After suffering through much of 2020, value stocks are suddenly roaring.
With vaccination rates increasing and Americans flush with cash after several stimulus bills, investors are betting that the economy will come surging back once fears about the pandemic begin to relax. There's already evidence of such a boom as retail sales jumped nearly 10% from February to March, showing that Americans are eager to spend.
As expectations for a strong recovery increase, investors are rotating back into value stocks and other cyclical plays set to capitalize on the recovery. Let's take a look at three stocks that could be winners.
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1. AutoZone
Auto-parts retailers have already benefited from a boom in demand during the pandemic as hobbyists used their extra time to work on their cars, and sales of used cars spiked as many Americans got an extra set of wheels during a time when they wanted to avoid public transportation.
AutoZone's (AZO 1.19%) sales and profits have soared during the crisis, but the stock has actually underperformed the S&P 500 since the start of 2020, a strong indicator that it's undervalued. In the company's most recent quarter, domestic same-store sales jumped 15.2% and earnings per share rose 20.5% to $14.93. The company has also been aggressively buying back stock and just added $1.5 billion to its share repurchase authorization, a sign it thinks the stock is undervalued.
The good news for investors is that AutoZone should continue to perform well. It will get tailwinds from the recent stimulus package in March, which included $1,400 checks and helped drive auto vehicles and parts sales up 15% last month. There's also a chip shortage that is impacting auto manufacturing, which will raise prices for new and used cars. That should support growth in auto parts as consumers will opt to spend money on repairs and fixing up old cars, rather than paying for an overpriced new one. Even rental car companies are complaining of shortages, showing this problem could last the rest of the year.
Finally, the company has historically performed well coming out of recessions. Cash-strapped Americans are typically reluctant to plunk down money for a new car, choosing instead to fix up their current ones.
With strong momentum and solid prospects, AutoZone trades at a price-to-earnings ratio of 19, much less than the S&P 500's valuation of 43.
2. Foot Locker
Another corner of the retail industry that looks set to take off is apparel. Apparel sales jumped 18% in March, according to the Census Bureau. It was the retail subsector hit hardest by the pandemic, as Americans staying home during the crisis didn't need clothes for going to work or socializing.
That's starting to change now. Foot Locker (FL -0.18%) has said it's received a boost from the stimulus checks, and as the pandemic recedes, it should be able to reopen all of its stores and avoid pandemic-related costs that challenged the business in 2020. Last year, 75% of the company's sales came from Nike, as it's the sportswear giant's most valuable distribution partner. That relationship should continue to pay off for Foot Locker as the reopening is sure to drive demand for streetwear.
The company has also made smart strategic moves like launching a rewards program just before the pandemic hit, and making a $100 million investment in online sneaker marketplace GOAT. CEO Richard Johnson told Yahoo! Finance recently, "There's just so much energy around the sneaker market" right now, and those demand tailwinds should strengthen as the economy reopens.
While Foot Locker's recent results have been impacted by the pandemic, performance should rebound solidly this year. Based on analyst estimates of $4.67 in EPS for 2021, the stock trades at a P/E of just 12.6, and a strong recovery would mean the company would top that forecast, giving the stock significant upside potential.
3. Wells Fargo
Of all the sectors, banking may be the most sensitive to the economic impact of the pandemic. Bank stocks plunged early on in the crisis as banks set aside billions in loan reserves. However, the sector now seems poised for a recovery as the economy is coming back faster than expected.
Wells Fargo (WFC 2.73%) may have the most upside potential of the major banks. The company came into the pandemic still reeling from multiple scandals, including fraudulently opening customer accounts. Wells Fargo shares have already doubled from their low point last year, but the company's recent earnings report shows why they could still have plenty of room to run. While revenue was only up slightly in the period, profits surged as the company benefited from an improving U.S. economy and the release $1.6 billion in loan loss reserves, though low interest rates remained a headwind.
CEO Charlie Scharf noted that charge-offs in the quarter reached historic lows, and the company is taking steps to streamline its business, selling off its asset management and corporate trust businesses. The prospect of getting out of the Federal Reserve's penalty box could also juice the stock. It seems more likely that the central bank will remove the asset cap after the latest report, and the company could raise its dividend and return to making share buybacks in the near future. Finally, rising interest rates also favor the company going forward, allowing it to capture a wider net interest margin.
Based on the analyst consensus of $3.62 in EPS this year, the stock trades at a P/E of just 12, and with a strong economic recovery in the offing, results could easily top that forecast. The potential for a dividend hike also sweetens the appeal.
