The continued sell-off of stocks, led by high-flying growth stocks, is an indication that the pandemic fear trade is gaining momentum.
That phenomenon, over the past six months, has fueled investors' insane rush to pump it all into a few major technology stocks, pushing their valuations to extreme levels last seen during the dot-com bubble.
While these stretched valuations have led many analysts to cut some major growth stocks in recent days, this correction also provides an opportunity to buy stocks that are trading for relatively cheap valuations in relation to their earnings and long-term growth potential. .
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The way to find these value stocks is to look for companies that have fallen into the background since the March upswing due to their temporary challenges. Some remain well positioned to deliver superior returns over the longer term. With this theme in mind, we look below at three of these value stocks:
1. JPMorgan Chase
Banks are purely a cyclical trade, closely tied to the direction of the economy. Nor do they currently offer an attractive buying opportunity when interest rates are expected in the next three years and international banks are under pressure from alleged money laundering.
As a measure of how hard banking stocks have been hit, it is down more than 35% this year. While macroeconomic conditions remain unfavorable for banks, there are a few players who can survive this downturn better than their competitors. JPMorgan Chase (NYSE :), the largest US-based lender, is one of them for its strong balance sheet and the quality of its operations.
With the economy still struggling and borrowers not meeting their obligations, JPM is quickly adapting to this new reality. The lender set aside $ 6.8 billion in the first quarter and $ 8.9 billion in the second quarter as it prepared for increasing borrower defaults and other pandemic losses.
That said, JPMorgan is too big to fail, and its diversified businesses provide cash flows in this difficult environment. During the period, JPM saw its market unit earnings increase 79% from a year ago, while investment banking fees increased 91% in the second quarter.
By yesterday's close, JPM was trading at $ 95.31, while JPM is down more than 30% this year, but the stock has seen a steep rise after downturn in the past. With its attractive 3.7% dividend yield, the lender is a good long-term bet for value investors.
2. Intel
This is perhaps one of the most disappointing times for Intel (NASDAQ 🙂 investors. The largest American chip manufacturer is struggling to catch up with new technologies because the production of the most advanced chips is behind schedule.
This summer, Intel announced that it was considering outsourcing its chip production after years of delays to bring the latest products to market. These delays have helped rivals, including Advanced Micro Devices (NASDAQ :), catch up on performance and gain market share.
Intel's current best technology, known in the industry as 10 nanometers, would be released in 2017. It is only now making large production volumes. And when the company reported that in July, it said the next iteration – 7 nanometers – would be delayed by a year.
Even with these setbacks, we believe that the long-term value of Intel's stock remains intact. The Santa Clara, California-based company is deeply rooted in the psyche of the tech world and has what it takes to get out of this current bad phase.
With all these challenges, Intel continues to show strong growth in both sales and profitability. It closed at $ 49.72 yesterday. At the time of writing, Intel is trading for only 9 times the multiple price-earnings ratio of 12 months. We don't see this stock staying this cheap for long, making it a good choice for long-term investors. With the potential benefit, investors will also earn growing dividends, currently 2.65 per share.
3. Hilton Worldwide
Hotel chains have been hit hard by the COVID-19 pandemic as both business and leisure travel are drying up. But that situation is unlikely to last forever. Once a vaccine is discovered, or the pandemic is over, it will resurface international travel, adding to the value of hotel supplies.
In this group, our preferred choice is Hilton Worldwide (NYSE :), best positioned to weather the crisis because of the quality of its assets and the company's ability to generate cash in this difficult business environment.
In a recent earnings report, Hilton said:
"We currently expect that even if current levels of very low occupancy rates persist, this cash position, together with the net proceeds from the proposed offering of a total principal amount of $ 500 million in senior unsecured bonds, will provide us with sufficient liquidity to fund our operations for the next 18 to 24 months. "
That means the company does not have a large loan that will expire before June 2024.
Although the company's stock remains about 25% lower this year, it has already recovered strongly from the dip in March, when it lost about 50% of its value. The stock closed at $ 85.48 yesterday, down more than 4.5% from a day ago. However, if you want to bet on a hotel brand, Hilton is a good name to consider.
