You Need Not Ignore Growth If You Are a Value Investor
Sometimes there's great value in solid growth stocks.
Value investors are generally of the more patient kind. Or, put another way, our value investments are those that we are willing to be more patient about. Because the goal here is to get into stocks with strong fundamentals while they have been rendered cheap by some unrelated factor (such as the pandemic for example). The idea then is to hold on to these things for a really long period of time until the story in the stock plays out.
By that I mean, say we invest in a stock with some innovative technology (let’s say EVs) and then we wait until EV adoption accelerates. This of course means that related infrastructure like charging stations also picks up, other industry-wide synergies also come into play and as a result, our holding continues to appreciate in value.
If you consider a past value story, it could be Alphabet/Google or Facebook, or Amazon, or Apple. These companies had a compelling offering that delivered huge returns for investors that got in early.
So the main thing we are looking for in value investing is a good story that is waiting to play out. The length of time we are willing (or able) to hold on to a stock of course varies, and we should be flexible enough to jump out of a stock if it the story somehow takes a different direction or the stock ceases to be the kind of value we were looking for.
But you could also find value in a recovering economy when everything seems to be getting more expensive by the day. Remember, the goal is to look beyond the current situation but it doesn’t hurt to buy stocks that are particularly well positioned to benefit from the current situation. This is the kind of stock that would have both value and growth characteristics.
And this is what I’ve tried to pick for you today-
Kohls Corporation KSS
The U.S.-based department store chain operates more than 1,100 stores across 49 states, as well as an online store called Kohl's.com and the Kohl's app.
The company topped both revenue and earnings estimates in the last quarter and raised expectations for the year. The reopening is significantly increasing store traffic (which also continues to benefit from the Amazon relationship and particularly, the returns program).
The company is also seeing a resumption in back-to-school demand. It remains on track to deliver on the longer-term strategic focus on active and casual lifestyle, women and beauty segments. At the moment, however, it is tightly managing cost and inventory as it deals with supply chain hiccups that are impacting not just retailers but many other sectors as well.
The Zacks Rank #1 stock has Value and Growth Scores of A. It belongs to the Retail - Regional Department Stores industry (top 1%).
Its earnings estimates for 2022 (ending January) and 2023 have moved steadily higher over the last 90 days. In the last seven days itself, they have appreciated 37.6% and 21.0%, respectively. This resulted in earnings growth expectations of a respective 583.5% and 0.4% in the two years on revenue growth of 20.1% and 3.8%.
Lazydays Holdings Inc. LAZY
The company offers new and pre-owned RVs, rental fleets (in Florida, Arizona and Colorado), service bays and on-site campgrounds. Its RV Accessories & More stores sell accessories and hard-to-find parts.
Lazydays is a beneficiary of the explosion in the RV space since the pandemic hit and people started using their own vehicles for pleasure/entertainment, especially in the summer months. The RV market has the same inventory issues that are prevalent in the auto market.
Consequently, sales of both new and pre-owned vehicles are taking place at elevated prices and generating solid profits for all players in the space. While there has been modest improvement in the inventory situation in recent months, management expects that there wont be a return to normal levels until at least the second half of 2022.
In the meantime, the company continues to add dealerships to its distribution network, which are increasing its near-term operating costs while creating significant growth opportunities for the future.
The shares carry a Zacks Rank #1, Value Score of A and Growth Score of A. They belong to the Leisure and Recreation Products industry (top 8%).
The single analyst providing estimates expects earnings growth of 86.5% this year on revenue growth of 40.7%. In 2022, earnings are expected to grow 8.3% on revenue that’s expected to grow 5.8%. And that is because the 2021 earnings estimate was raised 52.4% in the last 60 days while the 2022 estimate was raised 85.3%.
TimkenSteel Corp. TMST
Timken makes alloy steel, caron steel and micro-alloy steel in bars and tubes. It also makes precision components and provides value-added services like thermal treatment and machining. Its customers belong to the oil & gas, automotive, industrial equipment, mining, construction, rail, aerospace and defense, heavy truck, agriculture, and power generation industries.
The company is seeing a strong recovery in demand at both automotive and industrial customers. But while the chip shortage is leading to erratic orders from auto customers, (a situation that is expected to continue into the third quarter as well), Timken has so far been able to divert the supply to industrial customers.
Additionally, a 117% increase in the raw material price surcharge helped transfer rising costs to customers. This, along with a melt utilization of around 85% and efficient cost management is helping margins.
The company is, however, on track to see some labor cost escalation as its labor agreement is set to expire on Sep 27. Management expects consequent negotiations to result in incremental costs of $2-3 million in the second half of the year.
Timken’s shares carry a Zacks Rank #1, Value Score A and Growth Score A. It belongs to the Steel – Producers industry (top 8%).
The estimate revisions history for the fourth quarter and 2021and also 2022 are encouraging. The 2021 earnings estimate is up 40.9% in the last 30 days while the 2022 estimate is up 46.9%. Overall, this translates to earnings growth of 392.5% and 4.8%, respectively, in the two years. It will come on revenue growth of 50.7% and 3.9%, respectively.
ON Semiconductor Corp. ON
ON Semiconductor Corporation is an original equipment manufacturer of a broad range of discrete and embedded semiconductor components, including power management, logic, signal processing, memory and application specific integrated circuits (ASICs). It also offers foundry services.
The company is another beneficiary of the current strength in the automotive and industrial markets, both of which are in the middle of a strong growth phase. Additionally, its highly differentiated power management solutions have enabled it to generate new design wins and market share gains.
With auto customers entering into long-term supply agreements, the company stands to benefit from the improving visibility and better asset allocation. On Semi is also well positioned to capitalize on the emerging EV opportunity, as well as the rapidly expanding alternative energy market (mainly solar farms). So management expects that the record revenues generated in the last quarter will grow into more of a trend, at least through the first half of next year.
The Zacks Rank #2 stock has a Value Score B and Growth Score A. It belongs to the Semiconductor - Analog and Mixed industry (top 11%).
Analysts currently expect the company’s earnings to grow 194.1% in 2021 on revenue growth of 25.1%. For the following year, they expect earnings growth of 11.3% on revenue growth of 4.4%. In the last 30 days, earnings estimates for the two years have climbed 29.5% and 20.3%, respectively.
JAKKS Pacific, Inc. JAKK
JAKKS is a multi-brand company that has been designing and marketing a broad range of toys and consumer products since 1995. Its business is organized into 2 segments: (i) Toys/Consumer Products and (ii) Halloween.
During the pandemic, children were spending more time at home, so demand for toys generally increased. Also, toys that could engage them for longer periods of time did better, even if they were priced higher.
Another visible trend was the increased demand for classical all-time favorites (core items like certain categories of dolls and favorite game/content characters) because the things dependent on peer recommendations generally dropped in demand because schools and outings were cancelled.
Also, with video content creation taking a back seat during the pandemic, related toys were also off the list. These broad trends are generally expected to continue through this year as well although the reopening will mean more footfall at stores.
For JAKK, which has a solid lineup for the festive season, things are likely to heat up in the fourth quarter. At the moment, it is seeing solid demand for core offerings, while boosting its digital sales channels, expanding international reach, and managing costs and inventories.
It is also building its digital content as it seeks to tap the opportunity/deal with the threat in the growing number of kids transitioning quickly from physical toys to digital entertainment, thus eating into the demand for traditional toy categories.
The shares carry a Zacks Rank #2, Value Score A and Growth Score A. They belong to the Toys - Games – Hobbies industry (top 13%).
The single analyst providing estimates for this stock is extremely upbeat about its recovery prospects. Consequently, he has taken his 2021 earnings estimate to 17 cents this year (from a 16-cent loss expectation just 30 days ago).
This is up 109.9% from the -$1.72 loss reported in the year-ago quarter. And the 17 cents earnings are expected to jump to $2.17 in 2022 (that expectation is up 73 cents in the last 30 days). These earnings are expected to come on revenue growth of 14.5% and 3.7%, respectively in the two years.
One-Month Price Performance
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