Over the past three years, value stocks have outperformed growth stocks across the board, from large-caps on down. That should come as no surprise because there have been two bear markets during that time, and value investments tend to lead the way during down markets.
That dynamic has started to shift somewhat in 2023. But with economic uncertainty in the near term, and the market still overvalued as measured by the Shiller price-to-earnings (P/E) ratio -- which looks at inflation-adjusted earnings over the past 10 years -- value is still a pretty good bet. The key is to find stocks that are good values and have solid earnings growth potential. Here are two good options.
1. CPI Card Group
CPI Card Group (PMTS 3.56%) is a small-cap stock that you may not have heard of, but it is one worth researching because there is a lot to like about it. CPI Card Group is one of the leading manufacturers of payment cards -- of all stripes, including credit, debit, prepaid, and digital and on-demand cards -- through its software-as-a-service (SaaS) offering. Its customers are banks, credit card issuers, payment card issuers, credit unions, fintechs, and others.
Over the past five years, the company has gone from a $23 million net loss in 2017 to a projected $36 million in net income in 2023. In the first quarter, net income climbed 81% year over year to $10.9 million.
The stock is currently undervalued, with a P/E of 7.6 and a price-to-sales (P/S) ratio of 0.65. But the growth story is a good one, as the average price target of the two analysts who cover it is $50 per share, 83% more than its current $29.
CPI has seen strong growth in contactless, eco-focused, and its SaaS Card-at-Once offerings, and its leadership in these areas should drive growth. While the second quarter could be rocky, given the woes in the banking industry, CPI sees high single-digit percentage growth in earnings before interest, taxes, depreciation and amortization (EBITDA) by yearend and double the amount of free cash flow.
The number of cards in circulation has increased an estimated 11% annually over the past three years, and that number is forecast to keep growing. CPI is well-positioned to tap into that growth.
2. Charles Schwab
On the opposite end of the market cap spectrum from CPI is Charles Schwab (SCHW -0.78%), the financial services behemoth that, among other things, is the largest U.S. brokerage.
Schwab has been a growth engine over the years. In the past five years through the end of 2022, earnings have grown by about 22% per year, and over the past 10 years it has an 18% annual earnings growth rate. In the first quarter, despite a banking industry meltdown, earnings per share jumped 24% year over year on a 14% increase in net income.
The stock has fallen about 35% this year due to the problems within the banking industry, but that only makes this excellent growth stock a good value. Its P/E is about 15, which is near 10-year lows. Last year at the end of the first quarter, the P/E ratio was 29.
This makes Schwab a tremendous value for investors. Its earnings power is intact as the largest U.S. brokerage with a diversified business model that includes banking, asset management, financial advisory services, and wealth management. The average price target among analysts is about $66 per share, about 20% higher than current levels.
Schwab should also start to see the benefits from its 2020 acquisition of TD Ameritrade, which the company is now integrating into its operations. The integration of TD Ameritrade accounts onto the Schwab platform will be mostly complete by the end of 2023, and once that is done, the added scale should result in cost savings and a 10% to 15% boost in earnings.
A market leader with the earnings power of Schwab, at this nearly 10-year low valuation, is too good a stock to pass up. Both Schwab and CPI Card Group, while very different companies, have a history of excellent earnings growth. They are also both cheap, efficient, and undervalued relative to their earnings power.
