Value stocks about to catch up? These two titles are promising

• Value stock with strong underperformance from 2007 to 2020
• Signet Jewelers facing long-term growth
• Alibaba is likely to benefit from the AI ​​boom

“The big money is not in buying and selling, but in waiting,” is a famous quote from the late investment professional Charlie Munger. Together with Berkshire Hathaway CEO Warren Buffett, Munger was considered one of the most important representatives of value investing, which involves identifying undervalued stocks on the market that have an important competitive advantage, also known as a moat, and that in the long term approach their fair value and accordingly increase in value are likely to rise.

In contrast, there are so-called growth stocks that have above-average income and significant growth potential. As The Motley Fool writes, however, it has been shown in the past that the relative performance of value and growth stocks often moves back and forth, i.e. in opposite directions. However, this relative equilibrium was thrown out of balance not long ago, as an analysis by Patient Capital Management shows. From 2007 to 2020, value stocks performed significantly worse than growth stocks, namely a full 150.34 percent worse.

Value stock underperforms growth stock

However, according to founder Samantha McLemore, Patient Capital Management believes that there is now a general buying opportunity for “classic value” stocks, as she writes in a blog entry on the company’s website. In the past, periods of underperformance have been replaced by years of outperformance: “In earlier recovery phases, stocks with low multiples achieved average annual returns of more than 18%, more than three times the returns of their counterparts with high multiples and almost twice the market return (9.8%),” said McLemore.

The Motley Fool writer John Ballard has identified two value stocks that are poised for a long-term rally.

Signet Jewelers shares are available cheaply

For example, jewelry retailer Signet Jewelers, which includes brands such as Kay Jewelers, Diamonds Direct, Blue Nile and many others. According to Ballard, Signet Jewelers is not one of those companies that relies on rapid growth, but rather wants to build a significant portfolio of leading brands through strategic acquisitions. Signet Jewelers shares are still available cheaply and could generate lucrative returns over the next five years.

In the third fiscal quarter of 2024, which ended on October 28, 2023, the jewelry retailer reported a 12.1 percent decline in sales to $1.39 billion compared to the same quarter last year. Operating profit fell to $13.3 million from $48.4 million previously. The guidance for the 2024 financial year was confirmed.

“We achieved results that were at the high end of our expectations because we continued to make progress in executing our strategic objectives. We believe that our deep insights into the consumer world represent a competitive advantage that has helped us “We were once again able to gain market share in the wedding business this quarter and keep the average transaction value constant,” Signet CEO Virginia C. Drosos is quoted as saying in the press release accompanying the balance sheet presentation.

At the end of 2023, Signet also saw an uptick in engagement ring business. In general, sales in the wedding segment account for about half of the company’s revenue and should prove to be a growth catalyst, according to Ballard. In the long term, Signet management is targeting EPS of $14 per share, which brings the future price-earnings ratio (forward P/E ratio) to just seven and is therefore very favorable, as The Motley Fool argues. The five analysts surveyed by FactSet also see significant upward potential for Signet shares. The average price target here is $115.40. Signet shares are currently trading at $102.81 on the NYSE (as of February 9, 2024).

Amazon rival Alibaba as an AI beneficiary

According to Ballard, Amazon’s Chinese rival Alibaba is also one of the undervalued value stocks that could gain significantly in the long term. Alibaba has had a difficult year due to a gloomy economic environment in China and numerous regulatory requirements from the Chinese authorities. This can also be seen in the performance of Alibaba shares, which lost 30.52 percent of their value over the last twelve months (as of February 9, 2024).

The recently published figures for the financial quarter that ended in December 2023 also fell short of expectations. The EPS amounted to 2.37 yuan per share, compared to 2.41 yuan per share in the same quarter of the previous year. Analysts had expected EPS of 2.39 yuan per share. Sales of 260.3 billion yuan also fell short of estimates of 260.7 billion yuan. The online retailer also announced that it would expand its share buyback program.

Nevertheless, Alibaba is the largest e-commerce and cloud provider in China, with annual sales of billions. According to Motley Fool author Ballard, Alibaba’s low valuation does not seem justified against this background. The company has generous cash reserves, which Alibaba reinvests in its own business and which act as a buffer in the event of any political or economic storms. Alibaba is also well positioned to benefit from the trending topic of artificial intelligence, which is becoming increasingly popular in China, and become the market leader in the booming AI economy given its reach and technology.

The 46 analysts surveyed by FactSet also seem to see it that way. They gave Alibaba shares an average price target of the equivalent of $110,767. The share is currently still trading at $72.02 (as of the closing price on February 9, 2024). There is also clear upward potential here too.

Editorial team finanzen.net

This text is for informational purposes only and does not constitute an investment recommendation. finanzen.net GmbH excludes any claims for recourse.

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