Tech stocks dominated 2020 as the S&P 500's best-performing sector. Investors cheered businesses that grew during a recession over those with earnings collapses. Fundamentals were cast aside in favor of opportunity.
With the S&P 500 closing above 4,000 for the first time in history, investors may now be questioning the prices of high-flying growth stocks. Many of these companies benefited from the pandemic and are starting to see their valuations called into question as interest rates rise and the economy reopens. These names will now have to prove they can grow and keep growing under normal circumstances.
"Prove it" mentality is having the opposite effect on value stocks whose underperformance and fundamentals are looking increasingly attractive in an infrastructure bill and stimulus-induced environment. Clorox (CLX 2.17%), Kinder Morgan (KMI 0.85%), and Sherwin-Williams (SHW +0.11%) all performed well in 2020 and are positioned to deliver consistent results for years to come. Here's why this trio is worth a look while tech stocks crash.
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1. Clorox
As a maker of products that kill germs, it isn't surprising to learn that Clorox had record 2020 numbers. However, what's less talked about is Clorox's strong performance in its other segments. These business lines -- household, lifestyle, and international -- grew sales by an average of 16% in 2020 and comprised 59% of Clorox's overall revenue. You would be hard pressed to find another year where a large, established consumer staple stock posted 22.7% revenue growth and a 50.1% increase in net income. High earnings give Clorox a price-to-earnings (P/E) ratio around 20, which is reasonable for a steady-performing Dividend Aristocrat. In sum, Clorox's strong year was due to the strength of its overall business, not just cleaning products.
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Aside from its reasonable valuation and 2.3% dividend yield, Clorox is an interesting value stock for investors who believe in a mid- to long-term consumer behavior shift toward cleanliness. Clorox's CEO, Linda Rendle, is confident that its tailwinds won't simply fade as the pandemic ends. Rendle said the following on the company's most recent quarterly conference call:
People are cleaning and disinfecting more, and we expect that to continue. They're cleaning different surfaces. They're thinking about the fact that when they leave their house, they're thinking about those surfaces around them in a different way, and we're helping them to plan for that.
Clorox is a top-tier value stock with growth prospects, a reasonable valuation, recession resilience, over 40 consecutive years of dividend growth, and plans to buy back tons of stock and raise the dividend even higher.
2. Kinder Morgan
Pipeline and infrastructure companies like Kinder Morgan are a great place to look for value in today's market. Kinder Morgan and its peers were some of the few oil and gas companies that produced steady results throughout the pandemic. This is because much of Kinder Morgan's business is tied to long-term contracts, so its performance isn't as susceptible to short-term commodity price swings. Management deserves credit for its accurate guidance. Amid high uncertainty in April 2020, Kinder Morgan issued full-year distributable cash flow and adjusted EBITDA guidance that ended up being 99.5% accurate. This level of predictability is something that dividend and value investors look for.
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Kinder Morgan's big criticism is its slowing growth, which is mainly due to less spending. To understand why the company is spending less, it's worth understanding its history. A combination of high spending and high debt leading up to the oil and gas crash of 2014 and 2015 crushed investor confidence in Kinder Morgan as the company slashed its dividend. In recent years, Kinder Morgan has repeatedly stressed its focus on generating strong cash flow that supports the dividend without compromising the balance sheet. This is quite the value proposition in the energy industry, where overspending is rampant and can lead to bankruptcy -- and where high-yielding dividends are often supported by debt (as we saw in 2020).
To Kinder Morgan's credit, the company has done an impressive job spending less and generating gobs of operating cash flow. Capital expenditures have decreased 41% over the last five years while cash flow has remained steady, and the dividend is back up to around half of its pre-cut level.
KMI Cash from Operations (Annual) data by YCharts
Value investors can appreciate its consistent earnings and strong cash flow that more than supports its spending and dividend payments. With a yield of 6.3%, Kinder Morgan's dividend is significant and a core reason for investing in the company.
3. Sherwin-Williams
Like Kinder Morgan, paint giant Sherwin-Williams was one of the few industrial companies that performed well in 2020. Record annual revenue and net income are worth cheering about, and Sherwin-Williams thinks it can keep the hot streak going in 2021.
SHW Revenue (Annual) data by YCharts
The midpoint of its guidance suggests $26.80 in diluted EPS, 9% higher than what it generated in 2020. Sherwin-Williams issued a 3-for-1 stock split on Thursday, making its new split-adjusted diluted EPS guidance $8.93 per share. Finding an industrial stock that grew its top and bottom lines in 2020 and expects to grow net income close to double digits in 2021 is a rare find, especially from a large and traditionally slow-growing company.
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Last year, Sherwin-Williams benefited from the trend toward home improvement. Less directly, it is benefiting from a strong housing market as existing homes change hands and new homes demand a fresh coat of paint. However, Sherwin-Williams had its fair share of challenges too. Its performance coatings division struggled in 2020. Making up 28% of 2019 sales, Sherwin-Williams is looking for a rebound in performance coatings as industrial demand picks up steam. It also expects its Americas division to grow by mid-to-high single digits thanks to 54 new stores and a 3% to 4% price increase in the U.S. and Canada.
Sherwin-Williams' results and guidance are impressive. However, the company's forward P/E ratio of 28 is a little on the high side. The company makes up for this premium valuation with a history of dividend increases, market outperformance, and profitability.
