Stocks have gotten off to a rough start to the year. Specifically, growth stocks have gotten crushed, though value stocks have held up a little better. Inflationary pressures, the prospect of rising interest rates, and geopolitical tensions have all contributed to the market's volatility.
Prudential Financial (PRU 1.26%) is a value stock that has returned 29% over the past year but still trades at a dirt cheap valuation. Here's why the insurance and asset management company is a solid stock to buy, especially as uncertainty hangs over the market.
Why value stocks can outperform
From November 2020 through Monday's close, the iShares Russell 2000 Value ETF has outperformed the iShares Russell 2000 Growth ETF, returning investors 54.1% versus 14.3%.
Growth stocks had an incredible run in 2020 after the Federal Reserve slashed interest rates and started quantitative easing. However, the story changed that November when investors sensed these easy monetary policies would begin winding down.
That's exactly what happened. The Federal Reserve ended its corporate-lending program in December 2020 and wound down other programs throughout 2021.
Fiscal spending has also slowed down, and the Federal Reserve has indicated that it would begin raising interest rates in response to inflationary pressures in the economy. In January, the consumer price index (CPI) came in at 7.5% -- levels not seen since 1982.
Value stocks tend to outperform when inflation is high, while growth stocks outperform when inflation is low. That's because value stocks tend to be more established companies with steady cash flows but also tend to be slower-growing stocks.
Growth stocks are fast-growing companies, but they may not necessarily be profitable. When valuing stocks using the discounted cash flow model, growth stocks are more negatively affected by rising interest rates than value stocks.
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Prudential Financial is trading at a dirt cheap valuation
Prudential Financial is a life-insurance provider and asset-management company that provides a wide range of products, including life insurance, annuities, retirement-related products, and investment management. In 2021, it earned nearly $71 billion in revenue. Half that revenue came from insurance premiums, one-quarter from net investment income, and 7% from asset management and service fees.
After a rough 2020 due to the pandemic, Prudential put up a stellar year in 2021. Revenue grew 24% compared to 2020 levels, and 9.5% compared to 2019. Meanwhile, bottom-line growth was outstanding. Diluted earnings per share (EPS) of $19.51 was a vast improvement from its diluted loss per share of $1 in 2020 and nearly twice its EPS from 2019.
The financial-services company trades at a dirt cheap valuation by any metric. At Monday's closing price, it was trading at a price-to-earnings ratio (P/E) of just 5.8, putting it on the lower end of its history over the past 10 years. It also trades at a price-to-tangible-book-value (P/TBV) of just 0.72, which is also below its 10-year average.
Here's why Prudential can keep winning
2021 was a year for Prudential's executives to shift the company's focus, cut costs, and focus on more stable revenue sources. Prudential divested several businesses that weren't consistent profit-makers, including its Korea and Taiwan businesses and its full-service retirement business. The sale of these businesses will generate $6 billion in cash, which Prudential plans to plow right back into the business.
The two areas where it sees the best opportunity for growth are emerging markets and asset management. That's why the company acquired Montana Capital Partners, Green Harvest Asset Management, and ICEA LION Holdings. These acquisitions give it a European-based asset manager and a financial-services footprint in Kenya.
The ultimate goal is to be less sensitive to market conditions and focus on those higher profit-margin businesses. It also wants to expand its product offerings and scale up the distribution of its current offerings.
The company has also returned a ton of capital to shareholders. From 2021 through 2023, it has plans to return $11 billion in total capital to shareholders. In 2021, it returned $4.3 billion of this total. Not only that, but it recently raised its quarterly dividend by 4% -- its 14th consecutive year of increasing dividends.
Prudential's business shift, strong capital position, and tailwinds favoring value stocks make this a solid stock to buy amid this market volatility.
