Even as the major U.S. stock market indexes set new records, bargains remain among large cap stocks, according to Inigo Fraser-Jenkins, head of quantitative strategy at research firm Sanford C. Bernstein, a division of AllianceBernstein. He recommends a basket of “value stocks with a catalyst” that are cheaper than the market, have strong earnings momentum, and have positive opinions from Bernstein analysts, Barron's reports.

Among those stocks are: Apple Inc. (AAPL), Hewlett Packard Enterprise Co. (HPE), Anthem Inc. (ANTM), UnitedHealth Group Inc. (UNH), Delta Air Lines Inc. (DAL), United Airlines Holdings Inc. (UAL), Rio Tinto PLC (RIO), LyondellBasell Industries NV (LYB), DuPont de Nemours Inc. (DD), and Centene Corp. (CNC).

Key Takeaways

  • Bernstein expects "value stocks with a catalyst" to outperform.
  • Top picks include health care, industrial, and materials stocks.
  • Low expectations about earnings for these stocks are a positive.

Significance For Investors

Fraser-Jenkins finds that correlations among individual U.S. stocks and various factor groups recently fell to low levels. "This suggests that portfolio managers can form portfolios where single stock risk is the dominant driver of the portfolio,” he wrote.

Some stocks in Bernstein's basket may seem pricey. Both Apple and DuPont have forward P/E ratios of about 18, close to the S&P 500 average. Nonetheless, Fraser-Jenkins says they are undervalued versus peers, given their levels of profitability.

Here's a closer look at 3 of those stocks.

DuPont is one of three companies spun out of chemical giant DowDuPont. “We expect DuPont to look very different than it does today in 2 to 3 years,” writes Citigroup analyst P.J. Juvekar, per Barron's . The company's major business segments sell to automotive, electronics, construction, and food companies, and Juvekar sees potential economies from consolidation. He also notes that competing companies have higher valuations. DuPont's Q3 2019 earnings beat estimates.

Apple is a market leader in 2019, up by 64.5% year-to-date through Dec. 3. “Apple’s multiple is at a post-iPhone 6 high, which we consider unreasonable, given its slowing growth,” warns Nomura Instinet analyst Jeffrey Kvaal, as quoted by Barron's . He added: “Conventional wisdom holds 5G will drive strong iPhone 12 replacement sales. We are not overly intrigued, given device/service pricing, historical precedent, and limited consumer benefit. 5G iPhones are likely to cost more, and we do not believe consumers are likely willing to pay about $200 more for 5G when 4G will suffice.”

Delta has lagged in 2019, up by 11.5% YTD, but is cheap with a forward P/E around 8. EPS for Q3 2019 beat the estimate by 2.2%, and revenues were up 6.5% year-over-year. While the company projects Q4 revenues to grow about 5% YOY, it has issued negative earnings guidance. “Non-fuel costs are expected to increase due to a recent pay increase, timing of maintenance events and changes to actuarial assumptions,” writes Cowen analyst Helane Becker, as quoted by Barron's . She nonetheless rates Delta a buy, with a price target of $68, nearly 23% higher than its current price.

Looking Ahead

Value stocks have weaker-than-average expected earnings growth, but this is improving, Fraser-Jenkins notes. Also, the rate of earnings downgrades for value stocks versus other stocks appears to be bottoming. “There are signs that support for Value can come from what is already a very low expectation for earnings, which should shield them from further downgrades,” he observed.