A Big Sigh of Relief

News of a 90% success rate for the COVID-19 vaccine that is being developed by Pfizer (PFE) and Germany company BioNTech caused a dramatic rotation in the market yesterday.

The Russell 3000 Value Index, which has badly underperformed the S&P 500 and growth stocks this year, rose 4.3% yesterday. Banks stocks led the way higher, with many rising over 10% as the vaccine news raised hopes that the global economy will continue to recover next year, and that the threat of COVID-19 will diminish.

Meanwhile, the Russell 3000 Growth Index, which has benefited all year from very low interest rates that favor growth stocks and investors’ perceptions that technology companies would thrive in the COVID-19 environment, declined 1.68%. With the yield on 10-year Treasury notes now seemingly poised to rise above 1% for the first time since March, investors may now start to rethink some of the frankly absurd valuations that have been given to some growth names. Meanwhile, many value stocks are still selling at attractive multiples and dividend yields.

I believe that the rotation out of growth and into value can continue. The Russell 3000 Value Index is still 4.5% lower for the year, while the Russell 3000 Growth is up 28.1%. This level of outperformance by growth is not sustainable, and there are plenty of attractive areas that investors can turn to as they sell growth stocks. The economy still faces challenges, and COVID-19 is still an issue. However, I do think that value investors should have the wind at their backs through the end of the year — the opposite of what we have seen across the past 10 months of 2020.

I wanted to thank those who hung in with Value Authority during the rough times early in the year, when the Russell 3000 Value Index was down more than 30% for 2020. By concentrating on companies with strong finances, good free cash flow generation and reasonably attractive valuations, I remain confident that I can continue to build wealth for subscribers in the long-term.

A Solid Citi

Citigroup (C), the large financial services company, is a name that is most likely familiar to you. However, what does the company actually do? Citigroup has two units: Institutional Clients Group and Global Consumer Banking.

Institutional Global Clients Group is the larger of the two segments, contributing 59% of C’s revenue in the most current quarter. This segment provides investment banking and corporate lending services, with its largest businesses being fixed income trading and underwriting. The company’s other segment is Treasury and Trade Solutions, through which the company offers cash management lending and trade financing to large corporations and public sector organizations.

Global Consumer Banking contributed the remaining 41% of revenue. This segment has a large international presence, with 14% of revenue coming from Latin America and 23% coming from Asia. Most revenue from this segment comes from credit cards. This segment also provides general retail banking services.

The last decade was good for Citigroup, as the company reduced its risk and saw profitability steadily grow. Earnings per share (EPS) increased from $3.82 in 2012 to $8.04 in 2019. Citigroup generated a lot of capital during this period and used it to retire 25% of all outstanding shares.post-financial-crisis high

However, despite this success, Citigroup shares did not trade far from where they did at the end of 2012, when I made my initial recommendation. And despite the stock’s strong rally yesterday, the shares are still down approximately 43% from their post-financial crisis high that was set in January of this year, due to the economic threat posed by the COVID-19 pandemic.

Although recession brings a lot of uncertainty to banks, Citigroup has been up to the challenge thus far. Despite adding over $14.5 billion, or over 2% of total loans, in provisions for future loan losses since the start of the year, Citigroup should still earn over $4 a share this year. It is important to point out that the company took this large reserve even though actual loan losses have been relatively flat. Not only have they ranged between $1.9 billion to $2.2 billion per quarter, the number of consumer loans more than 90 days past due has declined slightly as a percentage of the total.

While there is still a lot of unpredictability, Citigroup’s operations are holding up well thus far over the course of the pandemic. Now, with a vaccine hopefully coming soon, we can put the pandemic behind us sometime next year. As a result, the global economy should improve. Provided that Citigroup can remain profitable until that happens, and I believe they should be able to, we have already made a significant bottom in the stock.

Even after yesterday’s rally, Citigroup trades at just at 64% of tangible book value, and I believe that there is too much risk being priced into the stock. Buy C under $43.50. My target is $50. Please note that this target could potentially be raised. I believe the $0.51 quarterly dividend is safe, and the 4.3% dividend yield will add to the attraction of the shares.

Position Review

Please refer to the Hotlines/Flash Alerts section for a detailed discussion of the earnings referenced below.

3M (MMM) was not among yesterday’s big winners, as investors were perhaps looking for names that had a little more cyclical exposure. However, the stock still looks good at 17.6X next year’s EPS estimates with a dividend yield of 3.6%. I believe that CEO Mike Roman is making good progress at 3M, and I continue to recommend the stock below $160. My target is $175.

Cognizant Technology Solutions (CTSH) gave back some of its post-earnings gains, but rebounded both last week and during yesterday’s big rally. The company’s transformation is going well, with investments in growth businesses and the ability to control costs in legacy businesses paying off. I believe that the company will earn $3.65 a share next year and over $4 in 2021. So, my $80 target could prove to be conservative. Buy CTSH below $70.

Genuine Parts (GPC) shares have shown some volatility with regard to the COVID-19 headlines. However, I believe that the pandemic will be largely behind us next year, and that GPC’s historic consistency and recent efforts to improve profitability by streamlining product offerings will be rewarded. GPC is a buy below $92. My target is $105.

Kronos Worldwide (KRO) gave back some of its gains that it earned as a result of the vaccine-related news yesterday, but the stock remains higher than where it was since last week’s earnings report. An improved economy next year should drive better volumes and higher titanium dioxide prices, and the stock should continue to advance. KRO is a buy below $13.50. My target is $17.

HP Inc. (HPQ) will report fiscal fourth-quarter earnings after the market closes on Nov. 24, with expectations for EPS of $0.52 vs. $0.60 on a 5% decline in revenues. I think the quarter will again demonstrate the recent trend of solid personal computer (PC) demand, although printing will remain weak due to COVID-19. However, this department should see some sequential improvement as businesses are reopening and HPQ is continuing its deep cost-cutting measures. My thesis behind HPQ remains that the businesses are more robust than the market gives them credit for. As a result, the stock should be selling for more than 8.5X fiscal October 2021 EPS estimates of $2.35. HPQ is a buy below $19. My target is $23.

Despite reporting a respectable third quarter, Ingredion (INGR) continues to struggle as investors believe that the rise in COVID-19 cases will continue to hurt the company’s food service operations. While the 6% decline in North American revenues, largely reflecting poor sales to restaurants, is alarming, weakness here was offset by good results in the rest of the world. This fact limited the decline in sales to 2% for the quarter, excluding currency. I am confident that North American results will improve as COVID-19 should be much less of a risk once a vaccine undergoes mass distribution. This should allow INGR to earn over $6 a share next year. Then, the stock will recover. Buy INGR under $82. My target is $95.

While Old Republic (ORI) was up over 5% yesterday, the stock still remains below its pre-COVID-19 highs of close to $24 a share. The improved economy, post-COVID-19, will increase investor confidence in the company’s workers compensation business. While ORI’s title insurance business will not likely reproduce this year’s very strong results in 2021, the company should still earn $1.80 a share next year. At the same time, the stock is cheap at 10X earnings and 90% of book value. ORI is a buy below $18. My target is $22. The 4.9% dividend yield will add to total returns.

Safety Insurance (SAFT) did not react much to third-quarter earnings, which were artificially strong due to the fact that COVID-19 greatly reduced automobile traffic. I still expect the stock to benefit very nicely from its current price. SAFT is also a very well-managed insurer with a long history of consistent profitability. The stock is attractively valued at less than 12X next year’s EPS estimate of $6. The company also has a dividend yield of 5.1%. Buy SAFT under $75. My target is $88.

State Street (STT) was a big winner yesterday, as were most banks. While the strong move higher was somewhat curious, in that State Street is not as economically sensitive as most banks, STT was very cheap and just needed a good rally to get its stock moving in the right direction. Trading at only 11X next year’s EPS estimates, the stock still has some upside left. STT is a buy under $70. My target is $80.

Valvoline (VVV) has added to its post-earnings rally, with the stock just missing a 52-week high yesterday before pulling back. The September 2021 fiscal year should be one of continued growth for VVV, largely driven by new store openings and high same-store sales in the Quick Lube segment. I look for EPS to improve to $1.65 in the current fiscal year, up from $1.48 last year, and there is still good value in the stock at 14X estimates. I am raising my buy under on VVV to $21. My target is now $27.