By Philip van Doorn, MarketWatch
If you really want to call yourself a contrarian investor, it’s time for a hard look at what hasn’t worked so far this year — value stocks and dividend stocks.
Value stocks have greatly underperformed growth stocks (especially Tesla Inc. /zigman2/quotes/203558040/composite TSLA +5.04% and the hottest tech names) amid the economic slowdown caused by the COVID-19 pandemic. As you can see on the list of dominant tech companies below, most have excellent sales growth even while the recession has hurt so many other companies.
This year’s action has exacerbated the long-term trend, setting up a broad recovery play for value stocks and dividend stocks, according to Bill McMahon, the chief investment officer for active trading strategies at Charles Schwab Corp.
McMahon was promoted to his current position in November. He was formerly investment chief of ThomasPartners, which runs the largest of the active Charles Schwab Investment Management strategies he is now responsible for. (McMahon joined ThomasPartners when it was established in 2001. That firm was acquired by Schwab in 2012.)
During an interview, McMahon said the spread between value stock and growth stock valuations was “wide, historically,” and that “if you were inclined to nibble at value, this is not a bad time to do it.”
“Over the long term, you benefit from holding companies that pay dividends, but over the short term it hasn’t worked that way,” he said.
This year’s divergence in growth and value performance is outlined below, where McMahon also comments about the super-hot FAANG stocks and the big-tech name he currently favors.
Five value-stock picks
McMahon discussed five stocks he believes “represent good value,” with an emphasis on attractive and safe dividends for several of them.
• Shares of Raytheon Technologies Corp. /zigman2/quotes/203237915/composite RTX +0.19% are down 30% this year. (All returns in this article assume dividends are reinvested.) “The business is split between defense, which is stable with long-term contracts, and commercial aerospace, which is not,” McMahon said. The shutdown of most passenger air travel during the pandemic has been an obvious problem. But McMahon believes over the long term the stock will recover and that the dividend is safe. The yield is 3.11%, which is nothing to sneeze at when 10-year Treasury bonds /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y 0.00% are yielding only 0.59%.
• PPG Industries Inc. /zigman2/quotes/202418877/composite PPG +1.09% makes paints and coatings used in various industries. The stock has a dividend yield of 1.96%. It is down 17% this year because of “a lot of economic sensitivity,” especially to auto sales and aircraft production, McMahon said. He likes the company because of its “really strong management team and good balance sheet,” and believes the stock “will have a lot of upside” for long-term investors who can wait for the post-pandemic economic recovery.
• Coca-Cola Co. /zigman2/quotes/209159848/composite KO +0.04% made headlines with a 28% decline in second-quarter revenue, but indicated the worst was over, as sales improved during May and June. McMahon said the company’s management is “very committed to the dividend.” The yield is 3.38%. He is also pleased with Coca-Cola’s plan to “get rid of smaller brands.” The stock is down 11% this year, but McMahon expects a resurgence ”when activity resumes and people go to restaurants and ball parks again.”
• Home Depot Inc. /zigman2/quotes/208081807/composite HD +1.07% seems always to be in a sweet spot. When the housing market is strong, it helps the company. When the housing market is weak, people do more renovations, which helps the company. McMahon called the business “fairly immune to online competition.” The stock is up 24% this year and has a dividend yield of 2.44%. McMahon expects “good dynamics” for the housing market to continue, as city residents look to the suburbs and the affluent look to coastal areas for summer homes.
• Abbott Laboratories /zigman2/quotes/203724446/composite ABT +2.51% has the lowest dividend yield among the stocks McMahon named: 1.44%. He pointed to the company’s “good growth characteristics,” especially through its Freestyle Libre glucose-monitoring system and Ensure nutrition products. McMahon added that Abbott has “been very good with M&A in the past.”