Value stocks finally outperformed growth stocks in 2022 after lagging behind them for more than a decade. The value subset of the Russell 3000 index of most U.S. stocks lost about 8% after dividends through most of 2022, versus a nearly 30% loss for the growth subset, its worst showing in 14 years.
Rising interest rates clobbered growth-stock valuations—and rates are likely to keep climbing in 2023, albeit more modestly than in ’22. But expectations of a weaker economy and lackluster earnings growth may keep stocks with lower valuations in favor.
In 2023, it will pay to be choosy, says Jon Boyar of Boyar Value Group, a New York–based firm that includes Boyar Asset Management and Boyar Value Research. For the past three decades, the firm compiled a list of 40 undervalued stocks that it thinks will perform well in the year ahead. The so-called Forgotten Forty includes shares that trade at a discount to their potential value, with a positive company-specific catalyst likely to manifest in the year ahead.
“If a stock is selling at a significant discount to what we calculate an acquirer would pay for the business, and has a catalyst for capital appreciation, that’s very interesting to us,” he says.
Walt Disney, one of this year’s Forgotten Forty, has been trading around $84—its lowest level since 2014. The stock is down nearly 60% from a March 2021 high. Yet Boyar sees another year of strong postpandemic theme-parks demand, while Disney’s streaming segment could turn profitable in 2023. He’s heartened by the return of CEO Bob Iger, and the involvement of a pair of prominent activist investors—Third Point’s Dan Loeb and Trian Partners’ Nelson Peltz—who are helping to keep management accountable to shareholders.
Hidden Gems
Six stocks from the Boyar Forgotten Forty value-oriented portfolio with a positive catalyst in the year ahead.
Using a sum-of-the-parts approach, Boyar calculates a fair value of $181 for Disney stock, indicating upside of about 115%.
The recently agreed-upon sale of a majority stake in the National Basketball Association’s Phoenix Suns for $4 billion demonstrates the scarcity value of major-league sports franchises, says Boyar. Liberty Braves Group (BATRK) is a tracking stock representing ownership of Major League Baseball’s Atlanta Braves and real estate surrounding the team’s ballpark. The Braves’ media market has 31 million people and offers ample sponsorship opportunities tied to companies based there.
In November, John Malone’s Liberty Media said it would spin off the Liberty Braves Group, making it a stand-alone publicly traded company. That could make a sale of the franchise easier and more tax-efficient, and help boost the shares. “It’s a question of when, not if, this team gets sold,” Boyar says.
The Suns’ sale came at a roughly 50% premium to Forbes’ valuation of the team. Boyar applies a more conservative 25% premium to the Braves’ valuation of $2.1 billion, per Forbes. Add real estate holdings and he derives a $49-a-share target price, up 39% from the recent quote.
Uber Technologies is a nontraditional value stock in the Forgotten Forty. Boyar notes that 2022 is the first year in which the ride-hailing and food-delivery company will generate free cash flow, and he sees growing profits from there. Lyft (LYFT) stock is cheaper, relative to sales, but Boyar sees the industry as “winner take most,” and Uber has greater market share and global reach.
Uber fell more than 40% in 2022. Continued profitability and a reduction in debt could attract investors in 2023. Boyar values Uber at $48, about double recent levels.
Markel is considered a mini- Berkshire Hathaway (BRK.A). The specialty insurer invests its cash in a portfolio of value-oriented stocks, including Home Depot (HD), Diageo (DEO), and Berkshire, and in fully owned businesses via Markel Ventures. Boyar sees the stock portfolio doing better in 2023, boosting book value, while plenty of cash on Markel’s balance sheet could mean that a larger deal might be in the works. He values the stock at $2,306 a share, or 77% above its recent level.
Watsco , a recent Barron’s pick, distributes air-conditioning, heating, and related equipment and parts. It is most exposed to the fast-growing U.S. Sunbelt, and has a 3.5% dividend yield and a solid balance sheet. Watsco has been able to pass along price increases to offset inflation. Increasingly strict government efficiency standards, plus tax credits for homeowners in the Inflation Reduction Act, will mean plenty of demand for new HVAC equipment in the coming years, Boyar says.
A return to the stock’s 10-year average valuation would boost the shares to $340, 38% above their recent price.
Laboratory Corporation of America Holdings (LH), or LabCorp, has become more of a household name after processing billions of Covid-19 tests. In 2023, it will spin off its faster-growing drug-development business, leaving LabCorp looking more like its rival Quest Diagnostics (DGX). That’s part of a shift to more shareholder-friendly policies, says Boyar, including a newly instituted dividend and stepped-up stock buybacks. More of those, and a rise to Quest stock’s multiple could boost LabCorp stock to Boyar’s $349 price target, up 51%.