Exploring Opportunities in Value Stocks Amidst Global Events

September 11, 2023 Season 5 | Episode 29

Ever wondered how a tragic event like 9-11 can impact and shape financial market valuations? Tune in, as we commemorate this historic event and dig into the subtle nuances of market valuations. We'll shine a light on the often overlooked value stocks and sectors that are boasting historically low valuations, offering unique investment opportunities. We'll also talk about the 'magnificent seven' stocks' disruptive influence on the market, and debate if the current market might be overvalued. Get your notepad ready as we share about Barron's six beaten down food stocks that could add some sizzle to your portfolio.

Curious about the recent utility sell-off? We'll break down the drop in value of stocks like Utility Select Sector Spider symbol XLU, VISTA symbol AVA, and Walgreens Boots symbol WBA. We'll also touch upon Disney's falling stock and discuss the risk-reward for these stocks. As the plot thickens, we'll move to upcoming tech events, pre-markets, and the futures of the Dow, S&P, and Nasdaq. We'll also delve into rising health insurance costs, a major railway deal brewing between Saudi Arabia, India, and the UAE, and the implications of the Consumer Price Index. Stay tuned for insightful discussions on the upcoming IPO of Arm Holdings, the Justice Department's lawsuit against Google, and a surprising twist in the tale - Microsoft's ironic role in the search engine market.

** For informational and educational purposes only, not intended as investment advice. Views and opinions are subject to change without notice.

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Transcript

Alan Eppers: 0:00

And now introducing Mr Keith Lante.

Keith Lanton: 0:05

Hi, good morning, it's Keith. It is Monday, september 11,. 9-11, 22 years ago Today was the attack in New York City. Today we're going to talk a little bit about remembering the victims of 9-11. And then we are going to talk about valuation of the market, talk about value stocks and the Magnificent Seven. Focus on what took place last week, what's coming up this week. Then we'll turn things over to Brad to give us some further insights on financial markets and, of course, the bond market, which, defying expectations, I would say, with movement up interest rates recently, despite the fact that valuations in fixed income look relatively attractive based on expectations. Brad, perhaps, will give us some more insights into his thoughts on the bond market, with many market strategists suggesting that fixed income, on a relative basis, is looking as attractive as it's looked in a decade or more. So here we are, second week of September, september 11, 22 years ago. Today, attack World Trade Center, new York City.

Keith Lanton: 1:20

Many of us lost friends, close business relationships, and attack on 9-11 really was a pivotal moment in many ways in many of our lives. Two quotes to commemorate the victims of 9-11. President Obama said in a 2011 radio address even the smallest act of service, the simplest act of kindness is a way to honor those we lost, a way to reclaim that spirit of unity that followed 9-11. And Sandy Dahl, wife of Flight 93 pilot Jason Dahl, in Shakespeareville, pennsylvania, said in 2002, we learned that life is short and there is no time for hate. Hopefully we can all take away some lessons and learn from this tragedy on many levels on a personal level, as a country and as humans. Hopefully, a lot we can digest and learn on this somber day.

Keith Lanton: 2:26

So we're going to talk about financial market. I want to start by talking about valuations in the equity market. We've seen that so far this year, markets are up here in the United States, s&p is about 17%, nasdaq up about 30% and there's lots of talk about extended valuations, especially relative to interest rates, that the Federal Reserve has taken interest rates from 1 quarter of a percent on the Fed funds rate to about 5.5% on the Fed funds rate, leading us to conclude that perhaps valuations are getting stretched. We had a lot of excitement around artificial intelligence and a lot of the gains in the markets have been stretched, attributed to what's called the magnificent seven Tesla, nvidia, apple, amazon, microsoft, meta and Alphabet, leading many to suggest that markets are fairly valued or perhaps overvalued, and I think that what's being neglected and that with many strategies are talking about is that there are sectors of the market that, historically, are very inexpensive and perhaps merit some attention, and this would fall into a category of value stocks. Many of the value stocks would be in the banking sector, in the utility space, in the consumer goods space, and these companies pharmaceuticals, utilities, really a lot of the industries that comprise the market are not trading at historically rich valuations and, arguably, are trading at very attractive valuations, especially when factoring in their dividends and the income that they provide, even while you wait for them to hopefully gain more favor. And this, arguably, is the answer to the question of where is there opportunity? In the US market opportunity? Very well, maybe in value stocks.

Keith Lanton: 4:30

Value Line recently came out with a strategy piece valuations economy may favor value stocks. The value growth relationship is, in an extreme, similar to 2020, said a Vanguard capital markets model research team. Now as then, investors and aggregator are very enthusiastic about growth stocks, notably technology shares, and seem to have limited interest in value stocks, including financial, industrial and healthcare companies. And, if you go back and look historically, an undervaluation near the peak of the tech bubble in 2000, of value stocks preceding an instance of value outpacing growth by 59 percentage points before reaching what some would say is fair value about a year later, in 2020, another undervaluation preceded a return advantage of 46 points of value versus growth in about 20 months. And if you're looking today at the valuation of value stocks, their deviation from fair value is about 51 percent below historical averages. Some are suggesting that the valuation has been lagging growth. So even if you account for some persistent drag of value versus growth, you could see gains of value versus growth of about 40 percent. If you just conservatively expect there to be some sort of return to historical means or averages On average, value was outperformed during economic recoveries. So, historically speaking, if you believe that the Federal Reserve has engineered a soft landing and you think that the economy is going to begin to reaccelerate, well then this may be a good time to start thinking about value stocks.

Keith Lanton: 6:21

Now, where to go? Where to think about value stocks? Well, barron's had a plethora of different ideas in the value space this weekend. One column six food stocks that have gotten beaten down. Time to chow down. Food stocks are worth the nibble barons after they're worth showing relative to the S&P 500 in more than 20 years. Stocks like Kellogg, general Mills, Kraft Heinz, conagra and Campbell's Soup are 15 to 25 percent off in 2023. A few of those stocks are back where they were trading 10 years ago, or even lower.

Keith Lanton: 7:02

So why take a look at this boring, stodgy sector? Wealth of starters, valuations that come down and look very reasonable. Craft times and Conagra are trading for about 11 times projected current year earnings. Kellogg, general Mills and Campbell's are trading in around 14 times earnings. This is a meaningful discount to the 19 times earnings that we're seeing on the S&P 500. And if we're looking at dividends, they seem to be well covered by earnings as well. Many food companies are sporting dividends between 3.5 and 5 percent, while the average dividend payout ratio is around 50 percent. Leverage ratios are at multi-year lows, leaving room for even higher dividends or perhaps stock buybacks.

Keith Lanton: 7:43

Timing may be right as well. Over the past 50 years, defensive stocks have tended to outperform the market in the final four months of the year. Now, if you're looking for explanations on why these stocks have underperformed, well, one outlier or unusual risk could be the risk of the Ozempic or Monjero. Perhaps some of our nation's bigger eaters will be chowing down on some of these diet pills and perhaps could be eating less of these snack foods. Moving forward, that certainly is a possibility, but Barron's concluding that, even if we were to see those folks more restrained, that these stocks at these valuations remain attractive.

Keith Lanton: 8:37

Speaking specifically about a few of them Kraft Heinz, which is Warren Buffett's food stock, which Berkshire Hathaway owns 26 percent of the company, and it has not been a great investment since the Oracle of Omaha invested in the company. The stock is trading around $33 per share, about half of where it was in 2015, when Kraft merged with the private company Heinz, which was then owned half by Berkshire Hathaway. Kraft Heinz makes Kraft foods, kraft macaroni and cheese, jell-o and, of course, heinz. The company has moved away from a cost containment strategy that they've implemented in 2015, and they have shifted course to focus more on investment in marketing, innovation and improving the balance sheet. In fact, berkshire Hathaway values its stake in Kraft Heinz, which, as I mentioned, trading around $33, at about $40 a share for accounting purposes, which is 22 percent higher than where the stock closed on Thursday.

Keith Lanton: 9:40

Kellogg, symbol K plans to split in two companies in the fourth quarter, executing a plan unveiled last year. Perhaps that will unlock some value, the larger Kellenova, which is the company that will be spun off here. That company will have the global snack food franchise, which includes Pringles and Sheezitz, and the other business will be the slower growth cereal company, which will be called WK Kellogg, owning brands like Frosted Lakes and Special K. What Kellogg is hoping is that Kellenova, which will account for about 90 percent of the value of the two companies, gets treated less like a slow growth food company and more like it's Pierre Mondelis which owns Nabisco, or gets treated like Pepsi, which owns Frito Lay, and gets evaluation more akin to those companies, which is closer to 20 times earnings versus the 14 times earnings it's currently being valued at. Also mentioned General Mills, stocking around $55, about 14 times projected earnings. Campbell Soup, which recently bought the Rayos pasta sauce when they bought the Sovos brand in a $2.7 billion deal. Street viewing that deal perhaps as a expensive acquisition. Nevertheless it may add to growth and Campbell's, even factoring in that acquisition, is trading around 14 times forward earnings.

Keith Lanton: 11:09

Perhaps the cheapest stock in the food group from evaluation perspective is Conagra symbol CAG, trading around 29, a little more than 10 times projected earnings. But Conagra perhaps has the toughest road forward as they are seeing sluggish growth in their main brands, which are Birds Eye, duncan Hinds and Slim Jim. Nevertheless, the stock recently did raise their dividend by about 6 percent. It's currently yielding 4.8 percent. But there are some concerns that Conagra is extending themselves with debt to pay that dividend, perhaps explaining the lower valuation for Conagra versus its peers.

Keith Lanton: 11:50

Next up, next sector, they have food groups. Now we're going to move on to the banking sector. Baron, saying banks are stuck in a rut, a buyout wave could be building Bank stocks under lots of pressure following the failures of Signature Bank and the failure of Silicon Valley Bank, the acquisition by Credit Swiss, by UBS and the acquisition by First Republic of JP Morgan All of that weighing on the banking sector. On topic concerns that banks are sitting on large losses in their portfolios of bonds and therefore they have unrealized losses that aren't showing up on their balance sheets. All absolutely true, but nevertheless you could make an argument that that bad news is discounted into the price of the stocks. And then some, taking a look at a few different bank stocks if you look at Goldman Sachs, trading near book value, trading at 9 to 10 times forward earnings assuming those earnings were to come through, of course, never know, with financials, exactly how the future plays out, but some are speculating that mergers and acquisitions and IPOs are going to pick up and Goldman Sachs could be a big beneficiary. Also, other bank stocks like Citigroup, which is trading in almost 50% of tangible book value at about eight times forward earnings. Capital One trading in around eight times forward earnings, so trading in around 70% of book value. Wells Fargo, truist all trading below book value, all trading seven, eight, nine times forward earnings. Also, barron suggesting that, given these valuations and the cost of doing business in the banking sector could lead in the future to a buyout wave where we could see lots of merger and acquisition activity in the banking space as these fixed costs to run these businesses rise and as valuations for some of these smaller banks that look extremely attractive.

Keith Lanton: 13:51

Next sector, utilities. Barron saying utility sell-off has gotten out of hand. They do say that one stock is selling in an assured price, but let's take a look at the overall sector and then we'll talk about that one stock. The utility select sector spider symbol, xlu, is down 12% during the past 12 months. It's fallen out of favor with investors this year. Most utilities are being dumped for being safe stocks as investors abandoned recession fears and embraced risk. Then higher rates made utility dividend yields less attractive and, more recently, wildfires in Hawaii and elsewhere have raised the possibility of legal liabilities for utility companies. Barron says the selling has gotten out of hand. Utility ETF now trades for less than 16 times forward earnings, down from 20 a year ago, and it's lowest multiple since April of 20. He's even trading a discount to the S&P 500, whereas typically trades at a premium. Barron saying utilities don't get much cheaper than that. They say concerns are overblown and earnings could be stronger than expected.

Keith Lanton: 14:52

Many utility companies are adding clean energy power plants faster than they're retiring old ones. That allows them to grow their rate base, a boon for profit because states typically allow them to earn a fixed return on the equity of those assets. In other words, as assets grow, so do earnings. For investors looking for a single stock, barron suggests taking a look at a VISTA symbol AVA, apple, victor, apple Down more than 25% this year. They say the stock looks particularly cheap at about 13.7 times earnings. It's lowest multiple in more than 10 years. There are a few factors holding the stock back, one of which is that the company has not been aggressive in requesting rate increases because it was planning on selling itself to a Canadian utility, hydro 1, but regulators nixed that deal. A standalone of VISTA, which operates in Washington, idaho and Oregon, has some catching up to do. Analysts expect assets to grow 3% this year, while return on equity they expect to creep higher to about 7% this year, although that's down from 10% in 2019. Looking forward, they say the company will enjoy favorable settlements from states that will allow them to lift prices, which will enable higher earnings as the market grows more comfortable. Assuming these higher profits materialize, the market will potentially put a higher multiple on those future earnings. An analyst at Siebert, william Schenck, quoted in this article suggesting that, based on his estimates of future earnings, that the stock could trade as high as $50 a share in 2025, that would be 50% upside from the current price of $33.

Keith Lanton: 16:39

Sticking with the value theme, we're going to talk about two more value stocks. These are two stocks that are absolutely I would say hated right now, one of which is Walgreens Boots symbol. Wba Barron is saying Walgreens is looking for a new CEO. Why that could make the stock a winner. Stock in Walgreens is slumped 13% just in September alone.

Keith Lanton: 17:06

If you're an investor in Walgreens, you've kind of gotten used to it because the stock is down 2 thirds of its value in the past five years. They certainly have a wide range of problems going on in the company. Growth has been sluggish. They missed out on buying a pharmacy benefits manager the way its competitor is CDS-ed. It's pivoted to buying physician practices, which has dragged down their profitability. But Barron says, with the stock down so much, investors apparently think that the new CEO will probably fail, just as they argue the previous CEO had done. Turning around the company, they say it will be tough but given the current multiple, they say the risk reward is favorable. The stock is now trading at just under six times earnings per share estimates for next year. Our way down stock earned $6,000 in 2018. They're expected to earn $395,000 next year. That six times earnings is a mere fraction of the 19 times earnings that the S&P 500 is currently trading at.

Keith Lanton: 18:04

The concern here is that Walgreens healthcare business, which includes Village MD shield help solutions. Those businesses which are physician practices which Walgreens purchase. Those businesses have to be viable and profitable and that will take time. These businesses are losing money because of payouts that they have to make when a patient visits the hospital and Walgreens has to figure out how to drive the healthcare cost down in these businesses. Until it does so, the stock will remain under pressure and, given the 8.7% current dividend yield, the expectation is that a dividend cut may be forthcoming. The good news is that management sit on a third quarter earnings call that expects the healthcare business to move closer to profitability and, as those practices grow, patients and revenue aggressively, management said the unit could get profitable by 2025. So for those investors who have patients, who believe in the new CEO can come in and turn this thing around, even modestly, and who thinks that evaluation is six times earnings is a good, attractive risk reward, perhaps Walgreens is appropriate for that type of value investor. Albeit, it certainly is your proverbial falling knife Next falling knife.

Keith Lanton: 19:17

Next stock that has become extremely unloved is Disney stock that formerly was very loved symbol DIS. Barron saying Disney stock has now fallen to a 10 year low. Why it is still a buy Despite all the problems that Disney is having with charter communications. As charter and Disney are fighting over rates to carry Disney channels on the charter network, disney stock nevertheless, barron says, looks too beaten up to ignore. They say Disney certainly has a lot to lose in their fight with charter. About $2 billion in revenues this year. That is on the line that the charter currently pays to Disney. But nevertheless, barron suggesting that eventually there will be some resolution between Disney and charter and they conclude that, however it is resolved, charter is the old school linear TV and, regardless of the outcome, disney is making a strategic decision to move away from linear TV and if that pace is accelerated a little faster than they would like, they feel that that is already being priced into the stock, as the stock has fallen about 10% just in the last few weeks. Barron concludes their argument on Disney as being a good valuation stands. The stock is cheap relative to earnings and the sum of its parts and it has a path to earnings growth from a steady narrowing of streaming losses and cost cutting elsewhere. Disney also has options, including asset sales and reinstating its dividend. The charter is certainly another negative headline in the long saga for Disney, but they say that the future looks brighter with more catalysts going forward. All right, so that's the thought process some value opportunities that may be out there in a market that has been favoring growth, and now we're going to change gears and just take a look and see what's going on this morning in financial markets.

Keith Lanton: 21:22

So let's start out by taking a look here at the pre-markets. Give you an update here on where the futures are. We're seeing Dow futures up about 94,. S&p futures up 27,. Nasdaq futures up 135 points this morning. Apple, which drove the index a lot last week, has been moving to the upside. This morning it's up around 1.5% With today's move. Apple has still declined 6%, including moves from last week. Following reports, the Chinese officials are being prohibited from using Apple devices. But we are getting a little bit of a pop from Apple this morning and Apple is engaging in their shindig this week where they will be talking about their new iPhone 15,. It's their event dubbed Wonder Lust and we'll talk a little bit more about that if we have time.

Keith Lanton: 22:22

Other mega cap stocks this morning are moving as well. Qualcomm this morning up on reports that Apple will be including their chips in their upcoming iPhones. Qualcomm had suffered from some of the concerns regarding inclusion in Apple's universe and this morning stock being rewarded on being included. Rising rates last week kept the stock market muted. This morning we are seeing the 10-year yield relatively unchanged, around 426,. The 2-year yield is up 1 basis point to 4.97%.

Keith Lanton: 23:09

One company that's getting a lot of attention is Guidewire simple GWRE. The stock is up about 11%, surging to a 52-week high as strengthens its cloud offering fueling and upbeat report from Guidewire General News. This morning, federal Reserve Bank of New York President John Williams commented that US monetary policy is a good place, but more data needs to be analyzed to determine how to proceed with rates. President Biden needs to. Saudi Arabia, india and the UAE are optimistic in announcing a railway deal this Saturday connecting the Middle East, according to Axios, and health insurance costs are expected to be the largest increase in more than 10 years, according to the Wall Street Journal, something that all of us will be affected by.

Keith Lanton: 24:05

What's going on this week? We have a two-megacap software company's releasing earnings oracle after the closing bell today, and Adobe with earnings after the bell on Thursday. Wednesday, lots of attention is going to be on the Consumer Price Index Bureau of Labor Statistics releasing the August CPI, expecting a 3.6 percent year-over-year increase, four tenths of a percentage point more than in July. Core CPI, with excludes food and energy, is expected to rise 4.4 percent, following a 4.7 percent gain previously. If this were to hold, the good news is the CPI is still down six percentage points lower than its peak of 9.1 percent reached in June of 2022. Thursday the ECB announces a monetary policy decision. Traders pricing in about a one-third chance that we'll see a raise in its key short-term interest rates by a quarter of a point, which would take it to 4 percent. And on Thursday the current contract between the United Auto Workers and the Big Three automakers expire at midnight. Uaw has authorized the strike if no contract is reached upon the deadline. The current contract covers 150,000 workers and as of now, the party is seen far apart.

Keith Lanton: 25:22

This week we've got three big events taking place in the tech space. So first off we have Apple will launch an updated iPhone. On Tuesday, apple will hold its annual fall launch event. I said it's called Wonderlust. This year the event will be focused on the debut of the iPhone 15. Analysts also expect new Apple watches and potentially updated AirPods.

Keith Lanton: 25:49

No one expects a major iPhone overhaul. The most notable change is likely a shift from Apple's proprietary Lightning Connected to the more widely used USB-C standard. There will be updated processors, improved cameras, a thinner bezel and a few other tweaks. Photos are expected to ratchet up from the iPhone 14 levels. With respect to Apple, there are reasons to worry. Consumer spending is far from robust and mobile phone sales have been softening for many months. According to Counterpoint Research, global smartphone shipments were down 9% in the June quarter from a year ago. Meanwhile, apple faces double trouble in China, where the new Huawei Mate 60 Pro smartphone appears to be taking share from Apple. Of course, we talked about the Chinese banning the use of iPhones for certain government officials.

Keith Lanton: 26:37

The second up in the tech space is the IPO of Arm Holdings. Arm Holdings is a company that was brought private by SoftBank. Arm Holdings is a chip design company. It was bought by SoftBank for $32 billion in 2016. You may remember, in 2021, softbank agreed to sell arm for $40 billion in stock and cash before that deal collapsed amid regulatory scrutiny. So SoftBank began making plans for initial public offering. This past week, arm set a price range of $47 to $52, which implies evaluation of $50 billion. The IPO was expected to price Wednesday night, with arm trading on the NASDAQ on Thursday. There is a wild card in terms of arms valuation and the outsized role that China plays in arms fate. Arm is even more reliant on China than Apple, accounting for more than 25% of its revenue.

Keith Lanton: 27:36

The third event in tech that's taking place this week is the Justice Department lawsuit against Google is moving forward. They have said that Google operates an illegal monopoly in Internet search market. Third case goes to trial on Tuesday in federal court in Washington DC. This complaint goes all the way back to 2020, saying Google used anti-competitive tactics to maintain and expand and extend its near monopoly position in Internet search and search Advertising. Google has called the lawsuit deeply flawed. One key issue with the trial will be Google's long-running position as the search provider to Apple for its iPhone and its Safari browser, paying billions of dollars to Apple to be the default option for search on the Safari browser. Any attempt to untangle the connection could be a boon to Microsoft, which operates the Bing search engine. Barron is saying how ironic is that? Another possibility is that the court could mandate an end to the exclusive relationship between Apple and Google, spurring Apple to develop its own search engine, and that, of course, would be a big story as well.

Keith Lanton: 28:48

Before I turn it over to Brad, I will mention one other comment here in the bond world, and then I'll turn it over to Brad. Report from Hartford Funds saying that people will really do anything to avoid paying taxes. A new study has found that some investors in municipal bonds which, uh, are not in are exempt from federal taxes and many cases also are from state and local taxes, that many investors are paying such a premium for the tax benefits that they are actually ending up with a lower yield than if they had bought taxable bonds. And with that, turn it over to Brad. Give us some more thoughts and comments on markets. Good morning, brad, good morning.

Brad Harris : 29:27

Keith. Good morning everyone. Just before I get started on Keith's last note, the thing that you should always look for when buying a municipal bond is to look what the percentage of treasuries are. I've referred to that a lot of times and that's really the telltale sign. Obviously, if you're not getting 50% of treasuries or corporates, you are not getting a good buy a municipal bond. So generally, the rule of thumb is you want to get at least 75% of where treasuries are. A lot of times you can get 100% of where treasuries are and in those instances municipals are obviously an excellent buy. Anyway, I hope everyone had a nice weekend.

Brad Harris : 30:12

9-11 is always one of the toughest days in the stomach. The memory is so vivid. For many of us it was a beautiful fall day and in a flash our lives would be changed forever. On a personal note, it happened to be my first son's breath that day and we obviously had to cancel that, but still, people came over, walking up from downtown, dirty and sweaty, to hug, talk and share the moment. For many of us, the next couple of months were just funerals and reflection, and it's something that the saying never forget. Not only never forget, you can't forget it. My reflection was that a lot of what I was doing those days trading bonds was really BS and not giving anything back to the community. But as time healed the wounds, I remembered what I was thinking when I went back to the office. The way to help people is to comfort them in my case it was financially and be thoughtful about what you say and recommend.

Brad Harris : 31:07

So many of us get carried away especially myself, with the market of fear and greed, factors that are created by business, news, television and social media and society in general. A day like today makes you think about not being so greedy and just appreciating what you have In the bar market. There are opportunities to invest, make a fair rate of return and not be greedy. I've been suggesting for a while now that I'd like a barbell approach for taxable accounts with short-term treasuries or agencies that in the 5% yield and intermediate to longer-term municipals at 4% or better.

Brad Harris : 31:44

The peace of mind with this strategy is that you always have short-term money pretty readily available for a rainy day like God forbid 9-11, or anything for that matter. The longer municipal set you up for a nice base for a fuller portfolio and if the rate market ever reverses, you'll be happy that you've locked something in In the meantime. This week, please watch for the 10-year and 30-year treasury auctions. They will be very important and they will reveal a lot about market sentiment. I hope everyone has a good week and please take a moment to reflect and be thankful. Today. I'll hand it back to Keith. Thanks.

Alan Eppers: 32:21

(Keith Lanton) Thank you, Brad. That's everything I've got. (Alan Eppers)Thank you for listening to Mr Keith Lanton. This podcast is available on most platforms, including Apple Podcasts, Spotify and Pandora. For more information, please visit our website at www. heraldlantern. com.

Sophie Cohen: 32:43

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