The Best Stocks to Buy This February as Value Investing Makes a Comeback

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Aside from a few exceptions, as we saw in 2022, value investing as a theme has underperformed growth investing for years now. In fact, the divergence between growth and value stocks is at the highest level since 1991.

Andrew Greenebaum, senior vice president of U.S. product management at Jefferies, senses an opportunity in the record divergence between growth and value. Speaking with MarketWatch recently, the analyst pointed to the earnings revisions between the constituents of the Russell 1000 Growth Index and the Russell 1000 Value Index to substantiate his thesis.

Specifically, Greenebaum said, “We’re getting to a point where there were fewer upward revisions in favor of growth, and in value there are more relative upward revisions than there were before," and noted this tends to be a strong indicator of future price action. In other words, value stocks could soon be set to outperform.

Notably, as several former growth companies are now battling a severe slowdown, they are pretty much value stocks now. I believe Ford Motor (F) and PayPal Holdings (PYPL) are two value stocks that look good buys amid the record divergence between value and growth stocks.

Why PayPal Is a Good Value Stock to Buy

Only a couple of years back, perhaps no one could have envisioned that we would be talking about PayPal today as a value stock. The company’s revenues rose 20.7% and 18.3%, respectively, in 2020 and 2021, and its next-12 months (NTM) price-to-earnings (PE) multiple was 40x as we entered 2022. These are hardly the kind of metrics that we associate with a “value stock.”

However, things have changed. Cut to 2024, and PayPal has delivered single-digit revenue growth for two consecutive years. Analysts now expect its revenue growth to be below 10% in 2024, as well as 2025. 

PayPal stock has closed in the red for three consecutive years. The stock is trading with a YTD loss in 2024, too, following a plunge earlier this month after its Q4 earnings.

And PayPal continues to face several challenges. For instance, amid rising competition, digital payment companies have been feeling pressure on their take rate (the fees they charge for processing the transaction). Its branded business has been under particular pressure, which has further compressed its margins.

PayPal’s 2024 Guidance Spooked Markets

Amid the uncertain economic environment, PayPal did not provide annual revenue guidance for 2024, but said that it expects full-year adjusted earnings per share (EPS) to be similar to 2023 – a forecast that was significantly below Street estimates.

The company has a new leadership team in place, and CEO Alex Criss has been pushing for profitable growth. However, the turnaround might take time - and meanwhile, PayPal shares remain out of favor with analysts. Wall Street has given the stock a consensus rating of “Moderate Buy” with a mean target price of $69.17, which is 16.9% higher than Friday’s closing price.

All said, at an NTM PE multiple of around 11.4x, I believe the worst is priced into PYPL stock, and it looks like a good value pick to buy and hold. The company's valuations are too cheap to ignore at these prices, even after accounting for all the pessimism over growth and margin compression.

Ford: Another Good Value Stock Worth Buying

While PayPal is a recent entrant into the value category, legacy automakers – which include both Ford and General Motors (GM) - have been value names for quite some time now. Ford, for instance, trades at an NTM PE of 6.52x, which is even lower than its three-year average multiple of 8.5x.

One of the key reasons Ford stock has sagged and moved sideways is because its earnings have been stagnant - a trend that analysts don’t expect to improve anytime soon. Ford forecast adjusted pre-tax earnings between $10 billion and $12 billion for 2024, compared to the $10.4 billion that it reported in 2023. Wall Street analysts expect the Detroit giant’s adjusted EPS to fall 7.5% in 2024, and remain unchanged in 2025.

There are concerns over Ford hitting its peak profitability, but CEO Jim Farley believes that is far from true. During the company’s Q4 earnings call, while calling 2023 a “solid year,” Farley stressed, “I want to be really clear, we are nowhere near our earnings potential for Ford Motor Company. And we are really positioned well this year for growth and profitability for revenues as well.”

The CEO had made a similar observation during the Q3 earnings call, as well, but his assertion has failed to cut much ice with the analyst community. Ford has received a consensus rating of “Hold” from the 17 analysts covering the stock. Its mean target price of $13.74 is 13.1% higher than Friday's close, while the Street-low and Street-high target prices are $10 and $21, respectively.

Why Is Ford a Good Stock to Buy?

Ford’s electric vehicle (EV) business has been eating into the stellar profits that the company’s other two automotive segments – Ford Blue and Ford Pro - are generating. The company expects the losses of its EV business to widen further in 2024, but said that it is working on new generation EVs, which it believes will become profitable within the first year of launch.

Overall, with a mid-single digit PE multiple and an almost 5% dividend yield, I find Ford to be a stock worth buying for value investors – especially those who like to have dividend-paying stocks in their portfolio.

On the date of publication, Mohit Oberoi had a position in: F , GM , PYPL . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.