Value stocks in the S&P 500 are outperforming this year. But analysts still think it's a mistake to part with some of them too soon.
Analysts say seven stocks in the S&P 500 Pure Value index — including communications firm Dish Network and energy firms like Marathon Oil and Baker Hughes — are poised to rise 40% or more in the next 12 months, says an Investor's Business Daily analysis of data from S&P Global Market Intelligence and MarketSmith.
Standing behind value stocks is increasingly tricky. Value stocks' valuations have climbed compared with those of S&P 500 growth stocks. That takes away from one of their most luring attributes to value fans: price. Additionally, some of the S&P 500 value stocks that analysts like most are down. And that's not a good sign, as this year has been a rare one of outperformance for value.
"Even after a 9% rally in July, we still view the U.S. stock market as materially undervalued, trading at an 11% discount," said Dave Sekera, Morningstar chief market strategist. He finds value and growth stocks still being equally undervalued.
The Rise Of S&P 500 Value
In many ways, it's been the year of S&P 500 value stocks. They even outnumber growth stocks in the S&P 500 now.
Thanks to the more than 10% drop in the S&P 500 this year, there's now 118 stocks in the index considered to be purely "cheap" value stocks. That outranks the only 56 pure growth stocks in the S&P 500 by roughly 2-to-1.
And on a performance basis, too, value is holding up best. The SPDR Portfolio S&P 500 Value ETF is only down 7.5% this year. That's less than half the 18% drop this year in the SPDR Portfolio S&P 500 Growth ETF.
What's more, high-dividend stocks, which usually have a value tilt, are the only bright spot in the market. All eight of the major U.S. diversified ETFs that are still up this year are focused on dividends, says Morningstar Direct. The top diversified ETF this year is WisdomTree US High Dividend, up nearly 3%.
And it's clear to see investors' frustrations with traditional growth stocks (even though analysts think now's the time to buy some). Nearly 40% of investors polled in the IBD/TIPP poll this month are looking for safer assets in which to put their money. And more investors, 25%, think a savings account is a better long-term investment than stocks, at 19%. Already, 13% of investors said they've moved to cash.
But analysts still think some value stocks are worth holding out for.
S&P 500 Analysts Favorite Value: Dish Network
The problem with value stocks is you can lose lots of money while you wait to be vindicated. And that's been the case at satellite TV provider Dish Network. Shares have cratered more than 40% this year to 19.19 a share. Analysts, though, still pray that this stock will be worth 44.35 in 12 months. If that's right, it would mark more than 130% in upside.
Analysts might be hopeful with the stock price, but the fundamentals still look weak at Dish. Analysts think the value stock's profit will drop more than 30% this year and about 29% in 2023. It's purely a valuation play. The stock trades for just 5.9 times diluted earnings. Analysts seem to think the weakness in the business is priced in.
Winning Value Stocks Analysts Like
Not all value stocks that analysts like are down this year. Energy stocks are an example of the outperforming value stocks analysts like.
Take Marathon Oil. Shares are up more than 32% to 21.83 this year. But analysts still think the stock is good for another 46% in upside to hit their price target of 31.92 a share. Fundamentals are strong, too. Just this year, Marathon's profit is seen jumping more than 195%.
It's a similar story for fellow energy company Baker Hughes. The stock is up 0.9% this year to 24.27. But analysts still think it's headed 45% higher in the next 12 months to 35.26. The company's profit is expected to rise nearly 60% this year.
Remember, analysts aren't always right. It's wise to follow time-tested rules when buying stocks. But it's also important to know you can still find opportunities in a tough S&P 500.
Analysts' Favorite S&P 500 Value Stocks
Members of S&P 500 Pure Value index seen rising 40% or more in 12 months
| Company | Symbol | Implied upside in 12 months to analysts' target | Sector |
|---|---|---|---|
| Dish Network | 131.1% | Communication Services | |
| Warner Bros. Discovery | 94.8 | Communication Services | |
| News Corp.* | 64.7 | Communication Services | |
| Marathon Oil | 46.2 | Energy | |
| Baker Hughes | 45.3 | Energy | |
| General Motors | 40.8 | Consumer Discretionary | |
| Alaska Air Group | 40.4 | Industrials |
