Let’s think long term this week. Growth stocks, like the ones we reviewed last week, boast rapidly expanding revenue and high valuations, but come with risk. Value stocks, which trade at a cheap price relative to their performance, are more stable and present a good choice for the long-term minded investor. With several great value stocks at a discount right now, it’s a good time to get in.
The three stocks I’m watching this week are The Coca-Cola Company (KO), Chevron Corporation (CVX), and JPMorgan Chase & Co. (JPM).
🥤 The Coca-Cola Company (KO, $48.06, +0%)
Personally, I’m a Coke guy. Aside from the iconic red can, KO owns several brands including Fanta, Sprite, Minute Maid, and more. But do people still drink soda? For a value stock like KO, you have to look at more than the price.
What to look at.
International Presence: Surprisingly, only about 30% of KO’s sales come from North America. KO's strategy is to put its drinks in more hands in more places more quickly than any competitor. As a result, they derive more than 40% of its sales from emerging economies. This lets them produce the most volume in several markets, lowering its cost to produce each unit.
Consistently High Gross Margins: KO’s gross margins (the difference between revenue and cost to make the product) are above 60%. They’ve achieved this by only handling manufacturing of its drinks’ concentrates. The more expensive operations, bottling and distribution, are handled by a network of third parties.
Decline of Soft Drinks: People are drinking less soft drinks, posing a risk to KO. They are actively managing this risk by buying into new markets, such as coffee with its $5B acquisition of Costa Coffee.
Why I’m watching it.
There’s a lot to like about Coca-Cola. First of all, it’s better than Pepsi. More importantly, it has shown continued growth and excellent execution despite a challenging market for its sugary drinks. When I evaluate a value stock, I look for indicators that a company will continue to thrive for many years into the future. In KO’s case, their brand allows them to price higher than competitors and their distribution lets them drive down cost with greater volumes. With a near-term hit due to COVID-19, analysts estimate their fair value at $54*, undervaluing them by 11%. Their share price may go lower in the short-term, and with a >10% upside along with a 3.4% dividend, that makes KO a strong long-term bet.
The verdict.
I’m going to wait to see if KO drops lower, and if it dips below $45 I may consider buying as a long-term play.
⛽️ Chevron Corporation (CVX, $87.17, +3.3%)
We’ve probably all gotten gas at a Chevron station. They are the second largest oil company in the US, and besides that there’s not much more to say about them. Energy companies in general are very long term investments that have high dividends.
What to look at.
High Dividend: A big attraction of energy stocks is their high dividends (cash you receive for being a shareholder). However, decreasing share prices of energy stocks can quickly eat up that dividend if you’re not careful. Buying Chevron for its 6% dividend is a relatively safe choice, as its 10 year returns are 4.7% compared to the industry’s average -3%.
Low Debt/Equity Ratio: Oil is a depleting natural resource, so oil companies must continuously invest in its production. The debt/equity ratio measures how much a company finances it operations by borrowing money versus its own. Chevron’s 0.16 D/E ratio is roughly half the industry standard.
Displacement by Alternative Energy: Clean energy alternatives such as solar and wind have the potential to displace carbon-based fuels in the future, posing a threat to Chevron's business.
Why I’m watching it.
Personally, I’ve never liked energy stocks. Attractive dividends often reel investors into a stock that racks up losses for years before a potential return. Another danger is that dividends can be lowered or cancelled if a company is under significant financial stress. Evaluating CVX has changed my mind to some degree. Compared to its competitors, their low D/E ratio tells me that they can ride out an extended period of low oil prices. That makes me feel like their dividend is safe for the long term. Analysts estimate CVX is undervalued at a 21% discount, showing an attractive upside to compliment its healthy dividend. I believe alternative energy is the future, but it will be a long time before it displaces oil enough to make any significant impact on this stock.
The verdict.
At its current discount, I would buy CVX knowing that its a 10-year investment and current losses need to be ignored.
🏦 JPMorgan Chase & Co. (JPM, $95.18, -4.9%)
JPM is one of the largest of the big banks in the US, with over $2.5 trillion in assets. Known for dominating the US financial sector in scale and scope, they face uniquely challenging times with the backdrop of COVID-19.
What to look at.
Macroeconomic Impact: Despite a potential recession imminent due to COVID, JPM is not prepared to process emergency small business loans. Rather, it is prioritizing its best customers rather than taking on more risk, a move that might hurt the bank’s reputation.
Exemplary Leadership: Long-time CEO Jamie Dimon is no stranger to crises, leading JPM through the 2008 financial crisis relatively unscathed.
Strong Fundamentals: JPM’s quarterly revenue growth is 10.3% compared to the industry average of 2%. Their consistent performance has produced 10-year trailing returns of 9.5% versus the industry average of 0.6%.
Why I’m watching it.
The coronavirus crisis is not a banking crisis. With their rock-solid fundamentals and dominant market position, JPM will most likely come out of this time stronger than their competitors. Its estimated that JPM is trading at a 16% discount right now (fair value of $113), which makes it an attractive long-term buy alongside its 3.8% dividend. JPM seems to be prioritizing its largest customers rather than its small businesses, reducing exposure to bad loans to small businesses. This could hit their reputation with that market segment, but over the long term should not impact the stock.
The verdict.
JPM won’t be spared by this downturn, which leaves room for the stock to go lower. I’ll wait to see if the stock dips below $90 before buying.
Last Week’s Stocks
You can review why I picked these stocks last week here.
*Fair value estimates are provided by Morningstar. These are estimates based on both objective and subjective analysis and should be taken at face value.