In 2016, Bank of America/Merrill Lynch released an intriguing report that examined the average long-term returns of growth stocks and value stocks between 1926 and 2016. What the report found was that, while both groups of stocks proved excellent over the long run, value stocks held the edge, with an average annual return of 17% (versus 12.6% for growth stocks) over this 90-year period.
Since the Great Recession, we’ve seen growth stocks…
handily outperform, which has a lot to do with the Federal Reserve keeping interest rates below their historic norm. Having abundant access to cheap capital has allowed high-growth businesses the opportunity to borrow and expand.
But things could change in 2020, especially with Wall Street and investors on heightened recession watch. This could bring value stocks back into focus for the first time in about a decade. This is why I expect the following five value stocks to make investors richer in 2020.
While value is most often defined by examining a company’s trailing or forward price-to-earnings ratio, what makes cancer-drug developer Exelixis (NASDAQ:EXEL) notoriously cheap among biotech stocks is its price-earnings-to-growth ratio (PEG ratio). Generally, a PEG ratio below 1 implies a potentially undervalued stock. Exelixis’ PEG ratio is just 0.4, and is indicative of the company’s ongoing double-digit growth potential and reasonably low P/E ratio.
What makes the wheels turn for Exelixis is Cabometyx, a therapy approved to treat advanced cases of renal cell carcinoma (kidney cancer) and hepatocellular carcinoma (liver cancer). The reason Exelixis is valued at “only” 18 times next year’s earnings per share (EPS) is the potential for increased competition in renal cell carcinoma, or RCC. Nevertheless, Cabometyx is the only second-line RCC indication to have led to statistically significant improvements in objective response rate, progression-free survival, and overall survival, and it may be able to further cement its market share in first-line RCC via a treatment combination with key rival Opdivo, an immunotherapy produced by Bristol-Myers Squibb.
Aside from riding Cabometyx to low double-digit growth, Exelixis somewhat recently reignited its internal research and development engine, and is building up quite the war chest of car, derived from its Cabometyx cash flow. Value investors are likely to realize just how inexpensive Exelixis really is in 2020.
Another value stock that could be flying high and making investors richer this year is Spirit Airlines (NYSE:SAVE). Spirit is carrying around a minuscule forward P/E ratio of 8, and has a PEG ratio of less than 0.9, meaning both figures agree there’s value to be found here.
If Spirit is such a moneymaker, why has its stock been grounded? The answer likely has to do with a number of short-term factors. As my colleague Adam Levine-Weinberg noted in August, Spirit’s expenses have temporarily risen due to construction at the company’s biggest hub, in Fort Lauderdale, Florida, and the implementation of new flight schedules that are designed to take advantage of its growing fleet. Additionally, Hurricane Dorian played spoiler by disrupting flights. Essentially, Spirit is set up to absolutely crush its comps in 2020, assuming the weather cooperates.
What’s more, history has shown that, even though the company receives poor satisfaction ratings from passengers, its bare-bones ticket model resonates with bargain hunters. Built to take advantage of high-margin add-ons and options, Spirit’s unconventional airline model continues to pay off.
The Valens Company
The idea that “value” can be found in the cannabis industry might seem laughable, but The Valens Company (OTC: VLNCF) isn’t your average pot stock. This extraction-service provider is the cheapest marijuana stock by a mile, at least based on forward P/E ratio, and should offer revenue growth of more than 200% in 2020.
The secret to Valens’ success is that it’s operating smack-dab in the middle of the hottest trend in cannabis: the rollout of derivatives in Canada. Derivative pot products, such as edibles, infused beverages, and topicals, all require extracts, and it’s Valens that’s responsible for processing cannabis and hemp biomass to yield the resins, distillates, concentrates, and targeted cannabinoids being used in these products. Remember, derivatives bear much higher margins than traditional dried cannabis flower, making them a must-have for any grower’s portfolio. This makes Valens a necessary processing middleman.
Valens also benefits from the fact that it locks in its clients with extraction deals that are typically two or three years in length. These agreements provide firm price and volume commitments, allowing Valens to understand its costs and cash flow so as to maintain profitability. Expect 2020 to be another high-growth (and green) year for The Valens Company…
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