Based on the latest headlines, investors might be tempted to ignore the viability of underappreciated value stocks. Primarily, the latest reports indicate that the economy grew at a much more rapid pace than experts anticipated in the fourth quarter. As well, inflation eased, making the Federal Reserve’s ability to engineer a soft landing seem rather credible.
So, why bother with value stocks? Instead, the data – that’s what everyone is talking about, right? – points toward optimism. However, not all signs paint a rosy picture. Specifically, critics wonder how long consumers can keep opening their wallets amid declining savings and the accrual of high-interest debt loads.
From the market’s perspective, several enterprises have already soared to significant heights. Could they really run higher from here? Fundamentally, the benefit associated with value-focused enterprises is that you don’t really have to worry about this question. Here, we’re dealing with unheralded opportunities that many if not most folks are missing.
So, if you want to go contrarian, below are the value stocks to buy.
British American Tobacco (BTI)
At first blush, British American Tobacco (NYSE:BTI) seems a tough idea to swallow for value stocks to buy. In the trailing 52 weeks, BTI lost 22% of equity value. A bargain? Hardly, you might think. After all, global smoking prevalence rates have declined. On the surface, that’s not a great equation for tobacco firms. As a result, Fintel’s options flow screener reveals heavy volume of bought puts along with sold calls.
For me, the sold calls are particularly revealing because – at face value – they represent bearish wagers. They’re bets that the underlying security won’t rise above the listed strike price. If it does, the call writer must fulfill the terms of the contract: sell the security at the strike. Of course, a huge problem exists if the position was naked (entered into without owning the underlying security to cover the bearish bet).
Fundamentally, I think it’s risky for anyone to wager against BTI because the e-cigarette/vaping market is so popular. In fact, Grand View Research believes the sector could expand at a compound annual growth rate (CAGR) of 30.6% from 2023 to 2030. Plus, BIT trades at only 6.27X forward earnings, below the sector median 8.6X.
Cenovus Energy (CVE)
Just by looking at the charts, Cenovus Energy (NYSE:CVE) also seems a dubious idea for value stocks to buy. A Canadian integrated oil and natural gas company, circumstances have not turned out well for CVE. In the trailing one-year period, shares lost more than 21% of equity value. Geopolitically, that could be explained by major oil-producing nations voluntarily agreeing to cut production but yielding limited results.
Still, despite all the talk about the electrification of society, the world still runs on crude oil. And if boosted economic growth in the U.S. translates to positive sentiment abroad, you’d imagine that consumption trends will increase. If so, hydrocarbon energy prices should rise. Therefore, I don’t think traders should bet against CVE and the wider industry.
However, that’s exactly what some members of the smart money are doing. Per Fintel’s options flow data, bearish traders sold heavy volume of call options. Most recently, on Jan. 24, the screener picked up 2,736 contracts sold of the CVE Jun 21 ’24 16.00 Call. That left me thinking – why!?
Dine Brands (DIN)
If you happen to be looking for a high-risk, high-reward idea among value stocks, look no further than Dine Brands (NYSE:DIN). Over the past 52 weeks, DIN lost nearly 40% of equity value. So, critics may state that DIN is indeed a “discount” – one that you’ll pay for over time. It’s hard to overlook the logic there. But it also could be flawed.
On a fundamental note, Dine Brands could enjoy relevancy with its restaurant brands IHOP and Applebee’s. Yes, the economy may be improving. However, following years of inflation and spiked interest rates, consumption slowed as evidenced by the rising personal saving rate. So, it’s likely that the discretionary spending will tiptoe into recovery rather than running to it. If so, that benefits low-cost brands like IHOP.
Also, Fintel points out that there may be a big risk regarding a sentiment reversal. Currently, DIN’s gamma exposure (GEX) is negative. I’m glossing over many details but it basically means that market makers stand to lose money as a result of big price movements in DIN stock.
Well, DIN’s point-and-figure chart in my opinion suggests the possibility of a bottom being printed. Thus, if DIN flies higher, we could see some fireworks.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.