As of yet, interest rates aren’t officially on the rise. The Federal ReserveThe overnight lending rate has not been raised for the first time since the outbreak of the pandemic. However, rising bond yields have now priced in a 70% chance of a 50-basis pointThe Fed must act quickly and decisively to stem the march hike. This is a difficult market for all stocks, even value stocks.
Stocks are already pricing the future impact of these hikes. The market has been in a downward trend as rising rates and inflation concerns continue to be factored in to equities.
Inflation is generally a bad thing for stocks as it raises the cost of inputs such labor and materials. This causes margins to drop and makes it difficult to reach profitability benchmarks.
Inflation is causing an increase in interest rates which can lead to market valuation compression. As investors are forced to discount future cash flows at higher rates, valuation multiples fall.
The question is: How can investors find value stocks in this environment, then? These macro factors will have an impact on every company to some extent.
Here are seven top defensive-value stocks that I believe have tremendous upside, despite the headwinds.
- Chevron (NYSE:CVX)
- Merck (NYSE:MRK)
- Bulk Storage (NYSE:SB)
- HP (NYSE:HPQ)
- Mr. Cooper (NASDAQ:COOP)
- The Andersons (NASDAQ:ANDE)
- Navient (NASDAQ:NAVI)
Top Value Stocks To Buy: Chevron, CVX
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Chevron stock has seen a significant increase in demand due to rising prices for natural gas and crude oils. Higher energy prices mean stronger margins, which means higher revenue and earnings. Chevron’s Recent earningsThis is what they have done. Investor expectations have been exceeded on the company’s top and bottom lines, with a return of invested capital exceeding 60%. Expectations are for this performance to continue, with Chevron’s top line potentially growing nearly 20% in 2022.
For a company of this size, that’s remarkable.
Expect continued dividend increases due to these strong earnings. Chevron raised its dividend for the 35th straight year. This was a major increase in the company’s dividend. Annualized yield of 4.16%.
Despite its strong performance, Chevron stock trades at an amazing multiple of just 14 times earnings. Accordingly, it’s no surprise to see world-class value investors like Warren Buffett jump aboard the CVX train here.
Merck (MRK).
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Last year, most big-pharma companies posted impressive returns. However, Merck lagged. This trend remained relatively stable in 2021. MRK stock has been under pressure and has fallen behind other Pharma stocks that offer vaccines. However, these stocks have recently performed well.
Merck is more of a “traditional” big pharma company, with a vast drug pipeline spanning a number of specialties. Of note, a big EU approval of the company’s Keytruda, a cancer medication has been a catalyst for investors to pay attention to. This stock has remained stable over time.
Stability can be a positive thing for value investors. And by some accounts, Merck isn’t necessarily cheap. The company trades at 10.5 times earnings right now, which is a fair multiple.
Merck has one of the best growth prospects in the industry and a dividend yield at 3.6%. A global champion, Merck’s pipeline remains strong, and this company offers a sustainable growth model that’s hard to find in today’s market. MRK stock may be a good investment for value investors looking to grow and earn income.
Top Value Stocks To Buy: Safe Bulkers
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There are many options for those concerned about rising rates and inflation to hedge their portfolios. One sector that’s benefited from this environment has been cargo shipping. Safe Bulkers is one of those players that has been gaining attention in this space.
Safe Bulkers is a mid-cap cargo shipping business that trades at around $500 million. With Forward earnings per share growth 186%Investors have been flocking to such trades as protection against inflation. This stock has performed well in recent months, despite recent inflation concerns.
Now, Safe Bulkers’ appeal may wear off should the market consider this company’s rise priced in. However, the demand for vessels is still high and new supply could take years. These macro fundamentals point to a boom period for this sector in the next few years.
This stock is extremely affordable from a fundamentals perspective. Investors can purchase Safe Bulkers at a price of around Earn 4-times your earnings. That’s right folks — four times the company’s annual earnings. And that’s not even on a forward basis.
Safe Bulkers seems to be one the most affordable companies in a sector that is expected to boom in the coming years. This stock should be on the watch list of value investors everywhere, at least right now.
HP (HPQ).
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HP is a legacy computing company and a stock worth considering for its value. HPQ stock has seen an increase in value, rising alongside the pandemic. But, unlike many of its peers HPQ stock continues to rise in recent weeks.
Much of this I think has to do with the company’s valuation. HP is currently trading at nine times earnings and is one of the most affordable stocks among its peers. The company’s dividend yield is 2.68%, which is a good deal. This kind of income and value are rare in this sector, making it an interesting stock to consider.
As the global personal computer company continues to grow, I believe value investors are going to continue to be interested in these levels. Sure, HP’s best days may be behind the company. However, as far as value goes in this sector, it’s hard to bet against this company’s current valuation.
Top Value Stocks to Buy (COOP)
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One stock I’ve been watching closer of late is Mr. Cooper. This financial services provider offers a variety of mortgage financing products to single-family home buyers. Given the relatively healthy nature of the U.S. mortgage market for the time being, this stock is one that’s performed quite well of late. COOP stock actually recently hit an all-time highCurrently, it is trading just a hair below this high as of writing.
Rising interest rates could cool the U.S. mortgage market. Refinancings and new home originations could also slow down.
The real estate market is still strong, with inventories at a low level and a rising demand from millennials. The mortgage market may be a space that investors might consider as a long-term growth area, given the changing demographics.
This is probably one of the most highly speculative names on this listing. However, Mr. Cooper’s valuation at around nine times forward earnings is dirt-cheap. This stock is worth a serious look by investors who are bullish about the market’s future prospects for at least three years.
The Andersons (ANDE).
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Many investors overlook the agricultural sector. Indeed, most economists do as well — ever heard of “non-farm payrolls?”
The Andersons is a major agricultural company that focuses on providing farm-related products and nutrients to its customers. This distributor of food staples and food has the potential for great inflation protection. As food prices rise, so will the input costs. This could be a major catalyst for increasing the value of ANDE stock.
ANDE stock has been a strong performer in the past year. Investors may be surprised to find that the stock trades at 16 times its earnings, despite trading near its 52-week high. This is a great valuation for a stock that has such a defensive business model.
I think the company’s trade segments and agriculture-related businesses are ones that are overlooked. This stock is worth looking at if you are looking for deep-value.
Top Value Stocks to Purchase: Navient (NAVI).
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We have Navient, a lending company. Navient is a financial firm that specializes in refinancing student loans.
Student loans are not a very attractive sector right now. The Democratic Party has spent a lot of recent rhetoric on cancelling student loan. Navient, which is trying to convince people to convert their government loans into private loans, has found it difficult to sell.
Accordingly, it’s perhaps unsurprising to see this stock trade at around six times earnings. Investors are looking for opportunities outside of the financials industry. That said, when the market turns its back on a sector or a company, that’s particularly the time when value investors come swooping in.
Right now, President Joe Biden’s Build Back Better Plan appears to be in real trouble. This stock has short-term catalysts that I consider to be worth your attention. It also has a strong long-term outlook. Accordingly, Navient is a value stock I’ve got on my watch list right now. I’d recommend investors at least watch this stock from here, it’s a cheap one.
Chris MacDonald didn’t hold any positions (directly or indirectly) in the securities mentioned in this piece at the date of publication. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His past experience as an analyst in financial markets and his passion for finding growth opportunities that are undervalued contribute to his conservative, long term investing perspective.