Value Investing Sectors 2020

3 Value Dividend Stocks to Buy in September

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Don't miss these value dividend stocks I'm buying in September

Hey Bow Tie Nation, Joseph Hogue here with Let’s Talk Money and an update to our 2020 Dividend Stocks Portfolio. We’re eight months into the portfolio, beating the market and I’m excited about the three stocks we’re adding today.

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Why I'm Buying Value Stocks for Our Dividend Portfolio

We’ve got lots of stable, long-term dividend paying stocks in the portfolio already but looking it over for this month’s video, I realized we don’t have a lot of value stocks.

Part of that is just the outperformance of growth stocks this year. I positioned the portfolio early to take advantage of it for higher returns but now I want to add some of those value picks because these could be some real moonshot returns.

In fact, if the recovery is confirmed over the next few months, these three stocks we’ll talk about today could produce a 272% return heading back to their 52-week highs!

I’ll be putting these stocks in the portfolio on M1 Finance, and I love the platform for that automatic investment rebalancing function. I can just put in what percentage of my money I want in each stock or fund and the website is going to automatically invest any new money across the group. M1 is totally free to use and offers some great savings rates and features.

Put your investments on auto-pilot and never pay a fee to buy or sell stocks with M1 Finance – learn more here.

Nation, I want to get right into these three dividend stock picks, so I’m going to wait until next month’s video to do an update of the rest of the stocks in the portfolio. If you’re not part of the community yet, just click that little red subscribe button. It’s free and you’ll never miss an episode.

My Favorite Mall Operator + Dividend Stock

Our first dividend stock for September is mall operator Macerich, ticker MAC, and a 7.5% dividend yield.

Mall operators have probably been the hardest hit by the pandemic, already struggling on a shift to ecommerce and weakness in department stores. I like Macerich though and better than larger Simon Property Group which has more debt and lower quality malls.

Macerich owns 29 class-A regional malls along with another 19 malls as part of a partnership and 12 non-mall properties. It’s a total of over 50 million leasable square feet and averages $800 in sales per square foot, which is well above the average for mall property and speaks to the quality of assets.

The company sold over $4 billion in lower quality malls over the last eight years so really went into this thing already positioned for quality. Occupancy is still over 91% though rent deferrals mean it will probably fall a little more over the next couple of quarters. Rent collection has improved from just 40% of rent due in April to over 66% in July, so definitely signs of some stability.

Shares are trading for 7.5-times on an enterprise value-to-sales basis which will seem high compared to the other two dividend stocks but is still less than a fifth of where the stock traded last year.

A quick recap here of the enterprise value, just in case. That’s the market cap, so the total value of all the shares, minus cash the company holds but then adding back debt. Take this over sales and you get a great valuation measure.

I like to use this enterprise value-to-sales ratio for valuations on a couple of reasons. First, if earnings are negative then that PE ratio isn’t going to make sense. Also though, the enterprise value takes into account cash and debt which is hugely important for these kind of heavily-leveraged turnaround plays.

Macerich has over half a billion in balance sheet cash and improving rent collection means it should have plenty of liquidity to hold it over well into next year even if things don’t improve. The company paid its July dividend even though it dropped it to $0.15 per share from $0.75 it had been paying quarterly.

That’s still a 7.5% dividend yield and for investors buying into the shares now…if the company can get the dividend back to that $0.75 per share quarterly…you’ll be collecting a 38% dividend yield.

Besides that dividend yield, the 52-week high is 340% above the current price. Now I’m not saying expect shares to get back to that point soon but even over a few years, that is a solid return. Analysts have targets up to $11 a share over the next year and half the shares available are sold short so any kind of upside could easily lead to a short squeeze and send the price higher.

How to Find Value Stocks and Sectors

Nation, throughout the list of dividend stocks today, you’ll notice these are some of the hardest hit names in the market but I also think there’s an opportunity for that broader value stocks play to produce outsized returns.

Value stocks are those with valuation multiples, so usually that price-to-earnings ratio, that are under the industry average or even entire sectors with lower PE ratios.

And something really interesting has happened in the market this year. If you look back, value stocks have outperformed growth stocks in every one of the last 14 recessions…100% of the time, returns on value stocks have been higher coming out of a recession. And it makes perfect sense. When the economy looks like it’s coming out of a recession, there still might not be much growth in sales but investors have more confidence to jump into these value stock plays.

But that hasn’t happened this year because of tech’s unique advantage in this recession. A lot of tech stocks, the bulk of that growth index, have actually booked increasing sales through the lockdown, while a lot of the companies in the value index have been shutdown.

So the gap between valuations, between the average PE ratios for value stocks versus growth, has gotten even bigger. The Russell 1000 value index, that’s a group of the top 30% of the market with low valuations, trades for 18-times earnings on that PE ratio. That’s up from 14-times last year and about a 45% gain since March.

Now a 45% run and rising PE ratio may not sound like ‘value’ but compare that with the surge in the Russell growth index. The index of growth stocks has rocketed 70% since March, taking it’s PE ratio from 22-times last year to 31-times earnings…almost twice as expensive as that value index of stocks.

And that imbalance, that difference in values, is something that could reverse if the recovery keeps going. If the economic recovery is real, then we should see spending shift to these companies and value stocks could come back in a big way!

I’m going to show you how I picked these value stocks next but first I want to get back to our dividend stocks list.

Best Value Dividend Stock in Travel

Next here is $1.8 billion Sabre Corporation, ticker SABR, and while this one suspended its dividend in March, I like the upside potential and think that dividend yield returns by early next year.

Sabre is a leading provider of software that helps airlines manage operations, reservations and crew management. About 74% of sales are air-travel related so its taken a bigger hit compared to some of the tech service providers with more hotel-related revenue.

Still though, air travel is recovering. Global airline capacity for August is scheduled just 47% lower compared to last year versus a drop as high as 70% in the May through July period.

Shares trade for about 2-times on an enterprise value to sales basis which is about a fifth of where it traded last year.

Sabre took advantage of low interest rates earlier in the year to raise over $1.3 billion in balance sheet cash so plenty of liquidity here. That’s important, that cash balance, anytime you’re looking at these kind of stocks because, in order to take advantage of those rebound returns, the company needs the cash on hand to survive over the near-term.

A return to the 52-week high would mean a 249% return potential on shares and even modest analyst targets put the fair value at 150% higher around $17 per share. Over 13% of the shares available are sold short, so again, good potential for a short squeeze if the price takes off.

And for all three of these stocks, the beauty is, we don’t necessarily need a return to normal or even profitability to see the price jump. We just need less uncertainty in the economy. That would give the market more confidence in these deep value names and could really boost sentiment.

We’ve still got one more value dividend stock to highlight but I wanted to show you how I picked these stocks. Those of you in the Nation know, I’m not about to just drop three stock picks in your lap and tell you to go buy them. That’s not what this channel is about.

How to Pick Value Stocks

I want you to understand how to invest, how to pick your own stocks, so you can be a better investor.

Before I look for value stocks, I like to get an idea of where the sectors are trading, which sectors of the economy might be expensive and which might be cheap. For that I can go to FactSet Earnings Insight, and we see here a chart of the forward price-to-earnings ratio for each of the 11 sectors and the S&P 500 index.

Value Investing Sectors 2020
Value Investing Sectors 2020

What we’re looking at here is the blue bar which is the current price-to-earnings ratio for the stocks in that sector. For example, tech stocks are trading for a price of 26.5-times the earnings analysts expect them to report over the next year.

The green bar is the average PE ratio over the last 10 years, so a long-term average of where those stocks trade on a valuation basis.

I’ve added the percentages above and this is the percentage the current PE is above that long-term average. So again using tech as an example, tech stocks trading for 26.5-times earnings is 70% above the long-term average of 15.6-times…that’s prices of 70% higher than what they usually trade for so definitely not cheap.

And what I do here is look at the sectors with the smaller premium, those trading at smaller percentages above the long-term averages. We can see here that stocks in the utilities, healthcare and financials sectors are all trading within 17% of their PE averages and stocks in the energy sector are trading so cheaply that the sector doesn’t even have a current PE ratio.

So I can look to find the best companies in these cheap sectors or I can also look for lower PE stocks, value stocks in some of the other sectors.

If I just want to screen for value stocks across the entire market, I can go to which is where I’m doing most of my research lately, and I click on Discover here in the menu.

Sign up on Stockcard for free and make stock-picking easy with the research tool I use! Use promo code: bowtienation for an exclusive discount!

In the Filters tab, I can create a new screener and we’ll call this Value Stocks here. And then I can select boxes here that fit the theme. Stockcard breaks down the financials and fundamentals of each company into easy-to-understand levels.

So we’ll look for large- and mid-cap companies. I’ll click this box for good, undervalued stocks and I also want to filter it by stocks that pay dividends.

And at anytime I can click to apply filter to see how many stocks meet those criteria, which here we’ve still got 647 stocks so I’ll probably want to add some more filters to narrow our list.

We’ll filter the list a little more for stocks with high growth potential, those with positive sales trends and then here for good cash availability and then click to see how many stocks still meet the criteria…and it looks like we’ve got seven names we can look through.

That filter for good cash availability is extremely important for these value stocks because we want to be sure these companies are able to survive for as long as the recession lasts and to get that chance to rebound. Stockcard takes a lot of the fundamentals we look for like the current ratio and debt-to-equity and boils it down into these understandable filters that makes investing really easy. I’ll leave a link to the platform in the description below as well so check that out.

Next here, Plains All American, ticker PAA, is one of the strongest…if not the strongest energy MLP out there and pays a 10% dividend yield.

The company owns $24 billion in assets including 18,000 miles of pipelines and 140 million barrels of storage capacity. Plains has been building this over decades and through multiple economic and oil price cycles so it definitely knows how to survive.

Shares trade for a multiple of just 0.54-times on that enterprise-to-sales ratio which is a tenth of where it traded as recently as June and even a third of where it was during the oil price apocalypse in the first quarter.

The company has over $3 billion in liquidity through available debt and credit. It’s managed to book $2 billion in operating cash flow and nearly $156 million in free cash flow over the last 12 months.

A return to the 52-week high would mean a 228% return from here and you’re collecting that 10% dividend while you wait. The average analyst target is for $11.50 per share, over 65% above the current price and even the low target is above the current trade.

Put your investments on auto-pilot and never pay a fee to buy or sell stocks with M1 Finance – learn more here.

It's time to start buying these deep-value stocks. You'll get a strong dividend yield while you wait and could book 100%+ returns when the share prices claw back the 2020 losses. Don't forget to join the community on Let's Talk Money so you don't miss any of our 2020 Dividend Stock videos.

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