What is a Stock of Value? Many investors – including Warren Buffett – would say that growth and value stocks are tied at the hip and that investors are simply looking to buy shares of a company at a price lower than the cash it will generate for shareholders. .
However, Wall Street likes to categorize stocks as either being in the growth camp or the value camp. Value stocks are generally classified as stocks with a price-to-earnings (P/E) ratio below the market average, while growth stocks are those whose financials are growing rapidly, regardless of their multiples. of profits.
While these are arbitrary distinctions, holding both growth and value stocks can be helpful in balancing volatility in your portfolio. This can be psychologically helpful when a category is experiencing a sharp decline, mitigating the impact on your portfolio in a bear market. Here are three value stocks that are smart buys this month.
1. Nelnet: A Diversified Student Loan Company
Student loans have a bad reputation in many circles, but it is a stable business with borrower payments backed by the federal government. Nelnet (NNI -1.66%) has a large portfolio of student debt and handles hundreds of billions of dollars in loans each year. The company is not allowed to make new loans (the US government does that itself now), but its existing portfolio should still generate cash for the company for many years to come.
Over the next decade-plus, management estimates this loan portfolio will generate $1.72 billion in cash flow for Nelnet, with the majority coming over the next five years. If student loans are forgiven and repayments ramp up, that estimate is lowered to just $1.14 billion. However, the money will come to Nelnet faster. With the company’s market capitalization of just $3 billion, much of what investors pay comes from just that existing loan book.
With the cash generated from the student loan portfolio, Nelnet invested in other businesses. These include educational and payment processing software (which generates nearly $100 million in quarterly revenue), a venture capital portfolio, renewable energy, real estate projects and the launch of a bank.
It is difficult to evaluate all these separate companies. But as an investor in the company, all I look at is the stock’s cheap valuation (its P/E ratio is just 6) and its superb growth track record. Book value per share – calculated as assets minus liabilities, an important metric for an investment company – has grown 17.2% annually since Nelnet’s IPO in 2004.
If this continues over the next decade, I think it’s likely that Nelnet shareholders will do well over that period as well, especially given the updated initial valuation.
2. Sprouts Farmers Market: A niche grocery chain
Cabbage growers market (SFM -1.26%) is a chain of grocery stores focused on serving healthy consumers at a reasonable price. Sprouts’ thesis is simple. It is for people who eat a lot of fruits and vegetables and those who follow special diets like vegan or keto.
With just 378 stores across the United States, Sprouts has a long track to grow its store units this decade, with a target for growth of 10% or more one year after 2022. The company has a stable unit economy, with a gross margin of approximately 36% and an operating margin of approximately 5.5% for the last five years. It has generated positive net income every year during this period.
The company expects earnings per share (EPS) of $2.22 in the middle of its guidance, giving the stock a forward P/E of 12.3. That’s well below the market average of 19. Plus, with plenty of green space to grow its store count, the company has a clear path to significantly increase its EPS this decade, making the stock an easy buy right now.
3. Altria: The Ultimate Sin Stock
If you don’t like the actions of sin, then Altria Group (MO -0.40%) maybe not for you. However, if you are comfortable investing in tobacco companies, the stock looks cheap at a current price of $43 a share.
Altria owns Marlboro cigarettes in the United States. Cigarette volumes have been declining for years, but the company has been able to mitigate this trend by steadily increasing prices for cigarette packs, which has stabilized revenues and increased profit margins. However, this strategy cannot last forever.
Management knows this and as a result has invested in many low risk and low nicotine risk products including the cannabis and vaping space. Some haven’t worked out, like his huge investment in Juul Labs, but he has a promising product with his On! nicotine pouches. Unit volumes for On! grew by 75% year-over-year through the first half of 2022. Although still much smaller than cigarette volumes, the segment will become much larger in a few years if it maintains this rate of scorching growth.
In 2022, management expects adjusted EPS of $4.86 at the midpoint. This equates to a P/E of just 8.8. It also gives the company plenty of room to pay its annual dividend of $3.76 per share (an 8.8% yield) while returning cash to shareholders through share buybacks. If you believe in Altria’s strategy of raising cigarette prices while switching to less harmful products, the stock seems like an easy buy right now.