold stocks like Yamana can shine is the favorable outlook for precious metals. The Fed's bond-buying and push to keep interest rates low mean there are few avenues for income investors to generate inflation-topping returns. Add in ongoing fiscal stimulus from Washington, and you have a recipe for a ballooning money supply and a weaker dollar. That's all great news for the lustrous yellow metal.
It's worth mentioning that Yamana Gold produces silver, as well. Silver has more practical applications than gold, and it tends to outperform in the first few years of an economic recovery. Silver should take on even greater importance in the coming years as a necessary input for solar panels and multiple electric vehicle components.
Beyond just higher gold and silver prices, Yamana Gold is set to benefit from higher output at its existing mines and ramping up activity in newer assets. For now, Canadian Malartic, which is half-owned by Yamana, continues to be the company's key growth driver. Following a pandemic-impacted year, gold equivalent output should increase in 2021 to 350,000 ounces from 284,000 ounces in 2020.
Meanwhile, the ramp-up continues at Cerro Moro, where Yamana continues to push mining to new underground levels. Cerro Moro, which is Yamana's highest silver-producing asset, should yield 166,000 gold equivalent ounces (GEO) in 2021, up from 132,000 GEO last year.
The point is that Yamana is fully capable of maintaining 1 million GEO in annual output for at least the next three years, if not longer. Based on the current spot price for gold, Yamana is valued at less than five times projected cash flow this year. That's exceptionally inexpensive for a company whose operating cash flow might hit six-year highs.
Bristol Myers Squibb
A third value stock that has the potential to make investors a lot richer in February (and beyond) is Big Pharma Bristol Myers Squibb (BMY).
In general, healthcare stocks can be a safe place to put your money to work. Since we don't get to choose when we get sick or what ailments we develop, demand for drugs and devices remains steady. It also means healthcare stocks can navigate recessions better than most sectors.
Bristol Myers is such an intriguing buy candidate because of its November 2019 acquisition of Celgene. Buying Celgene brought cancer blockbuster Revlimid into the fold. Revlimid's sales have been in a nonstop upward trajectory for more than a decade, with label expansion, longer duration of use, strong pricing power, and improved diagnostics leading to earlier cancer detection, all helping to pump up its sales. Revlimid is protected from a flood of generics for five more years, meaning Bristol Myers is going to be raking in the dough for the next half-decade.
Aside from inorganic growth, Bristol Myers Squibb has plenty going on in-house, too. Sales of the world's leading oral anticoagulant (Eliquis) continue to head higher, and cancer immunotherapy Opdivo has already proved it can generate in the neighborhood of $7 billion in annual sales. Opdivo is being examined in dozens of additional studies as both a combination therapy and monotherapy, giving Bristol Myers plenty of opportunity to expand Opdivo's label in the future.
A pharmaceutical stock with the opportunity to consistently grow its earnings by 5% to 10% annually shouldn't have a forward price-to-earnings multiple of only 8. That's investors' cue to pounce.