Value stocks have had a good start to the year, albeit not as hot as technology’s start.

The Russell 3000 Value Index is up a little over 5% so far in 2024, and most of our Value Authority names are solidly positive. Even the worst laggard in the Buy List, Phibro Animal Health (PAHC), has started to come to life. Stable earnings, coupled with a weaker dollar and hopefully a continuation in the recent improvement for small-cap stocks, should send shares even higher.

So, the question now is: Can the rally continue?

There are some near-term concerns, including the likelihood of increased bad loans in commercial real estate and rising consumer debt. However, I do not see any immediate threat of economic weakness or recession.

On the interest rate front, Federal Reserve Chair Jerome Powell reiterated that there will likely be rate cuts sometime this year. Bonds have been under pressure this year, but long-term interest rates are still well below last year’s high and have likely peaked in the current economic cycle.

So, if the economic and interest rate scenario works out as I expect, we will likely see further gains in the value indexes. In this environment, our current Buy List should do well.

Still, I recommend some caution, given that few names carry very attractive valuations at the present time, and stock selection will be important. Today’s new recommendation is one of these few stocks, as this household name has great consumer brands, but its stock is now down 17% from last year’s high. It also offers a 3% dividend yield for the first time since 2018. Let’s take a closer look.

PepsiCo: Excellent Entry Point

Food giant PepsiCo (PEP) owns well-known brands that dominate grocery store shelves, including, Pepsi, Lay’s, Fritos, Doritos, Cheetos, Quaker, Gatorade and Mountain Dew. And these powerful brands are helping to drive the company’s growth, with global beverage revenue up 7% from 2019 to 2023, and global food revenue up 10% over the same period.

Frito-Lay North American operations contributed 42% of adjusted operating profit in 2023, while North American beverages contributed 18% and Quaker accounted for 4%. The remaining operating income came from foreign markets, with Latin America the biggest contributor at 14% of the total.

Also notable, EPS rose from $5.60 to $7.62 from 2019 to 2023, or a compound annual gain of 7.9%. Higher costs offset some of the impact of the volume gains.

So why has the stock done so poorly since the shares topped out last May?

For starters, growth is starting to slow back down to the 4% to 6% core organic rate that management believes is sustainable. Growth is anticipated to be at the low end of the range over the next few years. There are concerns about the long-term impact of diet drugs like Ozempic on sales. Food stocks have also suffered as inflation has declined, and concerns mounted that it could reduce pricing power. And finally, food stocks are defensive stocks, and right now, traders have sought out more aggressive names.

However, the selling in these types of stocks is overdone.

PEP currently trades at 22X a reasonable earnings estimate of $7.45 this year, which is relatively in line with the S&P multiple of 22.2X. The stock’s current multiple fully discounts the expected slowdown in growth. While PEP is a large company with annual sales of $91.0 billion, it believes it serves a total market of $1.2 trillion in recent years, so the market share gains that the company has made in recent years should continue.

PEP is also very strong financially, covering its interest charges nearly 10X and achieving nearly a 14% return in total assets. PEP is also a strong cash generator, with free cash flow 86% of net income last year. That has enabled the company to pay its healthy dividend and repurchase $1.0 billion in stock while still investing in future growth. So, now is the time to buy.

PEP is a buy below $170. My $193 target is 24X next year’s EPS of $8.07.

I will be back in a few weeks with previews for our companies reporting earnings in April.