For the past ten years, hot growth stocks have been the better bet, providing average returns during the period of 15.35%, as compared to 7.61% for value investing portfolios. But now there are a multitude of experts proclaiming that value stocks will be en vogue in 2021 – and indeed, many already started to rally in 2020’s late innings.
Cyclical stocks considered too risky just a few months ago are suddenly flashing on investors’ radar.
Bank of America, for instance, sees the U.S. stock market in the early stages of a value cycle that will pick up steam in 2021. “The relative discount for value stocks remains nearly two standard deviations below average, “ BofA analysts say.
In this article we highlight three stocks that seem timely in a post-pandemic world, which for the practical purposes should materialize in the second half of 2021.
Sirius XM (SIRI) is the primary asset of 74% ownership by Liberty Sirius XM (LSXMK). These investments are controlled by legendary media investor John Malone. Investors who have followed Malone in and out of media stocks over the past 25 years can attest to the solid returns.
Liberty Sirius XM’s ownership in SIRI has risen steadily in recent years. When it crosses 80%, which at the current rate might be in early 2022, Malone may provide investors with a profitable exit, a pattern he has followed in the past.
SIRI has recovered a bit as auto sales have returned to pre-pandemic levels, and 78% of new car sales are enabled to receive Sirius XM. Additionally, the percentage of used cars sold with Sirius XM subscriptions continues to rise, and currently represent 50%.
LSXMK also trades at a 17% discount to the value of its holdings in Sirius XM. If these discounts were eliminated, perhaps in two years, we could see a stock, which closed at $42.32, worth $63. If past is prologue, it should be worth waiting for.
Of 13 analyst ratings, 10 rate the stock a Strong Buy, along with one Buy, one Hold and one Strong Sell rating, giving SIRI stock a consensus rating of Strong Buy.
NortonLifeLock (NLOK) provides cyber security solutions to 50 million customers across the U.S. The company’s subscription software protects Internet devices from viruses, malware, spyware and ransomeware. Its premium subscription product, LifeLock, adds protection from cyberthreats and identity threats. It also helps customers resolve ID theft issues and seek reimbursement for stolen funds.
NortonLifeLock is expanding internationally in 2021 via the $360 million acquisition of Avira, a provider of cybersecurity solutions in Europe and emerging markets. This acquisition adds 30 million active devices and 1.5 million paying customers to NortonLifeLock’s customer base and is expected to add “3 points of revenue growth.” The company projects the deal will be financially accretive in the first year and support 50% operating margins once deal synergies are realized.
NortonLifeLock, under a new management team, delivered a greatly improved financial performance during the first half of fiscal 2021, which ends in April. Billings improved 7% during the September quarter, operating margins gained 200 basis points and EPS grew 100%. Growth came from a new product for PC gamers, all-in-one family plans and online privacy monitoring services.
The sale of its enterprise business last year trimmed $1 billion from NortonLifeLock’s costs and shedding underutilized assets generated $875 million of proceeds from the sale.
The 2.4% dividend yield doesn’t sound like much, but it’s considerably higher than the 1.6% you’re getting from the S&P 500. Moreover, NortonLifeLock rewarded investors with a 67% dividend hike last year and a $12-per-share special distribution last January.
It’s also one of the best value stocks in the tech sector, trading at a forward P/E of 16, that’s roughly half of its IT peers. That’s also a 25% discount to the stock’s own historic forward-looking multiple.
LyondellBasell (LYB) had a brutal 2020, never sniffing a positive return from day one. It’s primarily in the business of selling plastics and petrochemicals, but it also has a large refinery business that makes gasoline, diesel fuel and jet fuel.
In a normal world, this would have been considered a diversified model. But in 2020, investors spent most of this year scared to death of anything resembling energy.
Chemicals companies are cyclical in nature, as are refineries. They tend to do well when the economy is humming. So, it’s not surprising that LyondellBasell got beaten up in March. But what is surprising is the sheer magnitude of the fall. Before the dust settled, the stock had fallen by about two thirds from its 52-week highs.
The shares bottomed out in late March and by early December had clawed back most of their losses for the year.
But here’s the thing. LYB shares were cheap before the March selloff, and they remain cheap today. The stock trades 1.1 times sales and 13 times expected 2021 earnings. To put that into perspective, the S&P trades at an almost shocking 2.7 times sales and 22 times expected 2021 earnings.
As we finish up 2020, value stocks appear to be assuming leadership from growth stocks. We’ll see if this is a blip or if it represents a sustained shift in sentiment. But regardless, LYB is a cheap stock showing strong momentum, and that puts it on strong footing to one of 2021’s top value stocks.
