In the equity asset class, meme-stocks have been attracting investors through multi-fold returns in a short span of time. In the last six months, AMC Entertainment (NYSE:AMC) has surged by over 1,200%. Things are no different in the world of cryptocurrencies. Meme coins such as Dogecoin (CCC:DOGE-USD) and Shiba (CCC:SHIB-USD) have been trending. However, if investors move back to the world of value investing, there are several value stocks that promise healthy returns and sustained dividends.
It does make sense to consider some exposure to meme stocks. Even if one idea delivers robust returns, portfolio returns can change overnight. However, given the speculation across asset classes, it’s a good idea to remain overweight on value stocks.
If broad markets do correct, meme stocks are likely to plummet. It’s the value stocks that will protect capital and provide investors with regular cash inflow through dividends. I am therefore focused on regular dividend-paying value stocks.
Let’s talk about seven value stocks worth holding in the portfolio:
- Pfizer (NYSE:PFE)
- Apple (NASDAQ:AAPL)
- Freeport-McMoRan (NYSE:FCX)
- Walmart (NYSE:WMT)
- McDonald’s (NYSE:MCD)
- Johnson & Johnson (NYSE:JNJ)
- Costamare (NYSE:CMRE)
Anti-Meme Value Stocks: Pfizer (PFE)
Even with the positive revenue and earnings impact of the Covid-19 vaccine, PFE stock has been largely sideways in the last six months. At a forward price-to-earnings-ratio (P/E) of 11.6, PFE stock is among the top value stocks to consider. Additionally, a dividend yield of 3.9% makes the stock attractive for income investors.
In terms of concerns, Pfizer will be losing exclusivity for more than a third of the lead products in fiscal year 2020. This has kept the stock relatively depressed.
However, it’s worth noting that Pfizer has a strong pipeline of drugs. The company expects revenue growth at a CAGR of 6% through 2025. This excludes the impact of BNT162b2 (the company’s mRNA coronavirus vaccine). Therefore, the company is positioned to deliver sustained cash flows.
For the Covid-19 vaccine, Pfizer expects revenue of $26 billion from BNT162b2 for the year. This estimate is based on 1.6 billion doses to be delivered through the year. Pfizer also expects to ramp-up manufacturing to 2.5 billion doses by the end of the year. Therefore, revenue from BNT162b2 can be potentially higher in the coming year.
Overall, with a strong pipeline of new candidates for various indications, Pfizer looks positioned for steady growth. At current valuation, the stock is worth buying.
AAPL stock has been in a very tight range in the last six months. A breakout on the upside seems imminent for this fundamentally strong name. Given the robust cash flows, AAPL stock will continue to create value for investors through higher dividends and aggressive share repurchase.
At the same time, the company’s growth has remained strong. Further, revenue is likely to be more diversified in the coming years. This makes AAPL stock attractive.
For the second quarter of 2021, Apple reported 54% growth in revenue to $89.6 billion. The iPhone segment was the key contributor to revenue growth. However, revenue from the wearables, home and accessories segment has also been accelerating. Even the services segment is likely to be a major revenue contributor in the coming years.
It’s also worth noting that the company’s revenue from Greater China was higher by 87.5% on a year-on-year basis. Similarly, Asia-Pacific revenue surged by 94.2%. Strong growth from emerging markets can help the company sustain growth at higher levels. News related to a potential Apple electric car is another upside trigger.
For the first six months of 2021, Apple reported operating cash flow of $62.7 billion. This would imply an annualized cash flow of $125 billion. Apple has ample financial flexibility for investment in innovation and potential acquisitions that serve as growth catalysts.
Anti-Meme Value Stocks: Freeport-McMoRan (FCX)
Being cyclical in nature, commodity stocks have a higher beta. However, considering exposure to commodities at the beginning of the bull market can help in generating robust returns. Investment research firm CFRA believes that copper is likely to remain in a multi-year bull market. This seems likely considering the demand from emerging markets and with copper being a de-carbonisation investment theme.
FCX stock is a top-name to consider among commodity stocks. At a forward P/E of 15.8, the stock also seems to be worth adding in the list of value stocks.
In terms of business growth triggers, Freeport expects copper sales of 3.85 billion pounds for the year. In the next year, the company expects to increase sales to 4.4 billion lbs. With higher sales, operating and free cash flow are likely to swell.
It’s worth noting that as of Q1 2021, the company reported net-debt of $5.2 billion as compared to $8.5 billion as of Q1 2020. De-leveraging will give the company financial flexibility for growth and shareholder value creation. For the current year and net year, the company has total planned capital expenditure of $4.5 billion.
Additionally, Freeport also expects gold sales to increase from 0.9 million ounces in 2020 to 1.8 million ounces by 2023. The current inflationary trend is positive for gold and the company stands to benefit from higher gold production and sales.
Overall, FCX stock looks attractive even after a big rally in the last 12-months. I expect further stock upside coupled with dividend growth.
The U.S. economy is largely consumption driven and retail spending is the key to economic growth. Through economic cycles, Walmart has demonstrated resilience and WMT stock looks attractive among value stocks.
According to analyst estimates, WMT stock has a price target of $163. This would imply an upside of 17% from current levels. In addition, WMT stock offers a sustainable dividend yield of 1.56%.
A key reason to like Walmart is the company’s aggressive focus on omni-channel sales growth. For 2022, the company will be investing $14 billion on supply chain, automation, technology and customer-facing initiatives. I expect the company’s e-commerce sales growth to remain robust in the next few years.
For Q1 2022, comparable sales growth in the U.S. was 6%. E-commerce contribution to comparable sales growth was 360 basis points. This underscores the importance of the company’s omni-channel investment strategy. At the same time, initiatives such as same-day delivery are likely to ensure strong comparable growth.
It’s also worth noting that Walmart international sales for Q1 2022 was $27.3 billion. With presence in early-growth markets like India, the international segment can be a key growth driver in the next decade.
Anti-Meme Value Stocks: McDonald’s (MCD)
Staying with value stocks coupled with the consumption theme, MCD stock is worth holding in the long-term portfolio. Given the broad market valuations, a forward P/E of 27.38 is not expensive and the stock offers a healthy dividend yield of 2.2%. Recently, UBS also opined that MCD stock is worth holding for the long-term with digital enhancement and higher global brand relevance being the key upside triggers.
For Q1 2021, the company’s global comparable sales and revenue surpassed Q1 2019 levels. With vaccination driving a broader economic reopening, it’s likely that sales will continue to trend higher. It’s also worth noting that U.S. comparable sales growth was 13.6% as compared to global comparable growth of 7.5%.
A revamped menu, increase in deliveries and digital platform contributed to strong U.S. growth. These factors are likely to remain revenue and cash flow drivers. In the international markets, comparable sales growth was driven by China and Japan. If healthy growth sustains in Asia, McDonald’s is positioned for value creation. India is still an early-stage market with big potential.
Last month, McDonald’s also launched a collaboration with BTS. The South Korean boy band have seen massive growth in the global fan base. The collaboration provides recipes from McDonald’s South Korea. These initiatives on menu innovation and brand enhancement are likely to deliver sustained positive results.
Johnson & Johnson (JNJ)
JNJ stock is another attractively valued stock that’s worth holding in the core portfolio. The stock currently trades at a forward P/E of 17.53 and offers a healthy dividend yield of 2.45%.
Johnson & Johnson has three primary business segments — consumer health, pharmaceuticals and medical devices.
In the consumer health segment, skin care, wound care and oral care are likely to remain key growth drivers. Further, there is ample headroom for sales acceleration in international markets in the women and skin care segments.
The pharmaceutical segment has been the key growth driver. For Q4 2020, the segment reported a healthy revenue growth of 14.6%. The company has strong presence in the immunology, infectious disease and oncology segments. In the fourth quarter, the company invested 17.9% of revenue in research and development. With a strong pipeline of drugs for various indications, strong growth in the segment is likely to sustain. The Covid-19 pandemic impacted the company’s medical devices segment growth. However, sales are likely to stabilize in the coming quarters.
For the current year, the company has guided for operational sales growth of 8.8% (mid-range). Even if sales growth sustains in the range of 8% to 10% in the next few years, the company is positioned to deliver healthy cash flows.
Anti-Meme Value Stocks: Costamare (CMRE)
CMRE stock is a small-cap that looks attractive at current levels. At a forward P/E of 5.3, it’s among the top value stocks. Additionally, CMRE stock has a robust dividend yield of 3.57%.
With a gradual uptick in economic activity, charter rates have continued to improve. As of June 2021, Costamare reported contracted revenue of $3 billion. This provides clear revenue and cash flow visibility.
It’s also worth noting that since the beginning of 2021, the company has acquired 17 vessels. With a strong balance sheet, the company is positioned for further fleet expansion. If day-rates remain robust, Costamare is well positioned for strong cash flow upside in the next few years.
It’s worth noting that since the initial public offering, the company has paid dividends for 42 consecutive quarters. This is an indication of business resilience through economic cycles. As day-rate improves and cash flow accelerates, higher dividends are likely in the coming quarters.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.