Over time, technology stocks have produced some of the greatest market-beating returns. More recently, the average stock in the Technology Select Sector SPDR ETF (XLK -0.45%), a commonly quoted benchmark, more than doubled between 2019 and 2020, compared to a 50% gain in the S&P 500. But over the last few weeks, many tech stocks crashed while the rest of the market held fast. Investors worried about that volatility may be in search of safer options.
With that, we asked some of our contributors which value stocks stand out from the crowd. They selected industrial manufacturer Emerson Electric (EMR 0.57%), Norwegian energy giant Equinor (EQNR -0.92%), and kitchen-equipment maker Middleby (MIDD 0.46%).
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Emerson Electric
Lee Samaha (Emerson Electric): While the technology markets have been volatile of late, Emerson Electric's share price has pretty much been on the uptrend throughout 2021.
The reason? Simply put, investors have warmed to the stock as the price of oil has risen from $47 at the start of the year to around $66 at this writing. For reference, Emerson operates two segments, the commercial and residential solutions business (tools, home products, and climate technologies), and an automation solutions business which typically generates around a third of its revenue from upstream and midstream oil and gas.
Given the rise in the price of oil, investors are betting that Emerson's oil-and-gas producing and refining customers will start to release pent-up capital spending on projects. Also, the improvement in Emerson's end-market prospects came at a time when the stock seemed to have very good absolute and relative values.
Emerson's stock-price rise is a reminder that sometimes value investing is about buying a stock without taking a strong position on the company's end markets. If the price of oil can stand its ground in 2021, and the company's other automation sales and the commercial and residential solutions businesses remain in growth mode, then there's more upside to come.
Blending oil and wind energy
Daniel Foelber (Equinor): With a GDP per capita of over $75,000, Norway is now one of the wealthiest countries in the world -- largely thanks to oil and gas production. Spearheading this effort is Equinor, which is 70% owned by the Norwegian government and state pension funds.
As a leading offshore oil and gas company, Equinor has benefited from rising oil prices, which are now at their highest levels in over a year. But Equinor isn't like other oil majors. In fact, it's cut costs and drastically reduced spending in order to better profit from its dwindling North Sea reserves. The result is that Equinor now has one of the industry's most profitable oil and gas portfolios, which the company says will be able to return over $6 billion in free cash flow (FCF) at $50 per barrel of Brent crude oil (Brent is currently $70 per barrel).
Equinor could also be an interesting dividend investment. It cut its $0.27-per-share quarterly dividend down to $0.09 per share in the first quarter of 2020. Since then, it's raised its dividend back to $0.12 per share per quarter, or $0.48 annually, for a current yield of 2.3% before fees and taxes. At its current dividend distribution, Equinor expects to pay less than $1.5 billion in 2021 dividends, leaving ample FCF to buy back shares, pay down debt, and invest in renewables. With oil prices where they are, 2021 could be a big comeback year for Equinor, allowing the company to regain its footing and improve its balance sheet.
Equinor's lack of oil and gas investments will likely mean stagnating or declining production. To make up for that shortfall, the company is aggressively investing in offshore wind energy. Although offshore wind is still in the early stages, it aligns with Equinor's experience on the high seas, not to mention Norway's clean-energy policies.
In sum, Equinor's low break-even cost per barrel allows the company to navigate weak oil prices while profiting from higher ones. It can then use excess FCF to bankroll its wind investments and raise its dividend.
Despite the sell-off, this kitchen equipment manufacturer is hot, hot, hot
Scott Levine (Middleby): While investors may have turned their backs on tech stocks recently, shares of Middleby, the stalwart manufacturer of commercial cooking equipment, soared. Over the past month, for example, as the S&P 500 dipped 0.3% lower, Middleby jumped 23%. That being said, shares of Middleby are still available at bargain-bin prices. Valued at 17.5 times operating cash flow, Middleby's stock is trading at a discount considering that its five-year average multiple is 20.7, according to Morningstar.
What did investors find so appetizing about Middleby? Primarily, they gobbled up shares after the company reported fourth-quarter 2020 earnings on March 1; the stock hit an intraday high of $166.31 -- 14% higher than where it had closed on the previous trading day. A cursory glance at the earnings report provides some explanation for the stock's bounce: Middleby reported quarterly revenue of $729.3 million, beating analysts' estimates of $694.9 million.
But dig into the Q4 2020 conference call that accompanies the earnings report, and it becomes apparent why investors decided to gobble up shares. Addressing the company's performance in 2020 and looking to 2021, Middleby's CEO Tim FitzGerald stated: "Financially, we ended the year in a great position. We reported record operating cash flows in 2020, realized strong profitability across all three of our business segments, and we developed a record backlog providing momentum as we head into 2021."
It's not only Main Street that's excited about Middleby's prospects. After Middleby reported Q4 earnings, Robert W. Baird boosted its price target on the stock to $192 from $161, according to Thefly.com. And an even more auspicious take on the stock came from BMO Capital Markets this week when it raised its price target to $225 from $150.
Over the long term, Middleby has vastly outperformed the market, providing investors with superior returns. Over the past decade, for example, Middleby has soared 470% while the S&P 500 has risen 195%. Of course, there's no guarantee that the company will be able to maintain the same trajectory above the overall market. But for investors who are looking to mitigate the risk of another tech-sector downturn, Middleby warrants strong consideration.
