By Nicholas Jasinski
Sometimes, being a value investor means going where others prefer not to go.
For some, that means wading into controversial situations in which a business is unloved due to past transgressions. That describes Wells Fargo (ticker: WFC) and Walt Disney $(DIS)$, says Aaron Dunn, co-head of the value equity team at Eaton Vance.
Wells Fargo, which dropped 1.1% this past week, has been subject to a Federal Reserve-mandated asset cap since 2018 and has paid fines to settle charges of illegal conduct. Its recent earnings report revealed that profits had been cut in half. But the stock trades for nine times 2023 estimated earnings and one time book value, versus about 10.5 times and 1.4 times, respectively, for JPMorgan Chase $(JPM)$, which lacks the same drama -- and that makes it attractive.
"There's a lot of internal change and cost cutting that the management team is bringing in [at Wells Fargo], and you have a relative-valuation tailwind," says Dunn, who co-manages the Eaton Vance Value Opportunities fund (EAFVX).
He's also a fan of Disney, which this past week rebuked activist investor Nelson Peltz, who has pointed out that earnings have tumbled and the stock has lagged the market in recent years. Dunn expects firmwide cost cutting and a more balanced approach to growth and profitability at Disney+ under newly reinstalled CEO Bob Iger, clearing the path to an eventual reinstatement of the stock's dividend. Disney stock gained 3.8% this past week as Netflix $(NFLX)$ results eased concerns around streaming, but is still down 30% over the past 12 months.
Another place to seek out value is in stocks that are just too complex for many investors to bother with. Some are companies structured as partnerships, not corporations, which complicates taxes, among other issues. Calumet Specialty Products Partners $(CLMT)$ refines oil into a variety of consumer and industrial products and produces "renewable diesel" from soybeans in Montana. Energy Transfer $(ET)$ owns tens of thousands of miles of natural-gas pipelines and offers an 8.5% dividend yield. Both partnerships are among the top holdings in the Frank Value fund (FRNKX).
Stocks that have been shunned by certain investors are also worth a look, says Brian Frank, chief investment officer of Frank Funds. He points to "sin stocks" like Philip Morris International $(PM)$ and Altria Group $(MO)$, which make tobacco products. Philip Morris, a Barron's pick earlier this month , trades for 17.5 times 2023 expected earnings and Altria trades for 8.9 times, both discounts to the consumer-staples average but with the same recession-proof attributes. Altria has an 8.4% dividend yield, and Philip Morris yields about 5%.
Then there are energy stocks, where Dunn and Frank both see value. Dunn's largest holding as of Nov. 30 was ConocoPhillips $(COP)$, with Halliburton $(HAL.UK)$ also in the portfolio. Frank owns shares of refiner CVR Energy $(CVI)$, oil-field services companies NOW $(DNOW)$, and NexTier Oilfield Solutions $(NEX)$.
It might seem odd to own energy stocks heading into a recession, but balance sheets are solid and the stocks have cheap earnings multiples and high dividend yields, Frank says. Supply growth should be constrained, keeping oil prices aloft more than usual.
There's value there.
Corrections & amplifications: Aaron Dunn is the co-head of Eaton Vance's value equity team. A previous version of a photo caption in this article misnamed him.
Write to Nicholas Jasinski at nicholas.jasinski@barrons.com
(END) Dow Jones Newswires
January 23, 2023 15:27 ET (20:27 GMT)
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