Morningstar's 5 Value Stocks with Nobias Machine Learning Insights
We recently came across an interesting article titled “5 Value Stocks With Room to Run” written by Lauren Solberg and Jakir Hossain at Morningstar. The article began by highlighting the recent sentiment shift that has occurred in the market throughout much of 2021, with investors seemingly more interested in owning value oriented names as a part of a reflation trend coming out of the pandemic, as opposed to the secular growth plays (largely tech companies) that have performed so well over the last decade (and remarkably well during 2020 during the COVID-19 pandemic period).
The authors wrote, “After years in the doghouse, value stocks are seeing their day in the sun as investors have shifted cash out of pricey, fast-growing company stocks.” They continued, saying, “However, many value stocks (which are technically defined as stocks with relatively low prices given pre-share earnings, book value, cash flow, sales, and dividend expectations) aren't such a bargain anymore.” In other words, the trend has played itself out. Investors looking to buy into value oriented names these days have largely missed the boat. Or...have they?
The Morningstar piece attempted to find the holy grail for value investors: high quality, wide moat companies that have been left behind by the market, implying irrationally low valuations that have the potential to result in strong long-term gains for investors. In doing so, they screened the Morningstar data looking for mid and large cap companies trading below fair value estimates with “wide moat” designations.
Morningstar defines a wide moat as, “a Morningstar designation for companies with long-term competitive advantages that allow them to earn oversize profits over time” Furthermore, the screen included a “stable Morningstar trend rating” which implies a bullish outlook with regard to growth trajectories and the companies’ ability to maintain their moats and market share positions in the face of inevitable disruption. With all of this in mind, the Morningstar piece landed on 5 stocks that value investors should be interested in today: Bristol-Myers Squibb (BMY), Dominion Energy (D), Gilead (GILD), Merck (MRK), and Wells Fargo (WFC).
After reading this piece and seeing Morningstar’s list of bullish investment ideas, we wanted to cross check the Morningstar findings against the blue chip (4 and 5 star rated) analyst opinions tracked by the Nobias algorithm to see whether or not other credible individuals agreed or not. Here are our findings.
Bristol-Myers Squibb
Bristol-Myers is an interesting stock to follow. Shares have lagged the market for several years now, trading in a fairly well defined range between $45/share and $65/share dating back to late 2013. During this same period of time, the S&P 500 has rallied more than 150%. In other words, long-term BMY shareholders are likely displeased with their stock’s relative stagnation.
BMY shares have underperformed the market on a year-to-date basis as well, posting 7.72% growth during 2021 thus far, compared to the S&P 500’s 14.5% performance. And yet, the share price performance of Bristol-Myers does not match the growth of its underlying fundamentals. Over the last 5 years, BMY’s earnings-per-share has grown by more than 220%. So, while its share price has languished, its valuation has fallen. And now, BMY appears to be one of the cheapest large-cap stocks in the market on a trailing and forward looking price-to-earnings basis.
Right now, BMY’s forward P/E ratio is just 8.9x. That’s extremely low for a company expected to post 16% earnings-per-share growth this year. And, BMY’s share price has recently broken out above its $65 resistance. With that in mind, it’s not surprising to see that our algorithm tracks a 91% bullish bias amongst credible authors. During the last month alone, we’ve tracked 14 analyst reports published by 4 and 5-star authors. 9 of these reports included “Buy” ratings. Only 5 of them reported “Sell” ratings. So, even after BMY’s run-up to the $65 resistance level, nearly twice as many blue chip analysts are bullish on the company than those who are bearish.
In a recent article written for TheStreet.com, Nobias 4-star rated author Bruce Kamich broke down the technical tailwinds behind the recent BMY momentum and concluded, “Traders and investors should continue to hold existing longs and add to longs if they have room in their accounts. Stops could be raised to $63.”
Dominion Energy
Dominion Energy is in a bit of a transition period. The stock was in the news in recent years due to the negative headlines surrounding its pipeline plans and the eventual deal that it struck with Berkshire Hathaway to sell its pipeline business. Alongside this deal came a dividend cut as management laid out long-term growth plans which involved a more intense focus on alternative energy generation. Dominion’s earnings-per-share fell 17% in 2020, largely because of the assets that it divested in the Berkshire deal. Management said that its growth plans should enable the company to post mid-to-high single digit EPS growth moving forward and the analyst community appears to agree. Right now, the consensus annual EPS growth rate amongst all of the Wall Street analysts that cover Dominion in 2021 is 9%. The consensus Wall Street estimates for annual EPS growth rates in 2022 and 2023 are 7% and 6%, respectively. If these estimates come to fruition, it would mean that Dominion is one of the fastest growing large cap utility companies. However, even with these strong growth prospects being laid out for the future, investors sentiment surrounding the stock remains tepid, at best.
Since July 2020, when the Berkshire Deal and impending dividend cut was first announced, D shares have fallen from approximately $80/share to $74/share. This represents -7.5% growth during a period of time in which the S&P 500 rose nearly 39%. This large relative underperformance is likely why Dominion ended up on the Morningstar list. After its recent sell-off - and with renowned growth prospects in mind for 2021 and 2022 - Dominion’s forward price-to-earnings ratio is now back in line with its long-term ~17x average. With that in mind, combined with above average growth prospects, we aren’t surprised to see that 89% of the blue chip Nobias analysts who cover D shares are bullish.
The most recent analyst report that we’ve seen published by a credible source comes from Michael Weinstein, a Nobias 5-star rated analyst who works for Credit Suisse. In his report, Weinstein said, “Dominion Energy (NYSE:D) price target raised to $90 from $80 by Credit Suisse analyst Michael Weinstein. This maintains D as Outperform.”
Gilead
Gilead has been an embattled bio-tech stock for years. The company burst into prominence in 2013 when it posted 297% earnings-per-share growth on the back of its Hepatitis C franchise breakthrough. In 2014, Gild’s earnings posted another 56% growth, meaning that in 2 years, the company’s bottom-line has grown by more than 6x. Gilead essentially solved the Hep-C problem for the world, effectively treating it amongst a wide variety of patients. The problem was, by curing the disease, rather than simply managing its symptoms, the Hep-C franchise essentially ran out of patients to treat now GILD’s earnings-per-share fell off a cliff. From 2015-2019, Gilead posted negative year-over-year earnings growth. During this period of time, GILD’s EPS fell from $12.61/share to $6.63/share. The company’s share price suffered as well and after GILD’s 2020 results, where management was able to generate positive 7% growth, GILD shares are beginning to become very popular amongst value investors once again.
Right now, the broader analyst community expects to see GILD produce $7.17/share in earnings during 2021. At the stock’s current share price of $69/share, that implies a forward price-to-earnings ratio of 9.6x. This is below GILD’s peer average and the broader market’s forward average as well. It’s worth noting that not only is GILD’s valuation relatively low, but the stock’s dividend is relatively high. GILD’s dividend yield right now is 4.12%, which compares favorably to the S&P 500’s 1.30% yield. Although GILD’s earnings growth has suffered since 2015, the company has raised its annual dividend every year since initiating its dividend payments in mid-2015 and therefore, the apparent dividend safety alongside the abnormally high yield has made this a popular stock amongst income oriented investors.
GILD is also a favorite amongst the blue chip Nobias community. Right now, the credible authors that our algorithm tracks have an 88% bullish rating on the stock. GILD shares have performed well during 2021, posting year-to-date returns of 18.2%, which exceeds the 14.5% generated by the S&P 500 by a fairly wide margin. During the last month alone, GILD shares are up 4.16%, more than doubling the S&P 500’s 1.9% performance. And yet, even after this recent rally, Nobias 4 and 5-star rated analysts continue to maintain their bullish lean.
Over the last month, we’ve seen such analysts post 8 reports. 5 of those reports came with “Buy” ratings compared to just 3 “Sell” ratings. David Van Knapp, a Nobias 4-star rated analyst who publishes work at Dailytradealert.com recently wrote an in-depth analysis on GILD, noting that, “Gilead’s operating margin is higher than companies such as Merck (MRK), AbbVie (ABBV), Pfizer (PFE), and Amgen (AMGN). It is this strong cash production that supports Gilead’s dividend.” Van Knapp estimates that Gild’s fair value is $75/share and with that in mind, he concludes his piece saying, “Obviously, with Gilead currently trading so far below its fair price, there is no need to even think about its maximum buy price [Van Knapp believes that Gilead can be reasonably bought up to $83/share]. A good time to buy Gilead is right now, at a 17% discount.”
Merck
Merck’s story is very similar to the one previously discussed with Bristol-Myers Squibb. Like BMY, MRK is a leader in the global oncology space. Because of the success that it has had with its drug, Keytruda, which is widely expected to become the world’s top selling drug (in terms of total revenues) by 2025 after AbbVie’s Humira (which currently holds the top spot) loses patent protection in 2023, it wasn’t long ago that Merck was considered to be market darling.
During 2018 and 2019, MRK posted strong earnings growth on the heels of its Keytruda rollout (9% in 2018 followed by 20% in 2019) and during this period of time, Merck’s share price rose from approximately $50/share to $86/share. However, during 2020, the stock underperformed, falling from $86/share at the end of 2019 to $78/share at the end of 2020. The cautious sentiment surrounding the stock has stayed in place throughout 2021, with MRK shares largely trading in a range between $72 and $80.
What’s odd about this sentiment shift is that MRK’s underlying fundamentals continue to grow at a respectable pace. In 2020, Merck’s earnings-per-share increased by 14%. In 2021, the analyst community expects to see the company generate another 8% growth. And, in 2022, the consensus EPS estimate calls for a re-acceleration on the bottom-line, back up to 11% y/y growth. In short, the weakness being applied to MRK shares by the market does not appear to be justified when looking at the stock’s fundamentals. This discrepancy between negative share price performance and positive fundamental growth has resulted in Merck’s forward price-to-earnings ratio falling to just 12.74x.
During the last decade, Merck’s average P/E ratio is 14.6x, meaning that the current premium being applied to shares represents a ~12.5% discount. Right now, the credible authors that Nobias tracks have a $96.20 price target on MRK shares, which represents upside potential of roughly 23.3%. 92% of the credible authors that Nobias tracks have a bullish rating on MRK. During the last month we’ve seen 9 analyst reports posted by 4 and 5-star rated authors. 6 of them came with “Buy” ratings, 1 had a “Neutral” rating attached, and 2 had “Sell” ratings.
Recently, a Daina Greybosch, a Nobias 5-star rated analyst posted a note regarding Merck shares that read, “Merck & Co (NYSE:MRK) price target lowered to $99 from $102 by SVB Leerink analyst Daina Graybosch. This maintains MRK as Outperform.”
Wells Fargo
My how the mighty have fallen. It wasn’t long ago that WFC was viewed as the gold standard in the big-banking space, due to the strength it has with retail clients, especially in the mortgage space. Wells Fargo was a top holding within famed investor Warren Buffett’s portfolio at Berkshire Hathaway for decades. Buffett began building his WFC position in 1989, held his position for roughly 30 years, having eventually built up Berkshire’s position to approximately 10% of the bank’s shares. This Buffett/Berkshire association gave investors solace when it came to WFC shares, which is why the news that broke in 2016 regarding the bank’s ethics when it came to various illegal sales practices.
Shares of WFC have fallen precipitously since the scandalous news broke. In 2016, they were trading for north of $65/share and as recently as October of 2020, WFC was trading in the $20 area. What’s interesting however, is that while the bank’s share price and reputation has been hurt badly by the scandal news, the company’s fundamentals have remained relatively intact.
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
In 2016, WFC’s earnings-per-share totaled $3.99. In 2019, WFC’s full-year EPS came in at $4.05. The company’s bottom-line struggled in a big way in 2020 due to pandemic related pressures and negative one-time items, resulting in full-year earnings-per-share of just $0.41 last year. However, the consensus analyst estimate for 2021 EPS currently sits at $3.76, which points to a quick bounce back, fundamentally speaking.
Berkshire Hathaway made news when it sold the vast majority of its WFC stake in early 2021. However, on a valuation basis, shares continue to look cheap, with a forward price-to-earnings ratio of just 12x. Although Mr. Buffett may have changed his tune when it comes to WFC shares, it appears that the market’s sentiment has turned positive. WFC is up approximately 50.5% year-to-date, making it ones of the best performing stocks in the market. However, even after this rally, there appears to be upside potential due to the longer-term underperformance dating back 5 years or so.
63% of credible authors that we track with the Nobias algorithm offer bullish commentary on WFC shares. During the last month, we’ve seen 4 and 5-star rated analysts post 3 reports on the company and each of them included a “Buy” rating. However, the bull case being presented for WFC shares by the blue chip Nobias authors isn’t quite as clear as the other 4 stocks on this list. Nothing in the stock market is ever certain and the average price target that we’re seeing when it comes to WFC clearly shows this. As you can see above, the average price target being presented by such analysts for WFC is $36.86 right now, which is actually 18% below the current share price. It appears that the stock’s recent rally has surprised analysts. This may point towards continued volatility moving forward due to a relatively high lack of certainty related to the trajectory of WFC shares.
Disclosure: Nicholas Ward is long shares of BMY and MRK. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
Additional disclosure: All content is published and provided as an information source for investors capable of making their own investment decisions. None of the information offered should be construed to be advice or a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The information offered is impersonal and not tailored to the investment needs of any specific person.
Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.
