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As growth stocks continue to struggle, now may be the time to take a value investing approach. In a recent investor survey, 74% of participants said they believe value will outpace growth this year as rising interest rates continue to dampen the appeal of growth stocks. So what kind of value stocks should you buy?
There are many value investing styles. You can focus on buying stocks that are selling at low valuations. Whether weak on an absolute basis or weak relative to peers. You can also adopt a more “old school” style: buy stocks that are trading below their book value.
In other words, stocks are trading at a price lower than the net value of their assets. Successfully doing so is easier said than done, as there is often a good reason why a stock is selling at a discount. However, in the case of these seven value stocks to buy, there are catalysts in play that could help close the gap between book value and trading price.
|CDEV||Centennial Resource Development||$8.52|
|NYCB||New York Community Bank||$9.98|
Acacia Research (ACTG)
Acacia Research (NASDAQ:ACTG) is a micro-cap value stock. This is a net operating loss (NOL) shell, controlled by an investment firm Starboard value.
Its goal is to monetize the remainder of its US federal tax losses carried forward, primarily through the purchase of undervalued companies. Yet besides the hidden NOL asset, ACTG shares are also trading at a decent discount to book. It has a tangible book value of $6.01 per share, compared to a stock price of around $4.75 per share.
Even better, almost all of its assets are either cash or short-term investments. With Acacia, you get a dollar for about 79 cents. You also benefit from the optionality of its management putting this war chest to work. It has done so successfully in the past, as evidenced by the gains made from the liquidation of its life science patent portfolio. Classic value investors should consider this stock.
Beazer Homes United States (BZH)
Of course, it may seem too late to enter a homebuilder’s stock like Beazer Homes (NYSE:BZH) so late in the real estate cycle. The cyclicality of homebuilding can be brutal, which is why this stock trades at just 2.6 times estimated earnings and just under 60% of its tangible book value.
However, it is possible that a housing downturn was too expensive in BZH stock. Despite rising interest rates, the housing shortage in the United States could keep demand stable. The industry may not be in danger of a repeat of the financial crisis of the late 2000s. Moreover, this homebuilder is playing it safe, deleveraging its balance sheet.
Is the housing market remaining strong or is it just resilient in the current rising interest rate environment? Beazer shares could rebound, having been hammered since January. This is a contrarian value game to add to your watch list.
Many of the value stocks to buy listed above and below are small-cap or micro-cap names. In the case of Citigroup (NYSE:VS), but it is a large-cap bank stock. It’s not something you can say “under the radar”.
As such, you can assume the market is right to price the money center bank at a discount of over 40% to book value. After all, as a Seeking Alpha commentator recently argued, Citi has been facing heavy loan losses, high exposure to Russia, and could fare worse in a recession.
On the other hand, Warren Buffett’s recent $3 billion C-share purchase Berkshire Hathaway (NYSE:BRK.ANYSE:BRK.B) can counter bearish claims that it is a low-quality “value trap”. While you shouldn’t buy it just because “Warren buys it”, the fact that he suggested it is worth a closer look.
Centennial Resource Development (CDEV)
Over the past two years, due to a rebound in energy prices, Centennial Resource Development (NASDAQ:CDEV) made an amazing recovery. It increased almost 7 times during this period. Lately though, stocks have been slipping lower.
Mainly due to mixed reactions regarding the merger of this independent oil and gas company with a private company Colgate Energy Partners. It is feared that this agreement will be more favorable to the owners of Colgate than to individual investors in CDEV shares. However, as sell-side analysts at Truist have pointed out, the deal has many upsides.
This includes reducing the company’s leverage, allowing it to increase the return of capital (dividends, buyouts) to shareholders. This, coupled with the fact that it trades for a price-to-book ratio of 0.73x, may make it a value stock to consider. To top it off, Centennial is trading at a low earnings multiple (4.3x). If the Colgate deal works out, it could move stocks to higher levels.
Jackson Financial (JXN)
from Prudential plc (NYSE:UKP) Last year, Financial Jackson (NYSE:JXN) is one of the leading providers of annuities in the United States. It is also a genuine high-value stock, trading for just 1.8 times earnings and at a 70% discount to its book value.
Now, there are some caveats with the JXN stock. The market doesn’t give you a dollar for 30 cents, with no strings attached. As an investment firm that bought it post-split explained in a letter to its investors, the complex nature of the annuity business makes the use of metrics such as GAAP book value less useful than in other sectors.
Yet given its steep valuation discount and high dividend payout (6.3% forward yield) and aggressive share buyback activity? This old-fashioned value game could pay off for investors. You might want to take a look at the stock as it rebounds from this month’s decline.
New York Community Bancorp (NYCB)
New York Community Bank (NYSE:NYCB) has caught the eye of income investors, as the decline in its stock price increases its forward dividend yield (currently at 6.86%). Its year-to-date price decline has also brought it down to a moderate discount (about 28%) to its book value.
NYCB stock has performed poorly over the past decade. But when its impending merger with Flagstar Bancorp (NYSE:CFB) finally closes? Things could get better. By allowing it both to further diversify outside of its historical market (financing of rent-regulated apartment buildings in New York) and to increase its deposit base, this transaction could transform this long-term value trap date into a successful actor.
While starting to rebound, after falling in April and May, a big move can take time. Delays in obtaining the necessary federal and state approvals put the Flagstar deal on hold until later this year.
Olympic Steel (ZEUS)
A small cap steel stock, Olympic steel (NASDAQ:ZEUS) soared earlier this year, thanks to the shock of steel resulting from Russia’s invasion of Ukraine.
It was on top of another jolt for ZEUS stock that occurred in 2021, as the metals boom was in full swing. Yet despite a total price increase of 3x since 2020, the steel products company continues to be a value game. It trades at less than 5 times earnings and at a 15% discount to book value.
With fears that an economic downturn could end the metals boom, it makes sense that Olympic’s price is so cheap. At the same time, the market may be underestimating the duration of the boom. According to analysts’ forecasts, the company should see only a slight decline in earnings per share ($8.31 in 2022 and $7.32 in 2023).
At the date of publication, Thomas Niel held a long position within ACTG. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.