The new year promises changes on many fronts: economic, political, and public health, to name a few. It may also bring about a major shift in U.S. stock markets. A growing cadre of investors and strategists are betting that 2021 will finally be the year when value stocks outperform growth.
Value has plenty of catching up to do. The
Russell 1000 Growth
index of U.S. stocks bested its value equivalent by 36 percentage points in 2020, the largest margin on record. It’s the exclamation point on a decade of leadership from growth stocks such as
(NFLX), at the expense of old-economy industries, including banks, mining, and energy.
As a result of the divergence, value stocks haven’t been this cheap, relative to growth issues, since the dot-com bubble in 2000, a gap that could narrow with a postpandemic recovery and eventual higher interest rates.
“Value has been in the dog house for the longest period I can remember,” says Mark Boyar, who founded The Boyar Value Group in 1975. “But we think now we’re going into one of these periods where value will significantly outperform growth.”
Jonathan Boyar, Mark’s son and president of the firm’s research division, Boyar Intrinsic Value Research, warns that not all value will benefit. “You really still need to look at high-quality businesses with good balance sheets and strong competitive positions—it’s not just about buying every retailer and airline that’s cheap right now.”
To that end, Boyar and team puts together an annual list of 40 stocks they see offering compelling value in the year ahead. They’re not necessarily the cheapest stocks in the market, but they’ve been overlooked and each has at least one positive catalyst on the horizon.
Data through Dec. 30; *Dividend on hold in 2020; E=Estimate. N/A=Not applicable
Sources: Bloomberg; FactSet
Boyar’s Forgotten Forty portfolio has produced an average annual gain of 9.6% over the past decade, versus about 8%, on average, for the Russell 1000 Value index. The broader index, including growth components, has risen some 12% a year over that period.
The Boyar team gave Barron’s a preview of its 2021 Forgotten Forty list. Here are some highlights presented in alphabetical order, with context from Jonathan Boyar and Barron’s:
At a recent price of $30,
Bank of America
(BAC) trades at 14 times 2021 estimated earnings and 1.5 times tangible book value, cheap relative to the market and its own history. An improving economy, expectations of a steeper yield curve, and a green light from the Federal Reserve to boost share buybacks and dividends in 2021 are all promising catalysts.
(BRK.A) has been adding to its stake in Bank of America; it currently owns about 12% of the stock. Boyar expects greater capital returns, a cyclical recovery, and Buffett’s vote of confidence to boost Bank of America shares to 1.6 times his estimate of 2022 tangible book value, or about $36—20% above a recent quote. BofA’s dividend currently yields 2.4%.
(KO) was one of Barron’s top 10 stock picks for 2021, and it makes Boyar’s Forgotten Forty for similar reasons. The reopening of restaurants, stadiums, and other public venues will lead to a near-term rebound in sales, as the world’s largest soft-drink company also begins to benefit from longer-term initiatives in 2021, Boyar says. That includes a push into new categories, including coffee and hard seltzer, along with the divestment of Coca-Cola’s bottling operations. New contracts will continue to give the company favorable pricing with those bottlers.
“That’s a better, more asset-light structure that should expand their profit margins,” Boyar adds, noting that a weaker U.S. dollar will boost overseas profitability. Coke’s stock isn’t particularly cheap at more than 25 times next year’s forecast earnings, but the Boyar team expects it to hold its multiple as the company returns to growth. They see the shares going to $66, 20% above their recent close of $55. The stock yields 3%.
(CVS) will play a vital role in the U.S. vaccine-distribution effort in 2021, expanding its database of customer information and bringing new patients into its stores and clinics. Boyar cites the advantages of CVS’s omni-channel approach. It has stores close to 80% of the U.S. population, along with a sophisticated prescription delivery business.
At $68, CVS stock looks cheap, trading at just nine times next year’s expected earnings. Boyar applies a 13 times multiple on his 2022 profit estimate to get to a $106 target, 55% above the recent close.
Liberty Braves Group
Madison Square Garden Sports
(MSGS) are rare examples of publicly traded sports teams. They own baseball’s Atlanta Braves, and basketball’s New York Knicks and hockey’s New York Rangers, respectively. Those are trophy assets that should be valued by what a potential acquirer would pay for them, says Boyar, rather than the cash flows they produce. Fortunately for the New York basketball team, the value holds up regardless of on-court performance. Still, all three teams can boost their sales and profits in coming years, he says, as television rights are renewed at higher rates and the legalization of online gambling increases fan engagement and attracts more advertising dollars.
Leagues have also opened the door to investors such as private-equity firms. They now can take minority stakes in teams, which could drive valuations even higher. Boyar values Liberty Braves stock at $41 and MSG Sports at $231, giving them estimated upsides of 60% and 24%, respectively. Boyar’s price targets are based on a roughly 30% premium to the teams’ latest valuations from Forbes.
(SYY) is in pole position to emerge from the Covid-19 pandemic stronger than it went in, as the largest player in the heavily fragmented U.S. food distribution industry. With a market share of just 16%, Sysco generates more in sales than its next two rivals combined. Management has been aggressive in trying to grow through acquisitions and in recruiting new customers.
“In this environment, restaurants and hotels are not only looking for the cheapest-price supplier, but also for companies that will survive this,” says Boyar, who sees Sysco going to $93, from a recent $73.
(DIS), at a recent 72 times next 12 months estimated earnings, isn’t inexpensive, based on traditional value metrics. But the entertainment giant has several catalysts ahead of it. First and foremost is the postpandemic recovery of its theme parks, which Boyar expects to surprise to the upside in 2021. The longer-term story is Disney’s transformation into a streaming-focused global content company, fueled by the rapid growth of Disney+ and its other direct-to-consumer services.
Boyar values Disney using a sum-of-the-parts approach. He applies a multiple of 12 times to estimated 2022 earnings before interest, taxes, depreciation, and amortization, or Ebitda, for Disney’s non-streaming businesses, and 5.5 times to estimated 2022 streaming revenue. That yields a price target of $237, or 30% above the stock’s recent close of $181.
And there’s an argument for giving Disney an even higher target price: Applying Netflix’s current 10 times sales multiple yields a price of $339 per share.
Write to Nicholas Jasinski at firstname.lastname@example.org