Returns on value stocks have not been robust this year, with the Russell 3000 Value Index returning just 2.3%, which is largely a product of concerns over slower global economic growth and the potential for trade wars.
However, we have done well despite this environment by keeping a highly contrarian view, by selecting stocks when they are out of favor for transient reasons and then by selling them when the market is overly excited about their prospects. Our recent success in Walmart was a great example of this philosophy in action.
In keeping with this philosophy, I have a sell and a buy recommendation today.
First, sell American Electric Power (AEP), which is close to my $73 target. Utilities have been the beneficiary of a few trades since June which has kept interest rates low. However, if we really do head for an economic downturn, the rise in credit spreads would not be bullish for utilities. AEP’s yield is now down to 3.5%, following the 11% rise in the stock since we recommended the shares. In my view, AEP is not looking competitive versus the 4.32% yield for low-investment-grade corporate bonds, with that bond yield more likely to rise than fall in my opinion. Sell AEP.
I am also recommending purchase of technology outsourcing firm Cognizant Technology Solutions (CTSH). The stock has fallen since the company reported earnings in early August, as forward guidance was taken down very slightly, although earnings per share (EPS) guidance stayed unchanged at around $4.50 a share. At 17X this year’s EPS, with the company realizing roughly 10% going forward as its digital offering expands, CTSH provides good value at this time. Buy CTSH under $77.50. My target price is $90.