Many have talked up the likelihood of a recession coming into play and chief among them is investing guru Rob Arnott. The founder and chairman of the board of Research Affiliates, who pioneered the ‘smart beta’ investing technique, thinks there’s an 80% chance a recession hits the U.S. economy over the next year. What’s more, Arnott knows who is responsible for this state of affairs.
“Ultimately, I count myself as a moderate pessimist on our ability to avoid a recession, created as usual by the Fed,” Arnott said. That’s because the Fed did not stave off multiple bank collapses, a consequence of which will be a “credit crunch,” and that in turn, will lead to a recession.
However, that’s not to say Arnott thinks there are no opportunities out there right now for investors. While he notes that value stocks have been making a comeback vs. growth since the summer of 2020, he thinks value is only “halfway back to historic norms, which means there’s ample room for value to perform brilliantly in this decade.”
With this in mind, we’ve opened the TipRanks database to get the lowdown on two value stocks Wall Street’s stock pros think are ripe for the picking. Both are included in the Vanguard Value ETF, which is the largest value-focused fund, and both are also rated as ‘Strong Buys’ by the analyst consensus. Let’s check the details, then.
We’ll start with ConocoPhillips, a global energy industry giant and one of the largest independent exploration and production (E&P) companies in the world, as measured by production levels and proved reserves.
The company has operations in 13 countries and its assets are spread over various locations across the globe, although almost half the Texas-based company’s production is derived from US sources. With a market cap of $132 billion, the firm takes the 77th spot on the Fortune 500 list.
Like many other crude oil players, ConocoPhillips had a strong 2022. In the most recently reported quarter, 4Q22, net income rose to $3.2 billion, amounting to $2.61 a share, from $2.6 billion or $1.98 per share, in the same period a year ago. Production in the quarter reached 1,758 MBOED (thousand barrels of oil equivalent per day), an uptick of 150 MBOED from 4Q21. And throughout 2022, Conoco attained a record $18.4 billion in FCF with shareholder distributions reaching $15 billion.
More recently, the company unveiled a 10-year plan that calls for over $115 billion of free cash flow to be made available for distributions. That’s a huge sum of money and amounts to almost 90% of Conoco’s present market cap.
For Barclays analyst Jeanine Wai, the company’s cash returning endeavors are key for the bull-case. She writes: “Using 2022 as a guide, the company’s cash returns are in practice variable in commodity upswings wherein shareholders win alongside cash flows, and are more fixed in commodity downswings. This is only possible given the company’s fortress balance sheet, strong asset base and through the cycle mentality.”
“Given its strong target total return of $15bn for this year, which management estimates is ~50% of CFO at $80 Brent, COP is one of the unique names where its FCF yield is average or slightly below average but its payout yield [(base dividend + variable dividend + buyback)/enterprise value] is above average. Numbers still matter, and investors want to get paid to ride out the commodity volatility,” the analyst went on to add.
What does this all mean for investors? Wai rates COP shares an Overweight (i.e., Buy) while her $141 price target makes room for one-year returns of 30%. (To watch Wai’s track record, click here)
Most on the Street agree with Wai’s take. The stock’s Strong Buy consensus rating is based on 13 Buys vs. 4 Holds. The average target stands at $134.63, implying shares will climb 24% higher in the year ahead. As a bonus, the company pays regular dividends that currently yield 2.14% annually. (See COP stock forecast)
UnitedHealth Group (UNH)
From one industry giant to another. Boasting a market cap of $477 billion, UnitedHealth is one of the biggest revenue generators in the world. This global mega-cap provides healthcare products and insurance services. Its activities are split into two separate segments: UnitedHealthcare, which offers health insurance, and Optum, which offers data and technology services.
The worldwide health insurance industry is seeing robust growth and the stock has reaped the benefits; UNH shares have bettered the S&P 500’s annual performance in all but one of the last 10 years, 2022 included.
That said, that has not materialized so far in 2023, as investors reacted negatively to the recently reported Q1 numbers. That might seem weird at first glance, considering the results beat expectations on both the top-and bottom-line. Revenue increased by 14.7% year-over-year to $91.9 billion, trumping Street expectations by $2.12 billion. Adj. EPS of $6.26 came in $0.18 above the $6.08 forecast. As for the outlook, the company raised its adjusted net earnings forecast from the prior range of $24.40-$24.90 to between $24.50 to $25.00 per share. The consensus had previously been at $24.93.
Despite increasing its outlook, Deutsche Bank analyst George Hill thinks the relatively tame raise is partly to blame for investors’ disappointed reaction.
“UNH management was particularly vague on the outlook for its fully capitated care delivery business as a result of the final rate notice and we consider the guidance raise of 10c (in line with the beat) relatively pedestrian by UNH standards,” Hill explained.
However, that does little to change Hill’s bullish thesis: “We continue to see the company as a high-quality defensive name in the large-cap healthcare services space given UNH’s increasing diversification into complementary businesses and the continued erosion of regulatory risks, which is reflected in the premium we granted in our target multiple.”
To this end, Hill has given UNH a Buy rating and a $627 price target, indicating potential growth of 22.5% over the next year. (To watch Hill’s track record, click here)
Overall, UNH has the bulls on its’ side; barring one skeptic, all 8 other recent reviews are positive, providing the healthcare giant with a Strong Buy consensus rating. The analysts see shares rising by 18% in the months ahead, considering the average target clocks in at $605.11. (See UNH stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.