2022 was an absolute disaster.
Inflation hit a 40-year high. Nearly 63% of U.S. consumers were living paycheck to paycheck. Markets were crushed. Home sales began to fall at the fastest rate in decades. Retail sales dropped. The Federal Reserve got far too aggressive in fighting inflation. The Nasdaq had its worst year on record since 2008. Recession fears are only mounting.
However, there may be some good news on the horizon for value investors.
According to the founder and CEO of Third Point, Dan Loeb says value stocks could “be the game to play in 2023 and beyond,” as noted by Forbes.com.
Value stocks are considered fundamentally undervalued, when trading at a discount to intrinsic value, which refers to what a stock should be worth based on earnings, dividends, and assets. Warren Buffett, for example, often seeks to uncover the intrinsic or true value of an asset, which is dependent on future sales, earnings, and estimates.
Value investors, like Warren Buffett, also believe that by holding undervalued stocks, they can earn a higher rate of return, long-term. Three stocks that fit the value mold include:
AbbVie (ABBV)
Heading into 2023, AbbVie’s top selling drug, Humira will face substantial competition from biosimilars. While that alone was enough to scare off investors, it created a good deal of value. For one, the company’s dividend yield of 3.64% is in no danger.
Two, the company has increased its dividend for the last 50 years, and is likely to continue hiking in 2023. Three, even after a respectable recovery in 2022, ABBV is still undervalued, trading at 14x forward earnings. Sure, ABBV will face heavy sales declines with Humira, but it still has a strong pipeline. In fact, AbbVie says that Skyrizi and Rinvoq could bring in about $15 billion in sales over the next three years, according to the company Chief Commercial Officer Jeff Stewart, which could balance Humira losses.
On the company’s fourth earnings call, Chairman and CEO Rick Gonzalez said the drugs would be commercialized across all Humira major indications, as noted by BioSpace.com. “We expect combined peak sales for Skyrizi and Rinvoq to exceed the peak revenues achieved by Humira.”
Analysts like the stock here, too. Credit Suisse analyst Trung Huynh, for example, initiated coverage of AbbVie with an Outperform rating and $170 price target. The analyst believes management’s 45%, plus or minus 10% erosion, expectation of Humira is “too conservative” and he sees long-term durability from portfolio leverage as well as incremental growth from the company’s “robust pipeline,” as noted by TheFly.com.
Lithium Americas (LAC)
With the lithium story only set to accelerate, Lithium Americas also holds immense value.
In fact, after a 54% decline from its peak-2021 high, the pullback appears largely overdone. And, a reversal rally seems to be in the cards. For one, the electric vehicle boom, coupled with supply-demand issues should keep lithium prices elevated.
Two, the company has two high-quality assets, including its U.S. Thacker Pass mine, where the company expects to see an average EBITDA of $520 million. Lithium Americas also holds a 44.8% stake in Argentinian asset Cauchari-Olaroz, where the company expects to see an annual EBITDA of $308 million.
Wanting to unlock even more value, Lithium Americas recently announced a split into two separate entities. That would include: An Argentina focused lithium company owning Lithium Americas’ current interest in its Argentine lithium assets, including the near-production Caucharí-Olaroz lithium brine project in Jujuy, Argentina; and a North America focused lithium company owning the Thacker Pass lithium project in Humboldt County, Nevada and the Company’s North American investments.
Once the split happens, Lithium International will hold 44.8% interest in Caucharí-Olaroz and 100% interest in the Pastos Grandes lithium brine project in Salta, Argentina. In addition, the company will hold the Company’s 100% interest in Thacker Pass, one of the most advanced lithium projects currently known to be under development in the United States.
Better, Lithium Americas and Arena Minerals just entered into a definitive arrangement agreement where LAC will acquire all shares of Arena not already owned by Lithium Americas.
“This Transaction will consolidate the highly prospective Pastos Grandes basin, and creates an exciting opportunity for Lithium Americas, a Canadian incorporated and headquartered company, to add incremental growth in one of the most important lithium producing regions in the world,” said Jonathan Evans, President and CEO of Lithium Americas. “The significant synergies between our two projects and a better understanding of the basin will enable us to advance development planning and maximize our growth pipeline in Argentina.”
Walt Disney (DIS)
Walt Disney hasn’t been the happiest place on earth to park cash over the last year. Since late 2021, shares of Disney dropped from about $180 to $86.88. In fact, 2022 was the company’s worst year since 1974. All on poor earnings, concerns consumers could cut down on discretionary spending, especially on entertainment, losses in its streaming segment, inflation, and fears of recession. The good news is most of the negativity has been priced into the stock. Its streaming segment could turn profitable in the new year.
For one, performance should improve in the new year. Not only does Disney expect for streaming losses to bottom out, it also forecasts break-even streaming results for 2024. Two, its theme park business is showing signs of improvement, thanks to returning demand.
Three, the return of the company’s former CEO Bob Iger – and activist investors such as Third Point’s Dan Loeb and Trian Partners’ Nelson Peltz – could help turn the company around. That led MoffettNathanson analyst Michael Nathanson to upgrade the DIS stock to outperform from market perform “to reflect our greater confidence in the company’s trajectory under the leadership of returning CEO Bob Iger,” as noted by The Hollywood Reporter.
In addition, DIS trades at less than growth with a PEG ratio of 0.70, as of late December 2022. And its forward P/E of about 49.8 is about 65% less than it was a year earlier.
Bonus: Schwab U.S. Large Cap Value ETF (SCHV)
One of the best ways to diversify is with an ETF, such as the Schwab U.S. Large Cap Value ETF (SCHV), which carries a balanced portfolio of large cap value stocks. With an expense ratio of 0.04%, the ETF offers exposure to companies such as Berkshire Hathaway, Johnson & Johnson, Exxon Mobil, JP Morgan Chase, Home Depot, AbbVie, Pfizer, and Merck.
Better, you can own more for less, and diversify. For example, if we wanted to buy 100 shares of the ETF, it would cost us just over $6,600. Meanwhile, if we were to buy 100 shares of just Home Depot, it would cost us more than $31,500 for one that just stock.
ETFs can also be safer than investing in individual stocks. After all, you’re investing in a portfolio of different stocks, and it’s highly unlikely that all of them will lose all of their value. Plus, if you’re just investing in single stocks your risk can increase, especially if you’re putting all your eggs in one basket.
