Growth stocks have clearly led the market thus far in 2023, but will that continue? Several extremely high-quality value stocks have been selling off this year, offering investors an opportunity to buy at a discount.
On Tuesday morning, in front of Congress, Jerome Powell stated he believed there may be more rate hikes in the future than the market is pricing in. As we saw last year, when rates rise, growth stocks get hit, and value stocks get bid. Is this year setting up like that again?
Procter and Gamble PG, Johnson and Johnson JNJ, and Abbott Labs ABT, three of the most established corporations in the world, are on sale today. This reflects the fact that investors believe the next 12 months are going to be rosy for the economy. But if they are wrong it could be another bull run in value stocks.
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Procter and Gamble, founded in 1837, is a multinational branded consumer packaged goods company. Its products range from cleaning products and detergents to shampoo and cold relief medicine. Most Americans, and some 170 other countries probably have a medicine cabinet filled with Procter and Gamble Products. It has a long history of steady earnings growth and stock appreciation.
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So far this year PG stock is down -8%, as many investors have rotated out of value into growth. Many investors are hoping for a Fed pivot, and lower interest rates. But that thesis is looking shaky.
Procter and Gamble was an outperformer for most of 2022, although it did deal with some volatility giving back much of its gains later in the year. But I would contend that this sell-off is an opportunity to buy shares.
Sales growth for the current quarter is expected to be down marginally, -0.3% YoY, with the next quarter expecting a resumption of growth. Furthermore, while the current quarter earnings expectations have been revised lower over the last 90 days it has only been a very small revision while all the other time frames have been revised higher over the same period.
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If PG were able to eek out a slight beat on sales next quarter, it will very likely cause investors to buy back into the stock. Many of the products PG makes are non-discretionary, so even in the case of an economic slowdown or higher inflation, consumers will continue to purchase PG goods.
Procter and Gamble currently trades at a one-year forward earnings multiple of 24x, which is in line with its five-year median of 24x. PG offers a dividend yield of 2.6%. It has raised its dividend an average of 6.5% annually over the last five years.
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Johnson and Johnson is a deeply diversified pharmaceutical, medical devices, and consumer products company that was founded in 1886. JNJ’s brands include Tylenol, Nicorette, and Band-aid among many other notable names. Its pharmaceuticals range from psychological treatments to Covid vaccines, and MedTech does everything from stroke treatment to orthopedics.
Johnson and Johnson stock has a long history of earnings growth, dividend growth, and price appreciation, returning an average of 10% annually over the last 30 years. So far this year, JNJ stock has struggled though, down -12.5% YTD.
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Johnson and Johnson is trading at a very reasonable valuation. At 14x one-year forward earnings it is below its 10-year median of 17x. Over the last 10 years the only time the valuation was lower was during the Covid pandemic low. JNJ offers a dividend yield of 2.9%, which it has raised an average of 6% annually over the last five years.
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JNJ, like PG, has had slight downgrades in the current quarter earnings expectations, although future timeframes are being upgraded. Additionally current quarter sales are still expecting slight growth, which will accelerate over the next few years quarters.
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Because of the non-discretionary nature of JNJ products, the company should remain very robust though many different economic regimes. So, if investors are looking for some defensive allocations in their portfolio, I think JNJ fits the bill.
Abbott Laboratories is another company founded in the 1800s, with a long history of earnings growth, dividend growth, and consistent stock appreciation. Over the last 25 years ABT stock has provided an average annual return of 10%. Additionally, management has raised dividends an average of 14% annually over the last 5 years.
Abbott Labs discovers, develops, manufactures, and sells health care products worldwide. It operates in four segments: Established Pharmaceutical Products, Diagnostic Products, Nutritional Products, and Medical Devices. Products sold by Abbott are critical in the treatment of many health issues ranging from glucose monitoring for diabetes, to heart pumps for cardiovascular disease treatment.
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Currently trading at a one-year forward earnings multiple of 23x, ABT stock is just below its five-year median of 24x. So far this year ABT stock is down -8.2%, and over the last two years is down -10%. This has all happened while both earnings and sales have increased 45% and 24% respectively over the two-year period.
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