SMCI - 5 Top-Rated Value Stocks For 2023

Summary

• No pain, no gain! According to Fed Chair Powell’s hawkish stance on inflation, investors must absorb some pain to get the economy back on track.
• Last year, monetary policy was not a good friend to growth stocks, and the value trend may continue to be an investor's best friend for 2023.
• We’ve all felt the burn of red-hot inflation because growth stocks were hit hard. The iShares Russell 1000 Growth ETF (IWF) through 12/31/22 was -30% compared to IWD, -10%.
• As economic uncertainty may continue in 2023, I am targeting value stocks with strong fundamentals. Where many growth stocks in 2023 report a fall in earnings and poor profits, the value stocks featured here have solid growth and offer a great way to diversify a portfolio.
• Many growth stocks are still overvalued. Our Quant model has identified five stocks that still come at a reasonable valuation and are considered Strong Buys based on their growth potential and profitability.

Value Stocks vs. Growth Stocks

There were many winners and losers in 2022, which resulted in a volatile ride for investors; markets rallied and dipped, and the jury is still out on what 2023 will bring. Back in the day, growth stocks crushed performance, as evidenced in 2021’s banner year . The trend of growth stocks, especially popularized by technology , has partly resulted in investors' fear of missing out and the market volatility highlighted by the meme craze and crypto scandals .

As illustrated in the chart below, 2022 highlighted substantial outperformance by value over growth. The iShares Russell 1000 Value ETF ( IWD ) ended the year down 10% compared to the iShares Russell 1000 Growth ETF ( IWF ), -30%.

iShares Russell 1000 Value ETF vs. iShares Russell 1000 Growth ETF

From a purely fundamental perspective, value investing defines the premise of buying low and selling high, capitalizing on inexpensive price-to-earnings ratio, price-to-book, yield, and other metrics. As shown in the table below, there can be benefits to value investing in the short and long term, as highlighted by the one-year and three-year performance.

Across All Market Caps, 2022 Favored Value

Value Stocks For a Recession or No Recession

After the latest jobs report showcased a drop in unemployment of 3.4% and the addition of 517,000 new jobs, it appears the job market is still tight. However, some economists believe amid a slowing economy and real estate prices, the Fed needs to become more dovish. And even though the Fed slowed the pace of its interest-rate increases from 75-basis points to 25-basis points, there are plenty of disagreements on whether there will be a recession in 2023. Regardless of what happens, the 2023 backdrop may favor value over growth investing, offering the ability to purchase severely discounted stocks in hopes of capitalizing as the economy recovers. Where many growth stocks experienced a bust in 2022, highlighted by layoffs and earnings misses in 2023, value stocks’ earnings are less susceptible to rising interest rates when discounting their future earnings. As such, I’ve selected five value stocks to consider based on our quant ratings.

1. United Airlines ( UAL )

• Market Capitalization: $16.59B

• Quant Rating: Strong Buy

• Quant Sector Ranking (as of 2/8): 23 out of 634

• Quant Industry Ranking (as of 2/8): 3 out of 29

United Airlines Holdings, Inc., through its subsidiaries, is a popular domestic and international airline carrier transporting people and cargo around the world. Despite setbacks from decreased travel during the pandemic, fuel costs, and pilot shortages , UAL has been on an uptrend as it focuses on hiring to meet demand, is making a significant investment in its widebody aircraft to increase capacity, and posted excellent Q4 earnings.

United Stock Growth & Profitability

United Airlines made tremendous improvements to its profitability, posting consecutive double-digit increases in its adjusted operating margins. Revenue of $12.40B beat by more than 50% year-over-year, and EPS of $2.46 beat by $0.32, prompting United to issue a bullish outlook for 2023.

United Airlines’ cash from operations remains robust. As illustrated in the A+ cash from operations, UAL has a $6.07B reserve, and a positive catalyst for 2022 and coming into 2023 is the reinstatement of corporate business travel.

“We expect the second half of February and March to be back on trend with booked revenue already 30% to 40% above the same period in 2019, and I think this validates our excitement for 2023. Overall, we expect our Q1 TRASM (Total Revenue per Available Seat Mile) to be up approximately 25% year-over-year,” said Andrew Nocella , United EVP, and Chief Commercial Officer.

Recovering economies mean a boost in travel, capacity, and leisure travel to help drive United’s profitability and growth. In addition to solid growth that resulted in 14 FY1 Upward revisions over the last 90 days, United still manages to trade at a discount.

United Airlines Valuation & Momentum

United is highly undervalued. Offering a solid ‘A’ for its overall valuation, its 6.12x forward P/E and forward EV/Sales are more than a 60% difference to the sector.

Bullish momentum and an environment primed for upside as business gets back to usual, Stone Fox Capital writes, “United Airlines is now a profit machine. The airline would trade at $150-plus with a similar valuation multiple based on the 2023 targets from the company.” Consider United Airlines stock for your portfolio and my next two financial picks, capitalizing on insurance and annuities.

2. American Equity Investment Life Holding Co. ( AEL )

• Market Capitalization: $4.08B

• Quant Rating: Strong Buy

• Quant Sector Ranking (as of 2/8): 21 out of 666

• Quant Industry Ranking (as of 2/8): 1 out of 21

Although cyclical, financials tend to benefit from high interest-rate environments, passing costs of rate increases onto customers. The backdrop of today’s environment makes my two Top Financials offering life insurance and annuities excellent. When you factor in an aging population and retirees looking for steady streams of income, there’s a reason why undervalued companies American Equity Investment Life Holding Company and Jackson Financial ( JXN ) are quant-rated Strong Buys. As fellow SA author David Zanoni writes :

“The U.S. annuity market is expected to grow at an annual pace of 4.7% to reach $299 billion by 2026 . One large driving force for growing annuity sales is the large amount of people retiring over the next few years. The U.S. population aged 65 and over is expected to grow by over 8.5 million people by 2026 . This growth increases the available market for annuity sales. Therefore, a large amount of people that are retiring and close to retiring are likely to consider annuities for income stability as they have been experiencing significant volatility in equities.”

Before diving into the valuations and growth metrics for both stocks, here’s a snapshot of Jackson Financial.

3. Jackson Financial ( JXN )

• Market Capitalization: $3.85B

• Quant Rating: Strong Buy

• Quant Sector Ranking (as of 2/8): 1 out of 666

• Quant Industry Ranking (as of 2/8): 1 out of 6

I recently wrote about Jackson Financial in an article titled 3 Top-Rated Growth Stocks to Buy in 2023. Both JXN and AEL come at extreme discounts while offering growth. As you can see in their below Factor Grades, which rate investment metrics on a sector-relative basis, the metrics don’t get much better!

With diversified product offerings, companies are primed to take advantage of broad distribution channels and successful management teams. Jackson Financial, a spinoff from Prudential ( PUK ) spin-off, is experiencing exponential growth and profitability, ranking as the #1 overall company out of 4756. has been on a solid rally since its demerger from Prudential in 2021. AEL is also crushing top-and-bottom-line results and is in high demand, so much so that they’ve been rejecting offers for mergers and buyouts of their business segments. The latest rejection of a $45 per share offer from Prosperity Group resulted in analysts calling the offer too low.

A look at each company’s valuation. Jackson’s forward P/E of 0.63x a -94% difference to the sector and AEL’s forward P/E of 3.4x a -67% difference. Both offer trailing PEGs of more than -97% discounts to their peers and bullish momentum for the new year.

The strong momentum of both stocks, whose quarterly price performance is significantly outperforming their peers, showcases both stocks are trending higher. Each has an upward-sloping 200-day moving average, a great sign as we review their past earnings and approach Q4 earnings.

Growth & Profitability

Jackson posted Q3 Non-GAAP EPS of $4.24, beat by $1.34, and revenue of $4.02B, beat by $2.59B, a +156% year-over-year increase, resulting in three analysts revising up estimates for the last 90 days. While AEL’s Q3 revenues weren’t as impressive as Jackson’s, its revenue of $673.40M still managed a 12.10% year-over-year increase, and EPS of $1.29 beat by $0.47.

Investors want investments that can generate income while also being able to avoid paying a premium. Both of these financials offer tremendous upside potential based on their valuations. In addition to the increases in the aging population and retirees, the demand for annuities stands to grow, and each of these companies, whose focus is on life insurance and annuities, stand to benefit.

AEL & JXN 1-year Price Performance

Although both companies have experienced some market fluctuations over the last year, their price returns have been strong. Laura Prieskorn , President and Chief Executive Officer of JXN, said it best,

“Jackson continued its strong momentum in the third quarter, reinforcing our proven ability to successfully navigate market stresses…Our healthy balance sheet enables the ongoing execution of our balanced capital management strategy, including our continued commitment to returning capital to shareholders.”

Her words also represent the strong performance of AEL, and as the search for value companies continues, what better industry in the current environment than packaged foods?

4. Cal-Maine Foods, Inc. ( CALM )

• Market Capitalization: $2.65B

• Quant Rating: Strong Buy

• Quant Sector Ranking (as of 2/8): 5 out of 193

• Quant Industry Ranking (as of 2/8): 3 out of 57

Stay CALM! Cal-Maine Foods, Inc. is here to provide your comfort food needs to help ease the stress of historically high inflation! In fact, it could be one of the best food hedges against food inflation.

Record-high grocery prices are putting a damper on consumers’ finances, but companies like Egg-Land’s Best, Land O’Lakes, and CALM are reaping the benefits. Despite egg prices beginning to trend down, peak egg prices remain intact, with the price of eggs up nearly 60% year-over-year. With consumer prices rising 6.5% in December and overall food prices +10%, Seeking Alpha News reports:

“Cal-Maine is in general one of the biggest beneficiaries of higher egg prices. The stock gained more than 30% last year after inflation, strong demand, and an avian flu outbreak contributed to higher prices. Of note, over 60M birds have died from highly pathogenic avian influenza, making it the worst outbreak in U.S. history, per data from the Department of Agriculture.”

Despite the stock’s gain over the last year, it is still highly undervalued.

Cal-Maine Foods Stock Valuation & Momentum

CALM, the #1 shell egg producer and distributor, is maintaining solid momentum as it outperforms the sector on six-, nine-, and one-year price performance. Inflation continues to weigh on earnings power, and CALM is passing off costs, including feed, packaging, and delivery to consumers.

Factor in pathogenics causing shortages, and eggs just became the new gold! With the egg boom, you’d think the stock would come at a premium, but you’re in luck. This stock has an A valuation grade, showcasing forward P/E ratios of 3.76x, a -81% discount, and forward EV/EBITDA with a -81% discount.

With record margins and a 5.63 trailing dividend yield, CALM’s collective characteristics, including growth, profitability, and earnings revisions, make this stock a strong buy-rated pick.

CALM Growth

With a quarterly gross profit margin of 39.6%, Cal-Maine Foods had solid Q2 earnings that included tremendous revenue of $801.7M, +110% Y/Y, despite its EPS of $4.08. CALM’s results led to A+ Revisions grade and four analysts' FY1 Up revisions over the last 90 days.

Boasting the excellent figures, CEO Sherman Miller said ,

“These results reflect the current market environment characterized by record average selling prices for conventional eggs, primarily due to reduced supply related to the outbreak in the U.S. of highly pathogenic avian influenza and good customer demand…Consumer demand for shell eggs continued to be good in the quarter, especially leading up to the Thanksgiving holiday, and we experienced record quarterly volume levels for specialty eggs sold.”

With continued tailwinds of limited supplies and uncharacteristically high egg costs, CALM continues to capitalize, results that have allowed shareholders to capitalize with an increasing dividend. Cal-Maine Foods goes ex-dividend , offering a 58.8% increase from its prior dividend, which offers one more reason to consider this value stock for a portfolio.

5. Super Micro Computer, Inc. ( SMCI )

• Market Capitalization: $4.40B

• Quant Rating: Strong Buy

• Quant Sector Ranking (as of 2/8): 14 out of 663

• Quant Industry Ranking (as of 2/8): 2 out of 29

My #1 Stock pick for 2023, and one of my Top 10 Stocks to begin the year, Super Micro Computer, Inc. and its subsidiaries is my tech pick that offers high-performance server and storage solutions that are “better, faster, and greener” than its competitors. It also offers investors a great blend of value and growth.

Showcasing a diversified product mix that includes software, networking devices, security software, subsystems, and more, it’s no surprise that guidance was recently raised. In a Seeking Alpha News report,

“Last week, Super Micro Computer said it expects second-quarter sales above its previously provided guidance and raised its earnings and adjusted earnings forecast. It now expects revenue to be between $1.77B and $1.8B, with earnings per share between $2.95 and $3.10. It previously forecast earnings to be between $2.54 and $2.81 per share. Adjusted earnings are expected to be between $3.07 and $3.22 per share, up from the previous estimate of $2.64 and $2.90 per share.”

The stock is already up 115% over the last year, compared to the Tech Sector ( XLK ) for the same period, -9.46%.

Super Micro Computer vs. Technology Select Sector SPDR ETF 1yr Performance

With Q2 2023 earnings released January 31st showcasing top-and-bottom-line beats, EPS of $3.26 beat by $0.23, and revenue of $1.80B beat by 53.8% Y/Y. This earnings beat is the 12th consecutive by the company!

With tremendous growth as evidenced above and industry tailwinds supported by a strong balance sheet, SMCI may emerge soon as one of the largest global suppliers of IT solutions. Not only does it possess one of the most attractive IT valuations, but its forward P/E ratio of 8x is also a -67% discount and its forward PEG of 0.26x is an -84% difference to the sector.

Amid a slowing economy and better-than-expected CPI figures, a potential turnaround for economies could see SMCI and our other stocks as tremendous value plays with growth prospects for the long term. As industries begin to stabilize and recession fears dissipate, each of the five stocks has been resilient in the face of market volatility in 2022 yet achieved significant traction and growth heading into the new year. Each of these picks has a strong cash position and is severely discounted. Consider each of these picks for your portfolio in 2023.

Should I buy value stocks versus growth stocks in 2023?

For many years, value stocks have lagged behind growth stocks. Although the current environment is riddled with speculation on growth versus value in 2023, investors should consider stocks that capitalized on last year’s value comeback that may benefit from rising prices in the new year. Better yet, the stocks we recommend are strong collectively on the basis of value, growth, and profitability.

Monetary policy and inflation concerns are still at the forefront of volatility and earnings season. Selecting companies with more significant margins, valuations that aren’t stretched, and possessing solid earnings track records may be the way to go.

Value stocks typically come at a great price point. My five picks, UAL, AEL, CALM, SMCI, and JXN, are trading well below their peers, have tailwinds into the new year, and were identified by my Quant System as low-cost stocks with growth prospects. If you’re not into value stocks quite yet, I recently wrote a piece on 3 Top-Rated Growth Stocks to Buy. Whatever your investing preference, my goal is to help you identify stocks with solid fundamentals. The stocks featured here may help to diversify your portfolio. Otherwise, we’ve got dozens of other Top Value Stocks for you.

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