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June 29, 2015

Are value stocks the next Brooklyn?

By CNNMoney

NEW YORK - The analysts at Wall Street research firm Jefferies have a fun way to describe the stock market in 2015.

They think that stocks may now be a little too trendy, just like the New York City borough that's famous for a certain well-known bridge, Coney Island and for being the original home of the Dodgers.

"Stocks and Brooklyn real estate used to be cheap and unpopular; not anymore," the Jefferies analysts wrote.

So what should investors do? Find the proverbial next Brooklyn.

"Just as savvy homebuyers look to the next frontier for value, there's a corner of the stock market that looks like a relative bargain," the analysts wrote.

They conclude that value stocks could be as up and coming as Brooklyn neighborhoods like Bushwick, Bed-Stuy and Crown Heights.

Hunt for value: Value stocks, basically companies that trade for relatively low price-to-earnings ratios, may not be as sexy as more rapidly growing companies like Facebook and Netflix.

But the Jefferies analysts list three reasons why they think value stocks are due to take off soon.

The economy is improving -- and value stocks typically shine in such an environment. The S&P 500 is expensive, trading at about 18 times 2015 earnings estimates. So investors may soon look for bargains due to concerns about the market being overvalued The Federal Reserve is likely to raise rates soon. Value stocks outperformed growth stocks in 2004 -- the last time the Fed started to boost rates.

Which value stocks have the most potential to rally? The Jefferies analysts looked for the cheapest 20% in each of the 10 sectors of the S&P 500.

Stocks to buy: The analysts narrowed down that list to 30 stocks that are currently related as a "Buy" at Jefferies and that they think have strong fundamentals. In other words, they wanted stocks that are cheap but also have good potential.

Here are some of the more well-known of the 30 value stocks that Jefferies likes and a brief reason why.

AT&T: Analysts are fans of the plan to buy DirecTV -- as well as Ma Bell's juicy dividend yield of more than 5%.

Bank of America: Jefferies thinks it's "among the best positioned" for rising rates.

Best Buy: The electronics retailer is showing signs of improvement and is now looking to grab market share from weaker, smaller rivals.

Google: Video advertising should increasingly shift from TV to online. That's great news for Google-owned YouTube.

Intel: The chip giant is focusing on data centers to boost growth. But the PC business should enjoy a comeback this year thanks to demand for Microsoft's new Windows 10.

Pfizer: Jefferies has very high hopes for the drugmaker's breast cancer treatment Ibrance. The analysts estimate $5.5 billion in sales by 2020.

Raytheon: The company's recent purchase of Websense is a way for this traditional defense company to get more exposure to the rapidly growing cybersecurity business.

Now, as anyone buying a house knows, a really low price can be too good to be true. You don't want to get stuck with a money pit in a neighborhood with no hope of improving.

But Jefferies thinks these stocks look like they have what it takes to eventually become hip.

Just remember, Brooklyn didn't magically turn into a real estate hotspot overnight. These stocks probably won't, either.

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