With 2025 almost in sight, it's a good idea to start thinking about making adjustments to your portfolios. With this in mind, here are three great value stocks to consider. They all trade at attractive valuations and have significant upside catalysts in 2025 that could lead them to outperform the market significantly.
1. Owens Corning for the housing market recovery
Trading at 12.4 times Wall Street analyst estimates for 2025, roofing, insulation, and doors company Owens Corning (OC 1.59%) is attractively valued and has upside potential coming from a recovery in the housing market. In addition, the company has earnings growth potential from delivering on its target of $125 million in synergies from the acquisition of doors and door system company Masonite in 2023.
Image source: Getty Images.
The two events are interlinked. If the housing market recovers, it will be much easier to generate synergies from the deal, not least as doors, shingles, and insulation are sold to the same customers. Owens Corning doubled down on the North American residential housing market when it bought Masonite. That could be a smart move if 2024 proves to be a trough and a lower interest rate environment stimulates the market through 2025.
While there's no guarantee it will happen, history suggests the Federal Reserve dropping the fed funds rate will lead to lower mortgage rates and increased housing activity, which should benefit Owens Corning's bottom line. Moreover, the stock's valuation suggests some room for error if the recovery proves more tepid than many expect.
NYSE: OC
Key Data Points
2. Baker Hughes for the new energy transition reality
After a few years in the wilderness, investors returned to the idea that fossil fuels have a big future after all. While the movement toward clean energy continues, the emerging reality is that it's likely to be more of an evolution than a revolution. Renewable energy's increasing complexity, cost, and intermittent nature means expectations have been pared back this year. That's good news for an oil and gas equipment and services company like Baker Hughes (BKR 0.63%).
To be clear, Baker Hughes is also exposed to clean energy through its "new energy" equipment (carbon capture equipment and hydrogen production). Management expects its new energy orders will exceed $1 billion in 2024 (up from $750 million in 2023) compared to overall industrial energy and technology (IET) orders of $11.5 billion to $13.5 billion.
That said, the recent rise in the share price comes down to improving sentiment over its two segments, namely its overall IET segment and its oilfield services and equipment (OFSE) segment. The Trump administration is seen as more friendly to the energy industry, particularly toward liquified natural gas (LNG), as President-elect Donald Trump is expected to remove the Biden administration's moratorium on licensing new LNG export facilities. In addition, the new administration looks likely to allow for increased drilling for oil in the U.S.
With new energy orders growing, renewed enthusiasm around its traditional business, and the role of gas as a fuel source in the economy, Baker Hughes is set to do well in 2025. In addition, the OFSE segment will continue to receive support provided the price of oil stays in the range it has been in over the last few years.
A valuation of 19 times expected 2024 earnings and 20.6 times free cash flow is attractive for a company growing earnings at a double-digit rate and with upside potential in 2025.
NASDAQ: BKR
Key Data Points
3. Delta Air Lines stock is set for takeoff
With the stock up 58% this year, it may be more appropriate to say the stock is airborne, but it's worth noting that share prices have no memory. Despite the price rise, Delta Air Lines (DAL 3.42%) still trades at a highly attractive valuation of 10.5 times its estimated 2024 earnings. In addition, recall that the company took a, hopefully, one-off hit in 2024 from the CrowdStrike software update issue in the summer.
Moreover, Wall Street analysts left the company's recent investor day presentation in a positive mood, and a slew of analyst upgrades followed. Much of the optimism around Delta comes from the idea that the airline industry acted in a disciplined way in 2024 by reducing capacity where necessary in response to some overcapacity in the summer. That's a good sign that it's not quite as cyclical an industry as is reflected in Delta's valuation.
In addition, Delta is reducing its reliance on cyclical main cabin ticket revenue by growing in the premium sector and loyalty programs, as well as via its highly successful co-branded credit cards with American Express.
Management's forecast of free cash flow of $3 billion to $5 billion over the next three to five years gives confidence that Delta will significantly reduce its net debt of $18.7 billion over the next few years.
Add in the prospects of lower interest rates and an improving economy in 2025, and Delta's stock price at the current valuation has plenty of upside potential.
