Recent volatility has hit growth stocks hard. But many deep value stocks have also experienced a pullback over the past few weeks. Factors like the Evergrande (OTCMKTS:EGRNF) crisis, the U.S. Federal Reserve’s tapering plans, Covid-19’s delta variant and possible corporate tax increases have convinced investors to tread carefully with cheap yet risky plays.
For some, these latest declines are on top of earlier selloffs that occurred during the summer. For instance, automotive stocks have moved lower due to the global chip shortage. Other industries, like private prisons and firearms makers, have faced headwinds related to pending or potential federal government policy changes. Yet whatever the reason and whatever the risk, for several of these names, the pullback may have been overdone.
Buying value stocks now, despite market uncertainty, could be a profitable move in hindsight. With their respective valuations much lower than that of the overall market, further declines may be minimal. Upside, however, could be substantial in time as investors realize past concerns were overblown.
So, which deep value stocks should you buy? These seven, a mix of large-, mid- and small-cap stocks, are some of the best value plays out there right now:
- AMC Networks (NASDAQ:AMCX)
- BorgWarner (NYSE:BWA)
- Cardinal Health (NYSE:CAH)
- CoreCivic (NYSE:CXW)
- Kroger (NYSE:KR)
- Sturm, Ruger & Company (NYSE:RGR)
- Vector Group (NYSE:VGR)
AMC Networks (AMCX)
AMCX stock has traded sideways in September, priced around $47 per share throughout the month. But it’s down considerably since the summer, so this out-of-favor media stock looks like a solid opportunity for many reasons.
Trading at a single-digit forward price-to-earnings (P/E) ratio of 5.6x, multiple compression doesn’t appear to be a problem here. Putting it simply, AMCX stock can’t get that much cheaper.
Yes, AMC Networks is struggling to grow. And with its “old media”-heavy portfolio of cable television networks, it’s vulnerable to cord-cutting.
That said, it’s not as if this perceived dinosaur, which owns TV channels and media properties like AMC, WE tv and IFC, has its head in the sand. AMC Networks is pivoting to streaming with subscription services like AMC+ and Acorn TV, much like ViacomCBS (NASDAQ:VIAC) has done in the past year. It may at the very least be able to convince Wall Street that it will survive in a post-cable world.
On top of its low valuation — and likely upside if it’s able to prove its bears wrong — is AMC Networks’ status as a takeover target. So far, this still hasn’t moved beyond the rumor mill. But after all the media mergers and acquisitions we’ve seen this year, it could still get snapped up by a deeper-pocketed rival.
BorgWarner (BWA)
The global chip shortage has weighed on auto parts giant BorgWarner. Since hitting its 52-week high of $55.55 per share, BWA stock slid to about $44 per share. With automakers facing greater production headwinds than previously expected, many are questioning whether this leading supplier can meet the high expectations it set after releasing strong quarterly numbers in August.
Nevertheless, you may want to buy the stock. At first glance, BWA shares may not look cheap — at least for an automotive stock. A forward P/E of 8.3x is cheap overall. But others may see it as a stretched valuation for such a capital-intensive, cyclical and low-margin industry. However, it may be a true “this time, it’s different” situation for this more dynamic auto parts name.
Why? Namely, its big move into providing parts for the electric vehicle (EV) space. As I discussed last month, BorgWarner could become a more profitable business in the coming years as it increases its percentage of EV-related sales from 3% to a targeted 45%.
Investors may decide BWA stock is worthy of something better than a mere 8.3x forward multiple. It may continue to struggle over the next few months, as the chip shortage is expected to carry over into next year. But for long-term investors, BorgWarner is still a deep value stock with substantial upside potential.
Cardinal Health (CAH)
CAH stock has seen modest declines over the past few weeks. But shares in the drug distributor experienced a full-on tanking in price on Aug. 5 following a big earnings miss and downbeat outlook.
A value play that performed well during the vaccine recovery, Cardinal Health shares are back to levels around $51 per share, not too far from where they traded last fall. On the flip side, now down to a single-digit forward P/E ratio of 8.9x with a nice 3.8% forward dividend yield to boot, it may be all uphill from here.
As a Seeking Alpha contributor detailed a few weeks after its big drop, there are many reasons why this undervalued stock may be a great long-term play.
Cardinal Health will soon be able to put its exposure to the opioid crisis in the rearview mirror. Along with its cost-saving plans and its continued use of dividends and stock buybacks to return capital to investors, CAH shares may have a path to a price in line with the company’s intrinsic value.
The contributor estimates CAH stock’s value to be $64 per share based on 3% annual free cash flow growth, but as much as $100 per share if growth exceeds this number.
Admittedly, it may take some time for Cardinal Health stock to hit $64 per share, much less $100 per share, so don’t assume this opportunity will play out quickly. Even so, dividend and value investors alike may want to keep it on their radar.
CoreCivic (CXW)
2021 has been a tough year so far for private prison operators like CoreCivic. Shortly after taking office, President Joe Biden quickly issued an Executive Order (EO) banning new federal contracts with private prisons.
However, it technically hasn’t been a bad year for CXW stock. Investors had already bid it down in 2020 when the real estate investment trust (REIT) suspended its dividend.
In fact, between January and June of this year, shares were up as much as 84%. This was due to contrarians piling into it and its peer, The Geo Group (NYSE:GEO). But as uncertainty has picked up again, the stock has tanked, falling from $10.80 on Aug. 11 to around $8.90 per share as of this writing.
So, after Biden resumed the federal government’s plan to phase out of private prisons, which was paused under former President Donald Trump, why buy this stock? Putting it simply, it’s dirt cheap.
Despite its many challenges, the aforementioned EO doesn’t destroy the company entirely. Only a quarter of CoreCivic’s 2019 revenue came from the two agencies covered by Biden’s order — the Bureau of Prisons and the U.S. Marshals Service.
Revenues from its operation of Immigration and Customs Enforcement (ICE) facilities are not affected. Neither are CoreCivic’s revenues from state and local contracts.
CXW stock is trading for 9.5x next year’s projected earnings. If the company can continue to adjust to the industry changes and reduce debt via the sale of non-core assets, shares may eventually see an epic rebound as investors realize it’s not deserving of such a fire sale valuation.
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