- Obstacles for value outperformance are expected to fade, with a 10% upside for value versus growth stocks expected by the first quarter of next year, Bank of America equity analyst, Sebastian Raedler, said in a new research note.
- Bank of America sector equity analysts outline 22 value opportunities with attractive yields, dividends and fundamentals as well as identify 6 value traps to avoid at all cost.
- "European value versus growth has yet to price in the macro recovery," Raedler said.
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Value stocks have had their worst year since 1992, falling by 38% adjusting for sector bias, according to Bank of America quant strategists in a research note released on October 20.
But equity analysts and quant strategists at the bank are expecting that to change going forward as obstacles for value outperformance begin to fade.
"European value versus growth has yet to price in the macro recovery," Bank of America equity analyst, Sebastian Raedler, said in the note.
Raedler identifies two obstacles in the way of value outperformance. Firstly, bond yields have not risen meaningfully in response to improving economic macro data. Secondly, two of the big European value sectors have continued to underperform —energy and financials. He expects with a maturing economic recovery this will translate to rising bond yields and an improving earnings cycle for these lagging sectors.
The removal of these obstacles should translate to a 10% upside for value versus growth stocks by the first quarter of next year, Raedler said.
"[Bank of America quant strategists] argue that the cyclical reasons for owning value have strengthened: (a) their Style Cycle and US & EM regional indicators point to a synchronized pick-up; (b) EPS Revision Ratio for value stocks is the strongest since 2018; and (c) 90% of Fund Managers expect a vaccine in place by H1 next year, which should help to lift bond yields," Raedler said.
To capitalize on the removal of obstacles in the way of value outperformance in European stocks. Bank of America lists the 22 European value picks and the six value traps to avoid at all costs.
Top Stock Picks
1. 3i plc
Price Target: £11.30
Analyst Commentary: "We believe that 3i is well positioned in the current Covid-19 environment and should perform well in the short- and medium-term," said Bank of America equity analyst, Philip Middleton. "The UK-based private equity firm's portfolio overall is quite resilient, with minimal exposure to at-risk sectors of Covid-19."
2. Ahold Delhaize
Ticker: AHODF / ADRNY
Price Target: €29.00
Analyst Commentary: "Ahold Delhaize should exit 2020 in a position of strength, deliver a strong dividend and be in a position to announce another €1.0bn share buyback, in our view," said Bank of America equity analyst, Xavier Le Mené. "After the Covid-19 pandemic, we could expect the company to build up sales on loyalty with new customers recruited during the pandemic and to capitalise on its online growth."
Ticker: AXAHF / AXAHY
Price Target: €24.50
Analyst Commentary: "The pandemic led to €1.5bn of costs for AXA, largely focused on XL," said Bank of America equity analyst, Andrew Sinclair. "However, AXA has reiterated confidence in this estimate, suggesting limited further downside despite our forecast for an additional cost of €0.7bn in 2021E. Further lockdowns should have far less impact, given that policies have been re-worded and governments are moving to localised measures (not covered by insurance) rather than national closures (which led to pay-outs)."
Ticker: BCLYF / BCS
Price Target: £1.45
Analyst Commentary: "Being significantly less interest rate sensitive than peers, Barclays' revenues should be more resilient to the lower rates environment," said Bank of America equity analyst, Rohith Chandra-Rajan. "Profitability combined with solid capital sees Barclays well positioned to restart dividends at the full year, dependent on the Bank of England lifting the dividend ban."
Price Target: €66.00
Analyst Commentary: "Despite re-rating since March, Brenntag, the global leader in chemical distribution, still trades 15% below chemical distributors on weighted P/E and EV/EBITDA (although it has a lower leverage) and 17% below broader distributor peers," said Bank of America equity analyst, Simona Sarli. "In our view, the market is not giving Brenntag enough credit for the on-going reorganization, especially in EMEA and North America."
6. British American Tobacco plc
Ticker: BTAFF / BTI
Price Target: £36
Analyst Commentary: "We view British American Tobacco (BAT) as a clear value opportunity, supported by improving fundamentals, strong cash generation and generous dividend distribution," said Bank of America equity analyst, Mirco Badocco.
Price Target: €145.00
Analyst Commentary: "We maintain our Buy rating on Capgemini, as we see scope for: (a) margin upgrades, driven by Altran synergies, structural cost base reductions post Covid-19 and improved utilization through remote work (we are 7% above consensus FCF for 2021); and (b) multiple re-rating, given that we view Capgemini as cheap relative to its key US peer Accenture," said Bank of America equity analyst, Toby Ogg.
Ticker: CRERF / CRRFY
Price Target: €19.00
Analyst Commentary: "Gradually, the various initiatives are starting to yield results, adding credibility to the transformation plan and its execution. The management's increasing confidence in delivering its 2022 plan is also reassuring," said Bank of America equity analyst, Xavier Le Mené. "There has been a significant change in tone over the past twelve months from "we have a recovery plan in place" to "the adoption of the plan by employees and the initiatives are delivering."
9. Credit Suisse Group
Ticker: CSGKF / CS
Price Target: $14.23
Analyst Commentary: "Credit Suisse generates almost 60% of revenues on a 12-month trailing basis from wealth management, asset management and Swiss banking – all areas where it has a leading franchise and return on allocated capital around 20%," said Bank of America equity analyst, Alastair Ryan. "The remaining 40% of revenues, in markets and investment banking, has been de-risked, as highlighted by the fact that the division remained profitable in Q1'20, in contrast with losses in prior periods of stress. The group is committed to allocating less than a third of capital to investment banking over time."
10. Deutsche Post DHL
Ticker: DPSTF / DPSGY
Price Target: €50.00
Analyst Commentary: "We believe that Deutsche Post remains an attractive value opportunity, despite re-rating from the trough earlier this year on the back of surging parcel demand and a tight air freight market," said Bank of America equity analyst, Muneeba Kayani. "We reiterate a Buy rating with a recently revised price objective of €50, driven by strong parcel revenues and the persistence of a tight air freight market following new management guidance."
11. Deutsche Telekom
Ticker: DTEGF / DTEGY
Price Target: €17.50
Analyst Commentary: "We see telecoms as well positioned to benefit from a rotation to value, having lagged the broader market (SXKP -21% year-to-date versus SXXP -13%) despite a limited Covid-19 impact on their businesses," said Bank of America equity analyst, Frederic Boulan. "This is creating a number of opportunities, with clear valuation gaps opening, and in a number of cases extreme divergence between equity and credit yields (Orange and Vodafone)."
Price Target: €8.85
Analyst Commentary: "We see Enel as a value opportunity given that the stock has de-rated versus peers in recent weeks despite: (a) no change in the fundamental outlook, with government and investor focus on renewables sustained by the recent tightening in EU 2030 decarbonisation targets; and (b) a compression in Italian sovereign bond yields, which has historically driven a positive trend in valuation," said Bank of America equity analyst, Harry Wyburd.
13. Imperial Brands
Price Target: £17
Analyst Commentary: "We see the dividend reset, as well as the arrival of the company's new CEO Stefan Bomhard (we expect a new strategy to be announced soon), as key catalysts to unlock a re-rating of the stock," said Bank of America equity analyst, Mirco Badocco.
14. ING Groep NV
Ticker: INGVF / ING
Price Target: €8.80
Analyst Commentary: "We believe that ING Group is an attractive value opportunity trading at 0.45x price to tangible book value, 6x P/E for a 7% return on tangible equity in 2021E. We reiterate our Buy rating with a price objective at €8.8," said Bank of America equity analyst, Tarik El Mejjad.
15. Julius Baer
Price Target: 49 CHF
Analyst Commentary: "Julius Baer is an attractive value opportunity trading on 11x 2021 P/E, or more than one standard deviation below its long-term average," said Bank of America equity analyst, Hubert Lam. "The company showed strong resilience during the pandemic, reporting net new money growth of 2% in H1'20, gross margin of 92bps (above the 2018-19 average of 84bps), and a cost-to-income ratio of 67% (in line with its medium-term target)."
Price Target: 55 CHF
Analyst Commentary: "LafargeHolcim trades on a 2021 P/E of c.11x and EV/EBITDA of c.6.6x, a discount to its historical average," said Bank of America equity analyst, Arnaud Lehmann. "We believe that based on the significant improvement in free cash flow generation and the potential for notable improvement in returns through asset rotation, the stock should re-rate over time."
17. Legal & General
Price Target: £2.80
Analyst Commentary: "L&G is a market leader in each of its markets. The company has: (a) the leading pension risk transfer business in the UK, and is increasingly winning overseas with operations in the US, Canada and Europe; (b) a top ten global asset manager, LGIM, with over £1.2tn under management as of 30th June 2020; and (c) the UK's leading term assurance protection franchise, which we consider to be the highest quality source of earnings in our sector. Each of these lines utilises scale as a competitive advantage, with L&G broadly exiting areas where being large is not a competitive advantage," said Bank of America equity analyst, Andrew Sinclair.
Ticker: FNCTF / ORAN
Price Target: €14.00
Analyst Commentary: "Looking ahead, we believe current levels offer particularly attractive entry points for longer-term investors, with exposure to a doubling of FCF by 2023E and a credible >7% dividend yield in the coming 12-months with growth thereafter," said Bank of America equity analyst, Frederic Boulan. "We see discipline and execution on pricing, cost cutting and asset portfolio management as the main drivers of performance."
Price Target: €44.00
Analyst Commentary: "Saint-Gobain is trading on a 2021 P/E of c.10x and EV/EBITDA of c.6.5x, at a significant discount to its historical average," said Bank of America equity analyst, Arnaud Lehmann. "We believe that structural improvement in free cash flow, asset rotation initiatives and exposure to the Green Deal should support some re-rating over time."
Ticker: SSEZF / SSEZY
Price Target: £17.16
Analyst Commentary: "We expect a resolution in the coming months of the twin issues of tough regulatory price control proposals and concerns about the ability of the balance sheet to support the investment pipeline and progressive dividend," said Bank of America equity analyst, Fraser McLaren. "Alongside an increasingly supportive net-zero policy backdrop and renewed appetite for ESG exposure, we see potential for SSE to reverse its recent underperformance versus UK and EU peers."
Ticker: TTFNF / TOT
Price Target: €42.00
Analyst Commentary: "Among the three Supermajors (BP, RDS and Total), we believe that Total stands out as the one that has (a) not yet taken an axe to its dividend policy with organic cash flows expected to cover future dividends and capex; and (b) the highest and most attractive dividend yield (>9%), given its higher quality low-carbon portfolio, relatively stronger balance sheet as well as breakeven oil price level," said Bank of America equity analyst, Christopher Kuplent.
22. Vodafone Group
Ticker: VODPF / VOD
Price Target: £1.94
Analyst Commentary: "The company's underperformance since Q1'20 results has been notable and we think current levels present a particularly attractive entry point for a stock whose cash flows are increasingly robust over time, more than able to cover a premium dividend yield, and whose portfolio restructuring is an additional (and value accretive) tailwind to deleverage," said Bank of America equity analyst, David Wright.
1. Associated British Foods plc
Ticker: ASBFF / ASBFY
Price Target: £20.00
Analyst Commentary: "While ABF appears cheap given its discounted valuation, we struggle to see what will trigger a material re-rating of the share price in the future," said Bank of America equity analyst, David Holmes. "We therefore consider ABF as a value trap rather than a value opportunity, with our negative view mainly based on Primark (which accounted for 65% of the group's operating profit in 2019)."
Ticker: BFFAF / BASFY
Price Target: €46.00
Analyst Commentary: "We see an acceleration in chemical capacity coming from China as the trade war accelerates the strategic push toward greater self-sufficiency," said Bank of America equity analyst, Matthew Yates. "While demand is likely to recover from the depths of the Q2 Covid-induced recession, we see little respite for chemical spreads over the next couple of years as the new Chinese capacity ramps up."
3. BP plc
Price Target: £3.00
Analyst Commentary: "BP remains particularly levered to the oil price, given that: (1) its re-set dividend still requires >$40/bbl next year to be covered by organic FCF; and (2) BP still looks to sell c$15bn more non-core legacy oil assets by 2025 as part of its $25bn disposal target – without which neither upside in shareholder distribution nor significant low-carbon growth can be funded," said Bank of America equity analyst, Christopher Kuplent.
4. Lloyds Banking Group
Price Target: 26p
Analyst Commentary: "We think that the market is underestimating the profitability challenge from low rates, mortgage refinancing and low provision coverage. Addressing low provision coverage keeps impairments higher into 2021E, with margin erosion a longer term headwind," said Bank of America equity analyst, Rohith Chandra-Rajan. "As a result, we see RoTE recovering to only a little better than mid-single digits even after the credit cycle has worked through. While the capital position is robust, weak profitability will likely need to be addressed, diverting surplus capital from shareholder distributions to further restructuring. The 0.5x tangible book multiple appears attractive, but we see Lloyds' 60% 2021E PE premium to the sector as unjustified."
5. Societe Generale
Ticker: SCGLF / SCGLY
Price Target: €11.00
Analyst Commentary: "We are uncomfortable with SocGen's structurally low profitability, which we forecast at a 2-3% ROTE in the next 2-3 years," said Bank of America equity analyst, Tarik El Mejjad. "We question the bank's business model especially in Corporate and Investment Banking (CIB). The announced de-risking in Global Markets is too little too late to address the bank's weak profitability, in our view. We believe SocGen needs a major shake-up through deeper and actual CIB deleveraging or sizeable consolidation."
Ticker: TSCDF / TSCDY
Price Target: £2.20
Analyst Commentary: "Our view has been very cautious on UK food retailers ahead of Brexit, given the reduced visibility on trade agreements and tariffs," said Bank of America equity analyst, Xavier Le Mené. "We are still concerned that even a skinny deal (see our economists' scenarios here) could result in significant food inflation and would accentuate the impact of the economic recession due to the Covid-19 pandemic. The risk of consumers trading down in such a scenario, and moving part of their food expenses to hard discounters, could put the typical supermarket players under pressure."
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