Growth stocks have outperformed value stocks significantly over the past decade. And thanks to the effects of the coronavirus pandemic, 2020 was also a great year for growth stocks, particularly their performance in the wake of a market correction last spring. Alas, many investors are still chasing high-growth stocks even though they are trading at lofty valuations. However, several analysts believe that a COVID-19-vaccine-driven economic recovery will drive a big shift in investments from expensive growth stocks to quality turnaround candidates. After all, its reasonable that some pandemic-hit companies will return to their strength once the economy recovers.
The recent outperformance of value stocks is evident in the SPDR S&P 500 Value ETF’s (SPYV) 14.3% returns over the past three months versus the SPDR S&P 500 Growth ETF’s (SPYG) 8.2% gains and the SPDR S&P 500 Trust ETF’s (SPY) 10.7% returns. Analysts expect this trend to continue with an economic recovery this year.
We believe BHP Group Plc (BBL), Shinhan Financial Group Co Ltd (SHG), ABM Industries Incorporated (ABM), and Clearwater Paper Corporation (CLW) are four value picks that are trading at discounts to their peers and are well-positioned to deliver solid returns based on their earnings growth potential.
BHP Group Plc (BBL)
BBL is the natural resources business in Australia, North America and internationally. The company engages in the exploration, development, and production of oil and gas properties, and the mining of copper, silver, zinc, molybdenum, uranium, gold, iron ore, and metallurgical and energy coal. It operates through Petroleum, Copper, Iron Ore, and Coal segments.
In terms of forward P/E, BBL is currently trading at 11.39x, 51.4% below the industry average of 23.44x.
BBL recently unveiled its plans to construct a wind fence at Finucane Island as part of the company’s Pilbara Air Quality Program. The fence would be the first of its kind in Australia, designed for the Pilbara’s unique weather conditions. In addition, BBL and Toyota Australia recently partnered on a new light electric vehicle (LEV) trial at BBL’s Nickel West operations. The partnership aims to reduce the emissions intensity of its light vehicle fleet. Earlier last month, it was reported that BBL’s biggest construction project, the South Flank iron ore’s construction project, is now more than 85% complete.
BBL’s revenue and EPS have grown at a CAGR of 6.1% and 9.6%, respectively, over the past three years. The company started its new financial year in July 2020 with a strong first quarter of safety and production performance driven by solid results in metallurgical coal and iron ore. Its total metallurgical coal production has increased 4% year-over-year to 10 million tons in the first quarter ended September 30, 2020. Its total iron ore production has risen 8% from the year-ago to 66 million tons over the same period.
BBL is on an expansion drive. The company has been focusing on lowering its debt and improving its cash flow, which should bode well during these still turbulent economic conditions. During the September quarter, its Atlantis Phase 3 began production ahead of schedule and on budget. The Jansen Stage 1 project in Canada is expected to begin operating this year. BBL is up 19.8% over the past year and is poised to grow more. BBL is benefiting from rising iron and copper prices, and analysts expect its EPS to grow at a rate 5.3% per annum over the next five years.
How does BBL stack up for the POWR Ratings?
A for Trade Grade
A for Buy & Hold Grade
B for Peer Grade
A for Industry Rank
A for Overall POWR Rating.
The stock is also ranked #3 of 40 stocks in the Industrial - Metals industry.
Shinhan Financial Group Co Ltd (SHG)
SHG is the largest financial group in Korea and provides financial products and services in South Korea and internationally. In addition to offering retail and corporate banking services, the company is involved in treasury and investment activities in international capital markets. SHG operates through five segments – Commercial Banking Services, Credit Card Services, Securities Brokerage Services, Life Insurance Services, and Others.
SHG’s forward P/E ratio stands at 5.13, 62.3% lower than the industry average of 13.61. In terms of trailing-12-month P/Sl, the stock is currently trading at 1.49x, 54.3% lower than the industry average of 3.26x.
SHG recently signed a stock purchase agreement to acquire 35% of Shinhan BNPP Asset Management from BNP Paribas Asset Management Holding. The companies agreed to reorganize an asset management company to accommodate increasing volatility in domestic and overseas financial markets and the broadening needs of domestic investors.
Over the past three years, SHG has grown its top line at a CAGR of 7.8%. In its last reported quarter, SHG secured sustainable growth through a diversified portfolio, and recorded growth in interest and fee income. The company posted KRW 2.95 trillion in net income. On a quarterly basis, it posted KRW 1.14 trillion, its largest quarterly income since inception. Its corporate loans rose 11.2% versus last year on the back of 2% interest income growth.
SHG has secured sustainable growth through a diversified portfolio, and recorded growth in interest and fee income. To increase the profitability of its investment banking and property asset management, SHG has adopted a matrix operational system, which is the basis for cooperation among its many subsidiaries. According to our POWR Ratings system, SHG has been accorded an “A” in Industry Rank and Trade Grade. Among Foreign Banks stocks, it is ranked 49th out of 106 .
ABM Industries Incorporated (ABM)
ABM is a leading provider of integrated facility solutions via 350+ offices throughout the United States and various other countries. It provides janitorial, facilities engineering, parking, custodial, landscaping and ground, and mechanical and electrical services, and vehicle maintenance and other services to rental car providers. The company operates through Business & Industry, Technology & Manufacturing, Education, Aviation, and Technical Solutions segments.
ABM’s forward P/E ratio stands at 16.04, 33.5% lower than the industry average of 24.13. In terms of trailing-12-month P/S, the stock is currently trading at 0.44x, 70.4% lower than the industry average of 1.5x.
In November, ABM announced the expansion of its partnership with JFKIAT, an operator at JFK International Airport, to include ABM EnhancedClean, a certified disinfectant program to help fight the spread of COVID-19 and seasonal illnesses. Moreover, ABM initiated an additional energy savings performance contract (ESPC) for the U.S. General Services Administration (GSA). Over the contract’s 20-year period, ABM is projected to save an estimated $34.3 million through ventilation system upgrades and improved indoor air quality (IAQ) in nine federal facilities.
ABM’s revenue has grown at a CAGR of 3.2% over the past three years. In its fiscal fourth quarter ended October 31, 2020, the company delivered $1.5 billion in revenues, declining 9.9% year-over-year, driven by pandemic-related client disruptions, particularly within the Aviation and Technical Solutions segments. However, the company has generated record net cash flow from operating activities of $198.7 million. ABM reported an adjusted income from continuing operations of $0.69 per share, rising 4.5% from the prior-year value.
Fiscal 2020 was a pivotal year for ABM because the COVID-19 pandemic created a historic shift in the demand for its essential services. The company witnessed record annual new sales bookings of $1.2 billion for the year. ABM’s management aims to continue leveraging its market positioning and operational excellence through strategic acquisitions while maintaining attractive profit margins. Wall Street analysts further expect ABM’s EPS to grow at the rate of 16% per annum over the next five years.
It is no surprise that ABM is rated “Buy” in our POWR Ratings system. It also has an “A” for Trade Grade, and a “B” for Buy & Hold Grade and Peer Grade. It is ranked #23 out of 55 Outsourcing - Business Services stocks.
Clearwater Paper Corporation (CLW)
CLW is a premier supplier of private brand tissue to major retailers and wholesale distributors, including grocery, drug, mass merchants and discount stores in the United States and internationally. The company operates through two segments – Consumer Products, and Pulp and Paperboard.
CLW’s forward P/E ratio stands at 7.52, which is 67.9%lower than the industry average of 23.44x. In terms of trailing-12-month P/S, the stock is currently trading at 0.36x, 77.4% lower than the industry average of 1.6.
Over the past three years, CLW has grown its top-line and EPS at a CAGR of 2.5% and 29.7%, respectively. In the third quarter ended September 30, 2020 the company recorded net sales of $457.4 million, increasing 2.7% year-over-year, on the back of elevated demand for tissue products, steady demand for paperboard, and solid operational execution. Total tissue volume sold was 90,091 tons, a 4% rise from the comparable period last year. Its retail volumes represented 96% of total volumes sold. Its adjusted EPS came in at $1.59, a significant improvement from the year-ago loss of $0.68 per share.
CLW’s management recently raised the company’s earning guidance for the fourth quarter of 2020 due to a much greater than expected demand for tissue, strong operating performance, and favorable cost trends. Moreover, analysts expect the company’s EPS to grow at the rate of 5% per annum over the next five years.
CLW’s POWR Ratings reflect a promising outlook. It has an overall rating of “Strong Buy” with an “A” for Trade Grade and Buy & Hold Grade. Among the 13 stocks in the Industrial - Paper industry, it is ranked #5.
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BBL shares were trading at $58.76 per share on Thursday morning, down $0.66 (-1.11%). Year-to-date, BBL has gained 10.81%, versus a 2.81% rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies.
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