Investors are keenly aware that growth stocks have beaten value stocks five years in a row. So what am I going to recommend today? Some extreme value stocks.
Beginning in 1998, I’ve started the year with the Robot Portfolio, comprising the ten cheapest stocks in the market. My measure of cheapness is the price/earnings ratio (stock price divided by the company earnings per share for the past four quarters) or P/E for short.
These are high-risk stocks. The companies have obvious problems; otherwise their stocks wouldn’t be so cheap. But that leaves lots of room for positive surprises.
To be eligible for inclusion in the Robot Portfolio, a stock must have a market value of at least $500 million, positive earnings and not too much debt (less than stockholders’ equity).
Over the past 23 years, the Robot has chugged to a cumulative return of 1,203%, dwarfing the 578% return on the Standard & Poor’s 500 Index. However, it’s been on a losing streak in recent years, when growth has been trouncing value. Last year was the fourth straight year in which it failed to beat the index. The Robot returned a respectable 17.2%, but the S&P 500 roared to a 28.7% return. Bear in mind that my column results are hypothetical and shouldn’t be confused with results I obtain for clients. Also, past performance doesn’t predict the future.
Perhaps it’s New Year’s optimism, but I sense that the market’s pendulum is beginning to swing toward value. I predict that the Robot Portfolio will outperform the index in 2022.
And now, let me introduce you to the new cheapies as 2022 begins.
Shenandoah Telecommunications Co. (SHEN), a broadband provider based in Edinburg, Virginia, qualifies as the cheapest stock, with a price less than two times recent earnings. Analysts expect earnings to plunge this year, but three of the four who cover the stock like it anyway.
What would 19th-century tycoon Andrew Carnegie say if he knew that United States Steel (X), which he founded, was now a mere mid-sized stock? It had losses in nine of the past 15 years. But lately, with tariff protection and keen demand for steel, it has been racking up profits. The P/E is two.
Another familiar name is Smith & Wesson Brands (WBI), a rifle and gun manufacturer based in Springfield, Massachusetts. This company had a great year last year and the stock sells for three times earnings. Investors may fear strict gun-control laws. I favor those, but think them unlikely.
Sage Therapeutics (SAGE), a biotech company based in Cambridge, Massachusetts, also trades at three times earnings. It targets brain disorders including depression. The stock fell 50% in the past year as a depression drug it was working on with Biogen floundered in clinical trials.
Weighing in at less than four times earnings is Ironwood Pharmaceuticals
Completing my list of ten Robot stocks is eBay
Based on past experience, some of these stocks will decline in the coming year. But there’s a good chance that a few will pop dramatically enough to make the speculation worthwhile.