The growth style of investing has been in favor for several years now and has really distanced itself from its value counterpart in 2020. With the S&P 500 Growth index up 21% and the S&P 500 Value index down 12% year-to-date, value investors have had a tough go of it.
However, among the lagging value group have been some standout performers. In fact, over one-third of the S&P 500 value constituents are up this year—and some are up significantly.
L Brands (NYSE:LB), FedEx (NYSE:FDX), and Rollins (NYSE:ROL) have all rallied big-time this year despite being members of the much-maligned large cap value index. All three have actually outperformed all but four of the S&P 500 growth stocks.
Let's take a look at why these so-called value stocks have been able to buck the value trend and rise to the ranks of the best performing U.S. stocks this year.
Can the Turnaround at L Brands Continue?
L Brands is up 85% this year making it the best performing stock in the S&P 500 Value index. It trails only Etsy, NVIDIA, West Pharmaceuticals, and Paypal, which are all part of the S&P 500 growth index.
The unlikely rise in L Brands stock has been more a function of where the company is headed than where it has been. The struggling women's apparel and beauty products retailer appeased investors in disclosing plans to make Bath & Body Works a "pure-play public company" and Victoria's Secret a "separate, standalone company". The strategic shift accompanied by $400 million in targeted annual cost reductions will enable L Brands to focus on the more promising Bath & Body Works brand.
A big earnings beat in the second quarter also deserves much of the credit for L Brands stock's turnaround. Bath & Body Works has benefitted from strong sales of soaps, sanitizers, and home fragrances while Victoria's Secret's direct sales of apparel, lingerie, and beauty products have been better than expected.
After several years of dismal performance largely tied to the Victoria's Secret business, L Brands is expected to turn the corner by 2022 when a return sales and earnings growth are anticipated. The biggest potential long-term growth driver for L Brands will be the international side of the business which accounts for just 5% of revenue.
Despite the steep climb off its bottom, L Brands may still be undervalued at 27x forward earnings. With shopping mall traffic likely to be muted this holiday season, L Brands will continue to lean on its online storefronts to keep this comeback story alive.
Is it too Late to buy FedEx Stock?
FedEx has risen to the occasion in 2020 capitalizing on unprecedented demand for residential delivery. The stock has advanced 81% year-to-date thanks to a massive consumer shift to online shopping for both essential and non-essential items.
And with the holiday season ahead, FedEx is poised to deliver some record numbers due to the expected e-commerce surge and increased pricing. This is why current FedEx shareholders should hang on for the ride.
Analysts have been frantically revising their earnings estimates upward in recent weeks to try to keep pace with the company's remarkable growth. Sales and earnings are now forecast to increase 11% and 64%, respectively in 2021.
Is it too late for investors to hop on board the FedEx express? Probably not. Although the 'easy money' has been made off the stocks spring 2020 bottom, there appears to be plenty of gas in the tank here.
With COVID-19 cases surging in the U.S. and overseas along with uncertainty around the availability and effectiveness of a vaccine, the coronavirus will likely be with us for a long time. And that means so too will elevated levels of e-commerce.
At 18x earnings FedEx has room for multiple expansion as it relishes in this period of hyper-growth. Any broad market-based weakness in the stock should be viewed as a chance to pounce on a clear pandemic winner for several quarters if not years to come.
Why is Rollins Stock up so Much?
To be fair, Rollins is a member of the both the S&P 500 Growth and Value indices as the index methodology allows for such overlap. The provider of pest and termite control services hasn't received as much press coverage as the flashy technology stocks but as performed just as well.
Up 79% so far in 2020, Rollins has posted some solid growth numbers over the last few years through both organic growth and acquisition. Its most recent quarterly earnings figure blasted away consensus expectations by 35%.
Unlike most of this year's big winners, there isn't much of a link with the pandemic to Rollins' success. The company has benefitted from aggressive cost cutting and lower fuel prices for its service vehicles. It was also quick to reduce its workforce, furlough workers, cut executive salaries, and forgo non-essential travel and capex. A declining debt balance and pattern of increasing dividends has also appealed to investors.
Rollins is very much a roll-up play. The company acquired a staggering 13 companies in the first half of 2020 alone after acquiring 30 last year. Meanwhile, the global residential and commercial pest control market remains highly fragmented. With a growing presence in 57 countries and a huge customer base, Rollins has a strong leadership position when it comes to pest control. A heightened focus on cleanliness and sanitation due to the pandemic suggest this stock can continue to buzz higher.
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