3 Stocks That May Snag The Value Premium For Your Portfolio
Nelnet (NYSE: NNI), UBS Group (NYSE: UBS) and Aegon (NYSE: AEG) are value stocks currently trading at low multiples, relative to many faster-growing e...
It may surprise you, but historically, value stocks have outperformed growth.
There's actually something called the "value premium," which refers to the risk-adjusted return of the value asset class, as compared to growth. It was first documented by Eugene Fama and Kenneth French in 1992.
In a nutshell, value investing centers around stocks considered cheap, relative to the underlying companies' earnings and revenue. When you buy into a value stock or fund, you're banking on the price rising as institutional investors identify a market mispricing, and pile in, pushing the price higher.
You can think of value this way: Say you are looking for an investment property, and you zero in on good neighborhoods where most of the houses are remodeled and in good repair, priced to perfection. But you find a house that's structurally sound, but needs some cosmetic repairs to bring it up to modern standards. You purchase that house, invest a little money into paint and landscaping - no major remodels needed - and resell it for a pretty penny.
Value investing is similar. You're looking for a sound investment with the potential to rise in price fairly easily. It's not the same as taking a flyer on a beaten-down company whose prospects appear grim.
Nelnet, which started its life as a student loan originator, pivoted 11 years ago after the federal government took over as the chief lender. The company suffered another blow in 2020, as the U.S. Education Department canceled Nelnet's contracts for servicing the loan payments.
It's not unheard of for regulatory changes to require changes to a business model. In Nelnet's case, the company wasn't knocked out of the student-loan business altogether but now focuses on other operations, such as servicing various types of loans, a payment business for educational services and even banking.
The stock's price-to-earnings ratio of 6 is a giveaway that you're looking at a stock that may be undervalued.
The company remains profitable, and has not suffered a loss in many years. Revenue slowed in recent quarters, so it doesn't meet the criteria that many growth investors are seeking, but analysts have a price target of $75 on the stock, which represents a 1.83% upside.
Swiss banking giant UBS Group has not participated in the strong rally of other financials, such as Morgan Stanley, Goldman Sachs, Bank of Montreal or Wells Fargo.
The stock is up 8.88% year-to-date and 34.50% in the past year, not exactly shabby, but not part of the horse race of financials galloping higher by 20% or more year-to-date.
As with many investment banks, earnings grew in 2020, as revenue growth resumed in the last two quarters of the year, after slowing earlier.
Analysts expect earnings of $1.73 per share this year, which would be a 3% decline from 2020. The company has a history of beating views, so it wouldn't necessarily be surprising if that happened again. In 2022, earnings are seen growing by 4%, to $1.80 per share.
Value investors should find the stock's P/E ratio of 8 to be a good signal they're not overpaying.
Dutch insurer Aegon skidded to the tune of 12.42% in the past month, and 15.31% in the past three months.
Earnings slowed in 2020, and are expected to drop 39% this year, to $0.66 per share, before rebounding again in 2022. That potential for a rebound could make this a stock to watch.
The moving-average lines tell a story about this stock. Shares closed Thursday at $3.99, below their 10-day, 50-day and 200-day moving averages. The 10-day line is below the 50-day, an indication of a stock that's been trending lower, and it is currently on a trajectory to cross below the 200-day line.
All those are bearish indicators, and the stock is definitely not buyable at this time. The same buy rules that apply to growth stocks also apply to value; it's OK to buy the dip, but you want to see some upward movement, preferably in heavy volume, before you jump in.
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