London, UK, ZEX PR WIRE – Ashford Capital Investments broker states that value stocks have started to pick up momentum of late but still remain undervalued relative to their respective markets. The recent selloff in the market has placed them into an even more favorable light. In our opinion, Value stocks will continue to outperform over the next three years as long as interest rates do not rise sharply or unexpectedly.
Value investors look for companies that are trading at a discount to intrinsic value. That value may come from the company’s balance sheet, cash flows, or income statement. Regardless of how it is derived, value investors look for companies that have a margin of safety between the price paid today and the intrinsic value at which they believe they will eventually trade. When interest rates are low and stable, higher-quality companies can be purchased for less than their intrinsic value and the margin of safety provides a buffer against risk. If interest rates rise, however, these higher-quality companies will no longer be available at such large discounts. This is why we believe that Value stocks are most desirable when interest rates are low.
In our opinion, growth stock investors look to invest in companies that can compound their intrinsic value over time by reinvesting cash flow and issuing new shares. Growth stocks are often very sensitive to changes in interest rates, with the potential for sharp price declines when rates rise or a sharp increase in share prices when rates fall.
In contrast, Value stocks are not dependent on low interest rates for performance but instead rise on the expectation that earnings will increase, thereby increasing intrinsic value over time. Value stocks are therefore much less dependent on interest rates than Growth stocks and may even benefit from rising interest rates.
As long as the economy continues to grow at a modest pace, we do not expect interest rates to rise significantly from here. This environment is very conducive to Value stock performance. We believe that the best values will be offered by banks, health care companies and energy stocks; however, a wide range of sectors should outperform over the next three years as interest rates remain low.
Discover Financial Services: The U.S. financial services industry is rapidly changing as regulatory changes are introduced by the Consumer Financial Protection Bureau and other agencies, which in turn creates uncertainty about future earnings. We believe that Discover Financial Services (DFS) has positioned itself well to take advantage of these opportunities and should continue to deliver solid growth for the next decade or longer. DFS is a leading issuer of private label consumer credit cards in the U.S., has a strong deposit franchise and is highly diversified geographically across all 50 states.
In our opinion, DFS benefits from a sizable opportunity to issue new credit cards as their current customer base matures. This creates an opportunity for substantial growth in card membership and average purchase size. As a result, we believe that DFS is positioned to benefit from higher levels of card spending and that the secular shift toward using credit cards for non-essentials will continue to grow over time.
In addition, changes in customer behavior have resulted in consumers banking differently today than they did ten years ago. Customers are now more likely to transfer their deposits into interest-bearing accounts rather than writing checks on debit cards or paying with cash only. We believe this trend will continue and that DFS should benefit from the higher level of deposits, which are used as a source of funding for their loans and investments.
EF Hutton’s stock price has run in place over the past five years while the S&P 500 has produced a total return of 53%. DFS’s price/earnings ratio is 11, which is low for its industry peer group. The company is now trading at an improved level from where we recommended it six years ago when its stock was depressed due to concerns about the impending financial crisis. We believe the current valuation of DFS is attractive and that it will continue to achieve solid growth over the next five years.
Eaton: Eaton Corporation (ETN) is a global leader in power management solutions, and we expect some of its segments to have strong results in 2015. We believe the secular growth trend toward increasing electrical efficiency will benefit companies in the electrical distribution and motor business as the world realizes its potential to reduce greenhouse gas emissions and other pollutants. In addition, we expect some of Eaton’s businesses that are focused on emerging markets will benefit from accelerating growth in India, South America and Africa.
Eaton is well-positioned for price appreciation over the next three years for several reasons. The company is one of a select group in its industry with very low leverage, strong free cash flow and an attractive dividend yield; we believe these characteristics will lead to future price appreciation as earnings growth accelerates.
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