3 Value Stocks To Bet On When The Rally In Growth Shares Falters

The ongoing sell-off in equities, led by high-flying growth stocks, is an indication that the pandemic fear trade is running out of steam.  

That phenomenon, during the past six months, is behind investors’ mad rush to pump everything into a few big technology stocks, pushing their valuations to extreme levels last seen during the dot-com bubble.

While these stretched valuations caused many analysts to downgrade some big growth stocks in recent days, this correction is also offering an opportunity to buy stocks that are trading for relatively cheap valuations relative to their earnings and long-term growth potential.

The way to find these value stocks is to look for companies that have taken a back seat since the March rebound because of their temporary challenges. Some remain well positioned to deliver superior returns over the longer term. Keeping this theme in mind, below we look at three of these value stocks:

1. JPMorgan Chase

Banks are purely a cyclical trade, tied very closely with the direction of the economy. Currently, they also don’t present a compelling buying opportunity when interest rates are forecast to stay low over the next three years and global banks pressured by reports of alleged money laundering.

As a measure of just how hard bank stocks have been hit, the KBW NASDAQ Bank Index is down more than 35% this year. While macroeconomic conditions continue to remain unfavorable for banks, there are a few players that can survive this downturn better than their peers. JPMorgan Chase (NYSE:JPM), the largest US-based lender, is among them due to its balance-sheet strength and the quality of its operations.

With the economy still struggling and borrowers defaulting on their obligations, JPM is quickly adjusting 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 growing defaults from borrowers and other pandemic-related losses.

JPM Weekly TTM

That said, JPMorgan is too big to fail, and its diversified business operations are providing cash flows in this tough environment. During the quarter, JPM saw its revenue from the markets unit surge 79% from a year ago, while investment banking fees jumped 91% in Q2.

Trading at $95.31 at yesterday’s close, JPM shars down more than 30% this year, but the stock has a history of coming out strongly from downturns. With its attractive 3.7% dividend yield, the lender is a good long-term bet for value investors.

2. Intel

Now is perhaps one of the most disappointing times for Intel (NASDAQ:INTC) investors. The largest US chipmaker is struggling to catch up to new technologies as its production of the most advanced chips falls behind schedule.

This summer Intel announced that it’s considering outsourcing its chip manufacturing after years of delays to bring the latest products to  market. These delays have helped rivals, including Advanced Micro Devices (NASDAQ:AMD), to catch up on performance and capture a larger market share.

Intel’s current best technology, known in the industry as 10 nanometer, was scheduled to be released in 2017. It is only now making it into high-volume production. And when the company reported its earnings in July, it said the next iteration—7 nanometer—would be delayed by a year.

INTC Weekly TTM

Even with these setbacks, we believe the long-term value of Intel's stock remains intact. The Santa Clara, California-based company is ingrained in the psyche of the tech world and has what it takes to rebound from this current bad phase.

With all these challenges, Intel continues to show strong growth in both its sales and profitability. It closed yesterday at $49.72. As of this writing, Intel trades for just 9 times its trailing 12-month price-to-earnings multiple. We don’t see this stock staying this cheap for long, making it a good value pick for long-term investors. With the potential upside, investors will also earn growing dividends, currently yielding 2.65 per share.

3. Hilton Worldwide

Hotel chains have been hit hard by the COVID-19 pandemic as both business and leisure travel dried up. But that situation is unlikely to persist forever. Once a vaccine is discovered, or the pandemic has run its course, international travel will be back, boosting the value of hotel stocks.

HLT Weekly TTM

In this group, our favorite pick is Hilton Worldwide (NYSE:HLT), which is best positioned to weather the crisis due to the quality of its balance-sheet and the company's ability to generate cash in this tough operating environment.

In a recent earnings report, Hilton said:

“We presently anticipate that, even if current levels of very low occupancy were to persist, this cash position, along with the net proceeds from the proposed offering of $500 million aggregate principal amount of senior unsecured notes, will provide us with adequate liquidity to fund our operations over the next 18 to 24 months.”

That means, the company does not have any big loan maturing prior to June 2024.

Though the company’s stock remains about 25% lower this year, it has already recovered strongly from the March dip, when it lost about 50% of its value. The stock closed yesterday at $85.48, down more than 4.5% on the day. Nonetheless, if you’re looking to bet on a hotel brand, Hilton is a strong value name to consider.