These 7 beaten-down value stocks are a buy, says a money manager who has outperformed the S&P 500 for 30 years

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If you consider yourself to be a contrarian long-term investor, keeping things simple might be the best bet in this bear market for stocks.

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The benchmark S&P 500 Index SPX,
+1.92%
has fallen 20% this year, the worst start to a year in decades.

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“This is precisely what you want to see if you are putting money to work,” according to John Buckingham, editor of The Prudent Speculator newsletter.

Buckingham has named seven value stocks to buy now, which he labeled “bargains thrown out with the bath water” in a recent report to clients. They are listed below.

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The Prudent Speculator is published by Kovitz Investment Group of Chicago and remains at the top of the list for 30-year returns among newsletters tracked by the Hulbert Financial Digest. The TPS portfolio’s average annualized 30-year return is 14.5% through June 30, compared with 9.9% for the S&P 500, with dividends reinvested monthly, according to Hulbert.

During an interview, Buckingham explained the role of market psychology in investing: “You don’t want everyone to be euphoric. You want them to be down in the dumps.”

The idea is that there is nothing unusual about a 20% decline in stock prices. Broad market declines must be expected and even embraced for long-term success.

The Prudent Speculator’s portfolio includes 80 stocks identified as suitable for three- to five-year investments. Starting with about 3,000 publicly traded US companies, Buckingham and his colleagues narrow the list to identify highly liquid, “potentially undervalued” names relative to the market.

One aspect of the value strategy is low prices relative to expected earnings. Buckingham said the TPS portfolio’s forward price-to-earnings (P/E) ratio was 10.4 as of July 12. In comparison, the forward P/E ratio for the Russell 1000 Value Index RLV,
+2.13%
was 13.5 (according to Kovitz, using Bloomberg data) and the forward P/E for the S&P 500 was 16.8 (according to FactSet).

There’s more about Buckingham’s long-term view of the market below. Now here are the seven bargain selections he shared, in the order he listed them:

Company

Ticker

Industry

Price change – 2022 through July 12

Forward P/E

Forward P/E – Dec. 31, 2021

Dividend yield

Alexandria Real Estate Equities Inc.

ARE,
+3.93%

Real Estate Investment Trusts

-36%

66.3

82.6

3.30%

Celanese Corp.

CE,
+1.88%

Chemicals

-34%

6.4

10.7

2.44%

Capital One Financial Corp.

COF,
+4.54%

Major Banks

-26%

5.6

7.5

2.24%

EnerSys

ENS,
+2.29%

Electrical Products

-26%

10.6

14.9

1.20%

MDC Holdings Inc.

MDC,
-0.08%

Homebuilding

-37%

3.5

5.7

5.65%

Meta Platforms Inc. Class A

META,
+4.21%

Internet Software/Services

-51%

12.9

23.6

0.00%

Micron Technology Inc.

MU,
+3.67%

Semiconductors

-36%

8.4

9.5

0.70%

Data source: FactSet

Here’s more about the seven listed companies:

Here’s a summary of opinion about the seven stocks from analysts polled by FactSet:

Company

Ticker

Share “buy” ratings

Share neutral ratings

Share “sell” ratings

Closing price – July 12

Consensus price target

Implied 12-month upside potential

Alexandria Real Estate Equities Inc.

ARE,
+3.93%

92%

8%

0%

$143.21

$201.82

41%

Celanese Corp.

CE,
+1.88%

56%

36%

8%

$111.66

$159.45

43%

Capital One Financial Corp.

COF,
+4.54%

58%

38%

4%

$107.04

$148.74

39%

EnerSys

ENS,
+2.29%

67%

33%

0%

$58.28

$88.25

51%

MDC Holdings Inc.

MDC,
-0.08%

25%

62%

13%

$35.40

$48.80

38%

Meta Platforms Inc. Class A

META,
+4.21%

73%

23%

4%

$163.27

$274.76

68%

Micron Technology Inc.

MU,
+3.67%

83%

14%

3%

$59.18

$78.71

33%

Data sauce: FactSet

All have the majority “buy” or equivalent ratings, except for MDC.

How to put the 2022 stock market in perspective

If you are investing with a long horizon — building a retirement nest egg, for example — it is surely a good thing if you have cash to commit at lower prices. Even the S&P 500’s SPX,
+1.92%
long-term average return of close to 10% is a good number, but some investors — and some members of the financial media — seem to expect the stock market to rise in a straight line, even though it has never done so. Consider the past 10 annual returns (yes, the calendar year is an arbitrary cutoff) with dividends reinvested:

Year

S&P 500 total return

2021

28.7%

2020

18.4%

2019

31.5%

2018

-4.4%

2017

21.8%

2016

12.0%

2015

1.4%

2014

13.7%

2013

32.4%

2012

16.0%

Source: FactSet

Buckingham pointed out that there are continual reports in the financial media that this year’s stock market has been the worst in decades.

“If you didn’t just buy a house three weeks ago, or only begin investing at the start of the year, your net worth is up substantially if you invested for more than two years,” he said.

Looking at the figures in the table, above, investors have had an incredible 10-year run, with only two “bad” years, which weren’t really that bad. But look at this 10-year price chart for the S&P 500:

FactSet

You can see that large pullbacks for stock happen pretty frequently.

Don’t miss: These high-yield stocks are down as much as 58% this year. But their inflation-fighting dividends have room to grow.

,

Credit: www.marketwatch.com /

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