While growth stocks have largely led value stocks over much of the past 15 years, a rotation into value could already be underway. Value outperformed growth by more than 20 percentage points in 2022, as measured by the Russell 1000 Growth and Value indexes, leading to the belief that a rotation to value had begun. While value has trailed growth in 2023, some investors see it as a temporary setback in an early inning for value leadership.
Growth stocks have dominated the market for years, but no investment style stays on top forever. That might be why many investors now believe that value stocks are overdue for a turn at leadership. The current market presents an enticing opportunity for value investors. Even high-quality companies with solid fundamentals see share prices fall when the stock market drops. Plus, value stocks tend to be better established and less volatile compared to growth stocks.
We have identified three stocks not only trading at attractive valuations but could also be well positioned for success in a cooling economy.
Chubb Limited (CB)
Given the recent volatility stemming from bank closures, the sector can make an attractive environment to hunt for value. And while the rapid rise in interest rates has proved challenging to some banks, there are also segments of the financial sector that benefit from higher rates. One is the insurance industry, where companies generally invest the premiums they receive in fixed-income instruments.
Insurers such as Chubb Limited collect premiums from policyholders typically at the start of a contract period and can now invest that money at much higher rates. With a market capitalization of $79.6 billion, Chubb is one of the world’s largest property and casualty (P&C) insurance providers and the largest publicly traded P&C insurer. The more than 140-year-old insurer is recognized for having a strong brand name, outstanding customer service, and careful management of its liabilities over the years.
Chubb stock has declined 3% YTD and currently trades at an attractive 12.8 time 12-month forward earnings, well below the industry average of 15.8 times 12-month forward earnings. The analysts offering recommendations say to Buy CB stock. A median 12-month price target of 248.00 represents a +18.96% increase from the current price.
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The GEO Group, Inc. (GEO)
The global government secure facilities specialist owns significant prison real estate and an extremely valuable tech platform called BI, which monitors prisoners and illegal migrants.
BI provides a GPS technology intended to enhance compliance. The electronic monitoring program tracks immigrants and prisoners via cell phones and other electronic devices. GEO has an exclusive five-year contract with ICE that ends in 2026 but will likely be renewed post-2026. This allows the company to capture 100% of the ICE market for immigrants who are under this system.
The GEO Group’s owned real estate is estimated to be worth multiples of the current enterprise value in private market transactions and BI could be worth the entire enterprise value in a spin-off or sale of the segment.
The margins are also impressive with 55% EBITDA margins and the company putting up over $270M of EBITDA in 2022 alone from the BI segment. With a share price of $7.22, GEO has a market cap of $903 million and an enterprise value of only $2.7 billion.
Citron Research thinks GEO is cheap, and the pros on Wall Street agree. The analysts covering the stock give a median 12-month target of $15, representing a 102% increase from the current price
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Albemarle Corp. (ALB)
Albemarle Corp. develops, manufactures, and markets chemicals for purposes ranging from various consumer electronics to construction and medicine. ALB’s robust lithium segment successfully produces lithium carbonate, chloride, and hydroxide. It also deals in bromine and hydro-processing catalysts for clean fuel.
Albemarle expects to deliver revenue growth in the range of 35% to 55% for 2023. Additionally, the company has guided for 20% to 30% annual growth in lithium sales volume through 2027. As of June, the company reported net debt to EBITDA of 0.4. With high financial flexibility, there is ample headroom for aggressive expansion.
At a forward price-earnings ratio of 5.1, the stock looks undervalued. The current consensus among 29 polled investment analysts is to buy ALB stock. A median price target of $254 represents a 51% increase from the current price.
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