Value investing strategies have lost their popularity this year due to the growth-stock-led market rally, primarily by the tech sector. Many investors are still chasing the class despite lofty valuations. However, most analysts believe that the economy will recover next year with the deployment of coronavirus vaccines. This, in turn, they say, will drive a shift in investments from expensive growth stocks to quality value stocks.

Investors usually use price-to-earnings (P/E) ratios to evaluate whether a stock is overvalued or undervalued. Some analysts also use price-to-sales (P/S) ratios and Price/Cash flow ratios. If a stock is trading at a discount in terms of these ratios relative to its peers or sector, it is considered undervalued, which could imply solid gains in the future.

Verizon Communications Inc. (VZ) and HP Inc. (HPQ) are two value stocks that have been trading below their fair value. So, these stocks may wise picks now before the market begins to realize their worth.

Verizon Communications Inc. (VZ)

VZ is one of the world’s top communications, information, and entertainment companies, which delivers products and services to providers to consumers, small and medium businesses, global enterprises, and governmental agencies. The company operates primarily in two segments – wireless and wireline. VZ’s market in both business segments totals more than 94 million retail connections and 90 million postpaid connections.

In terms of forward P/E, VZ is currently trading at 12.36x, which is 30% lower than the sector average of 17.67x. Moreover, VZ is less expensive in terms of trailing-12-month Price/Cash flow (5.99x versus 7.06x).

For the I third quarter, VZ reported a top-line of $31.5 billion, representing a 4.1% year-over-year decline due to lower customer activity and a delay in certain device launches. However, the company’s performance was highlighted by increases in wireless service revenue and total Fios Internet net additions. Adjusted EPS came in at $1.25, which was relatively stable compared to the year-ago quarter.

In October, VZ acquired certain assets of Bluegrass Cellular, a rural wireless service operator, to expand its footprint in central Kentucky. VZ is now accelerating its 5G network deployment and network monetization. The company’s last earnings report explained that VZ is in the forefront of 5G Ultra-Wideband, 5G mobility, and Intelligent Edge network. In line with the progress, analysts expect VZ’s EPS to grow 2.4% per annum in the over the next five years.

VZ is still 1.4% down year-to-date, to close yesterday’s trading session at $60.55. However, the stock is up nearly 8% in the past six months and is currently trading just 2.7% below its 52-week high of $62.22.

How does VZ stack up for the POWR Ratings?

A for Trade Grade

A for Buy & Hold Grade

A for Peer Grade

B for Industry Rank

A for Overall POWR Rating.

It is ranked #1 out of 25 stocks in the Telecom – Domestic industry.

HP Inc. (HPQ)

HPQ provides personal computing, workstations, thin clients, tablets, imaging and printing products, and related technologies, solutions, and services for the commercial and consumer markets worldwide. The company operates through three segments – Personal Systems, Printing, and Corporate Investments.

HPQ’s forward P/E ratio currently stands at 8.80, which is significantly lower than the sector average of 26.81. In terms of trailing-12-month P/S, the stock is currently trading at 0.58x, which is 84.7% lower than the sector average of 3.78x.

HPQ reported net revenue of $15.3 billion in its fiscal fourth quarter ended October 31, 2020, up 7% sequentially. The company achieved record unit shipments in the quarter; total units were up 7%, with Notebook units increasing 25% and Consumer hardware units rising 18%. Moreover, non-GAAP EPS came in at $0.62, up from $0.60 in the prior-year period.

HPQ is benefiting immensely from its cloud-based print services and solutions. The company introduced new global Managed Print Cloud Services offering this year. By harnessing the power of the cloud, HPQ is delivering personalized services and intelligent, purpose-built solutions to its clients. Analysts, thus, expect HPQ’s EPS to rise 10.7% per annum in the next five years.

With a year-to-date gain of 15.4%, HPQ closed yesterday’s trading session at $23.71. The stock is up 21% over the past month and is currently trading just 0.9% below its 52-week high of $23.93.

It is no surprise then that HPQ is rated “Strong Buy” in our POWR Ratings system. It also has an “A” for Trade Grade, Buy & Hold Grade, Peer Grade and Industry Rank. It is ranked #6 of 30 Technology – Hardware stocks.

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VZ shares were trading at $60.26 per share on Wednesday morning, down $0.29 (-0.48%). Year-to-date, VZ has gained 2.43%, versus a 16.66% rise in the benchmark S&P 500 index during the same period.

About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...

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