MW 20 value stocks primed for rapid revenue growth

By Philip van Doorn

This might be the perfect time to add exposure to value stocks, with growth stocks having lead to high price ratios for the S&P 500.

The broad rally for the S&P 500 index has continued so far in 2025, with a 2% increase for the large-cap U.S. benchmark index through last week. This has some investors continuing to worry that the stock market in general might be overvalued. But there are always stocks that are cheaply priced.

Below is a screen of stocks trading well below the S&P 500's valuation by several measures, which is narrowed further to a list of companies expected to show their revenue most quickly over the next two years.

First, a look at index valuations

In general, value stocks tend to be those of mature companies that are growing relatively slowly and that pay dividends. Growth stocks are those of rapidly growing companies that tend to trade at relatively high valuations and may or may not pay dividends as they emphasize expanding their businesses.

The most commonly cited valuation measure for stocks is the forward price-to-earnings ratio. This is a stock's current price divided by the consensus earnings-per-share estimate over the next 12 months.

S&P Dow Jones Indices divides the S&P 500 SPX into the S&P 500 Growth Index and the S&P 500 Value Index, by scoring stocks based on various factors. Valuation metrics include book value, earnings and revenue to price, while growth metrics include trailing three-year growth rates for earnings and revenue, as well as 12-month price momentum.

This scoring methodology leads to overlapping groups of stocks. There are 401 stocks in the S&P 500 Value Index, which is tracked by the iShares S&P 500 Value ETF IVE. There are 208 stocks in the in the S&P 500 Growth Index, which is tracked by the iShares S&P 500 Growth ETF IVW. These indexes are weighted by market capitalization, as is the full S&P 500.

Since the S&P 500 Value and Growth indexes overlap, S&P Dow Jones Indices also maintains smaller S&P 500 Pure Value and Pure Growth indexes, which are weighted by S&P's value or growth scores, rather than by market cap. The S&P 500 Pure Value Index is tracked by the Invesco S&P 500 Pure Value ETF RPV and the S&P 500 Pure Growth Index is tracked by the Invesco S&P 500 Pure Growth ETF RPG.

Here is a comparison of these four index exchange-traded funds, along with the SPDR S&P 500 ETF Trust SPY, which tracks the entire S&P 500, to show current P/E valuations relative to five- and 10-year averages:

   Exchange-traded fund             Ticker    Forward P/E  Current P/E valuation to 5-year average  Current P/E valuation to 10-year average  5-year total return  10-year total return 
   SPDR S&P 500 ETF Trust           SPY              21.6                                     109%                                      118%                  94%                  253% 
   iShares S&P 500 Value ETF        IVE              17.7                                     110%                                      115%                  64%                  167% 
   iShares S&P 500 Growth ETF       IVW              27.6                                     112%                                      126%                 113%                  321% 
   Invesco S&P 500 Pure Value ETF   RPV              10.4                                      96%                                       93%                  51%                  124% 
   Invesco S&P 500 Pure Growth ETF  RPG              21.9                                      99%                                      104%                  70%                  195% 
                                                                                                                                                                        Source: FactSet 

You might need to scroll the table to see all of the information, including total returns on the right. All total returns in this article include reinvested dividends.

It is clear that broad growth index strategies have trounced value strategies - at least for large-cap stocks - over the past five and 10 years. And the numbers back the case that the growth indexes and the full S&P 500 are trading high to historic P/E averages. One might even call the S&P 500 a growth index because its weighting by market cap means that three companies - Apple Inc. $(AAPL)$, Nvidia Corp. $(NVDA)$ and Microsoft Corp. $(MSFT)$ - make up 19.8% of the index. And the three stocks' forward P/E ratios are 30.1, 31.3 and 30.2, respectively.

But growth doesn't always win out. This chart shows total returns for the S&P 500, along with the S&P 500 Value and Growth indexes from 30 years ago through 20 years ago - a period that encompassed the dot-com bubble that began to reverse in 2000:

The value strategy won out for that 10-year period, and it was a much smoother ride.

Screening companies for low stock price valuations and high expected revenue growth rates

Last week Mark Hulbert made the case that value stocks were positioned to outperform growth stocks because investor "no longer can count on lower interest rates and inflation to support higher stock and bond prices."

He then shared a list of two dozen value stocks favored by the writers of investment newsletters tracked by the Hulbert Financial Digest.

The recommended stocks needed to have forward price-to-earnings ratios, forward price-to-sales ratios and price-to-book-value ratios below that of the S&P 500 as a whole. They also had to have dividend yields higher than that of the index.

So now we are following up on that list with a new screen of the entire S&P 500, with another element: The highest expected rate of increase for revenue over the next two years.

To pass the initial screen, a stock needed to have three valuations below that of the full S&P 500:

-- Forward price-to-earnings ratio below 21.9.

-- Forward price-to-sales ratio below 3.0.

-- Price-to-book ratio below 5.2.

-- Dividend yield higher than 1.26%.

Among the S&P 500, 129 stocks passed the initial screen.

Here are the 20 stocks passing the value screens with the highest expected compound annual growth rates (CAGR) for revenue from 2024 through 2026.

   Company                                 Ticker    Two-year estimated sales CAGR through 2026  Forward P/E  Forward price/ sales  Price/ book value  Dividend Yield 
   Truist Financial Corp.                  TFC                                            26.9%         11.8                   3.0                1.1           4.37% 
   KeyCorp                                 KEY                                            22.9%         11.7                   2.5                1.3           4.48% 
   Coterra Energy Inc.                     CTRA                                           22.8%          9.6                   2.9                1.7           2.85% 
   ONEOK Inc.                              OKE                                            13.8%         18.0                   2.6                3.6           3.63% 
   Cincinnati Financial Corp.              CINF                                           10.4%         19.5                   2.2                1.6           2.30% 
   UnitedHealth Group Inc.                 UNH                                            10.0%         17.0                   1.0                4.7           1.65% 
   ConocoPhillips                          COP                                             8.8%         13.4                   2.2                2.2           2.95% 
   Allstate Corp.                          ALL                                             8.3%          9.9                   0.8                2.5           1.95% 
   Bunge Global SA                         BG                                              8.0%          9.1                   0.2                1.0           3.42% 
   Elevance Health Inc.                    ELV                                             7.5%         11.0                   0.5                2.0           1.69% 
   Everest Group Ltd.                      EG                                              7.4%          5.7                   0.8                1.0           2.21% 
   Corning Inc                             GLW                                             7.1%         21.4                   2.8                3.8           2.25% 
   Citizens Financial Group Inc.           CFG                                             6.6%         12.2                   2.5                0.9           3.53% 
   Travelers Companies Inc.                TRV                                             6.6%         11.3                   1.2                1.8           1.75% 
   Hartford Financial Services Group Inc.  HIG                                             6.5%          9.6                   1.1                1.9           1.86% 
   Quest Diagnostics Inc.                  DGX                                             6.4%         15.5                   1.6                2.4           1.98% 
   Xcel Energy Inc.                        XEL                                             6.2%         17.4                   2.5                2.0           3.28% 
   Freeport-McMoRan Inc.                   FCX                                             6.2%         20.2                   2.1                3.2           1.49% 
   Lennar Corp. Class A                    LEN                                             6.1%         10.8                   1.0                1.4           1.41% 
   RTX Corp.                               RTX                                             6.0%         19.7                   1.9                2.6           2.08% 
                                                                                                                                                      Source: FactSet 

The revenue projections are based on consensus estimates among analysts polled by FactSet, adjusted for calendar years for companies whose fiscal years don't match the calendar.

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January 25, 2025 06:03 ET (11:03 GMT)

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