Although value stocks have largely been out of fashion since the end of the 2008 financial crisis, these tried and true wealth creators are poised to make a furious comeback in 2022. The core reason is the Federal Reserve's plan to boost interest rates multiple times this year in an attempt to tamp down inflation.
What's important to understand is that tighter monetary policies by the U.S. central bank have historically been bad news for pure-play growth stocks, but a boon for classic value equities. And sure enough, value stocks have indeed been the best-performing group of equities since the start of the year.
Which value stocks are the best buys in February? Integrated energy giant Chevron(CVX +0.00%) and pharmaceutical titan Merck (MRK +0.44%) are both well positioned for a strong showing this month. Here's why investors may want to add these two large-cap companies to their portfolios soon.
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Chevron: A red-hot stock still worth buying
Thanks to rising crude oil and natural gas prices, Chevron stock has generated total returns (including dividends) on capital of 62.3% over the prior 12-month period. Even so, Chevron's bull run appears to be far from over for a couple of solid reasons.
CVX Total Return Level data by YCharts
If crude oil prices do indeed breach $100 a barrel this year as some analysts predict, for instance, Chevron's top line could jump by as much as 19.6% this year, according to Wall Street's most optimistic forecast. That kind of explosive top-line growth would mean that the oil and gas giant's shares are currently trading at under nine times 2022 projected earnings. To put this figure into context, the three-year average price-to-earnings ratio for oil and gas stocks at large is roughly 13.4 at the time of this writing. Therefore, Chevron's stock might be deeply undervalued right now.
Apart from its compelling near-term growth prospects and lowball valuation, Chevron's top-notch shareholder rewards program could also drive its stock price higher over the course of 2022. Keeping with this theme, the company recently hiked its dividend for the 35th consecutive year, a move that boosted its annualized yield to a noteworthy 4.35%. The energy titan also noted during its latest quarterly update that share buybacks this year should range from $3 billion to $5 billion. Depending on how aggressive the company gets with share repurchases, Chevron's bottom-line growth could surpass even Wall Street's most bullish forecast for 2022.
The one drawback with this story is that Chevron is facing some hefty production headwinds in key foreign territories right now. Nonetheless, this energy behemoth should be able to shrug off these production hiccups to deliver market-beating returns for shareholders this year, thanks to its generous shareholder rewards and surging oil and gas prices.
Merck: Buy the dip
While most big pharma stocks posted jaw-dropping returns for their shareholders last year, Merck's stock fell by 6.31% in 2021. Merck's stock struggled last year due to the threat of generic competition for its mega-blockbuster cancer medication Keytruda, an event that actually won't occur until the tail end of the decade. The long and short of it is that Wall Street simply isn't convinced that Merck's various business development deals over the last four years will be enough to solve the Keytruda patent cliff issue. Keytruda, after all, currently makes up a little over a third of the drugmaker's annual revenue, and it is one of the best-selling drugs of all time. That's a big hole to fill to be sure.
Merck, however, does in fact have a rock solid plan in place to grow past the loss of exclusivity for Keytruda. The company sports a highly diverse and robust clinical pipeline, with multiple potential blockbusters under development. Moreover, Merck has made it abundantly clear that the company will continue to be aggressive on the merger and acquisition scene in order to bring in new sources of revenue. Despite these facts, though, the pharma giant's shares are being valued at less than 11 times forward earnings right now. That's a rock-bottom valuation for a top big pharma stock.
The good news is that Merck's shares ought to perk up as investors drill down on value plays in this risk-averse market. And until this inevitable rebound takes shape, patient shareholders can take advantage of the drugmaker's rather generous 3.41% annual dividend yield.
