Jonathan Boyar, president of the independent research firm Intrinsic Value Research, New York City. BoyarValueGroup.com
After last year’s stock market debacle, many investors are fed up with pricey, volatile growth stocks (technology companies!) that dominated the financial markets for the past decade. Instead, those investors have turned to cheaply priced, steadier value stocks. In 2022, value stocks in the S&P 500 lost 5% versus a loss of 30% for growth stocks. Value stocks tend to do better in periods of elevated inflation and interest rates, so analysts say it could be the beginning of years of outperformance for value investors.
But Jonathan Boyar, president of Boyar’s Intrinsic Value Research, warns that you can’t just own any value stock. You need to be highly selective because plenty of cheap stocks will stay cheap as the economy slows and perhaps slips into recession. Instead, look for “forgotten value” stocks—bargain-priced stocks with big catalysts and opportunities to propel their shares higher. These catalysts aren’t always obvious to small investors, so Bottom Line Personal spoke to Boyar to find out how he finds forgotten value stocks and which ones he thinks look the most attractive now…
Many investors think undervalued stocks are much safer than fast-growing ones. Their reasoning: If a stock has already fallen 50% below its highs, there must be less risk that it will lose more. Reality check: These value stocks could be traps if the companies have limited potential to grow. A company could be selling at a bargain price because it is weighed down by too much debt or has outdated products and mediocre management…or it’s stuck in a dead-end industry. The stocks of these types of companies can go sideways for years. To avoid value traps, I look for the following criteria in companies…
High-quality businesses with stable balance sheets and cash flows, enduring competitive advantages and in-demand products/services.
Selling below their intrinsic value—how much a private owner would pay to take over the company. Because valuing a company is difficult, I protect myself by building in a large margin of error. I only consider stocks that are selling for at least 20% below my calculations of intrinsic value.
Catalysts that will drive the company’s earnings and stock price higher. This is the most important criteria. These catalysts might include an initiation of dividend payments or a large share-buyback program…a spin-off that makes financial sense…changes in management…or new products/services with major potential.
Here are the “forgotten value” stocks I am looking at now…
Laboratory Corporation of America Holdings (LH) is one of the country’s largest diagnostic medical-testing labs. Known as LabCorp, it became a household name during the pandemic by processing millions of COVID-19 tests. With about 2,000 patient-service centers across the US, LabCorp can test specimens at much lower cost than hospitals and doctor’s offices. But the decline in COVID-19 testing hurt the company’s revenues last year, and the stock fell 25%.
Catalysts for earnings growth: In 2023, LabCorp plans to spin off its drug-development business and focus on its diagnostics business, including its fast-rising at-home testing and collection options known as LabCorp OnDemand and new tests for infectious viruses and diseases, oncology and more. The company has announced more shareholder-friendly policies such as a newly instituted dividend and a $2.5 billion share-repurchase program. Recent share price: $224.55.
The Scotts Miracle Gro Co. (SMG). The 155-year-old company dominates the US consumer market for lawn and gardening products with brand names Miracle-Gro plant food, Scotts seed and fertilizer, and Ortho weed and bug control. It reaped a windfall during the COVID lockdowns with so many people paying more attention to their yards. But its stock plunged 70% last year as revenues shrank to prepandemic levels.
Catalysts for earnings growth: Scotts has rebounded this year as it taps into a new generation of consumers—Millennials who are buying homes. It also has embarked on a cost-cutting effort called Project Springboard to trim nearly $200 million in annual expenses. And it has quietly become a major player in the cannabis industry. Its subsidiary, Hawthorne Gardening, supplies hydroponic and lighting systems used to grow marijuana. Recent share price: $63.29.
Topgolf Callaway Brands (MODG). Even neophyte golfers are familiar with this iconic golf equipment and apparel firm, the maker of the “Big Bertha” drivers. Golf has been a dependable, albeit slow-growing business to invest in. The company’s stock has averaged just 3% annualized returns over the past 15 years and fell 28% in 2022.
Catalysts for earnings growth: Topgolf Callaway is reinventing itself as an entertainment firm in a bid to attract younger consumers and stir up the golf business. In 2021, Callaway merged with Topgolf, a rapidly growing chain of 85 golf-entertainment complexes offering a mixture of high-tech indoor driving ranges, restaurants and bars. Management envisions 450 Topgolf locations worldwide. The company also has a hot product in its golf-related technology Toptracer, software that allows you to trace and analyze shots on indoor driving ranges. Recent share price: $19.63.
Watsco (WSO) distributes tens of thousands of heating, ventilation and air-conditioning (HVAC) systems and parts through hundreds of stores and suppliers across the US. The downturn in the housing market slowed business enough to panic investors in 2022. The stock dropped 20% last year even though Watsco is a rock-solid business with consistent earnings and 48 consecutive years of dividend payouts.
Catalysts for earnings growth: On January 1, 2023, for the first time in nearly a decade, new minimum efficiency standards for air conditioners and other household appliances went into effect in the US. That, plus energy-efficiency tax credits for homeowners in the Inflation Reduction Act, should spur plenty of demand for HVAC equipment. Watsco stock, up about 30% in the first few months of this year, has room to grow. It is expanding by making acquisitions in the fragmented HVAC parts-distribution industry, especially in the fast-growing Sunbelt states. It now controls about 13% of the roughly $50 billion market. Recent share price: $357.73.
The Walt Disney Co. (DIS). Mickey Mouse had a meltdown in 2022. The stock plunged 44% as multiple crises came to a head. Investors especially disliked the management initiatives of CEO Bob Chapek, who took over in early 2020. Chapek suspended the company’s dividend and sank $30 billion last year into Disney+, the fast-growing but money-losing streaming platform. Under his leadership, the company produced corporate earnings shortfalls coupled with out-of-control operating expenses.
Catalysts for earnings growth: In November 2022, Disney fired Chapek and brought former CEO Robert Iger out of retirement. Iger promptly announced an overhaul of the Magic Kingdom, which included $5.5 billion in cost cuts and elimination of 7,000 jobs. He also is pressing to make Disney+, which has more subscribers than Netflix, profitable by fiscal 2024, and has asked the board of directors to reinstate the dividend. Meanwhile, Disney is proving it’s still a box-office superpower. The movie Avatar: The Way of Water has collected more than $2 billion worldwide. And this year, Disney will roll out three Marvel blockbusters and the last Harrison Ford–led Indiana Jones film. Another catalyst: After nearly two years of Disney theme park closures, the parks are booming again. In the fourth quarter of 2022, park revenues soared 36% year-over-year. Recent share price: $93.14.