Value stocks can be identified by their low price-to-earnings ratios (P/E). The market has low expectations of the stocks. If their businesses end up performing better than anticipated, their stock prices will experience a nice boost. Here are some of the top value stocks that could outperform through 2030 with the help of valuation expansion.
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Empire
As a grocery store chain and the parent company of banners like Safeway, Sobeys, Les Marches Tradition, Thrifty Foods, Fresh Co, and IGA, Empire’s (TSX: EMP.A) earnings should be resilient even when the economy turns south.
Sure enough, the consumer staples stock has supported a growing dividend for 29 consecutive years. At $32.36 per share at writing, it trades at a blended P/E of about 11.7, while it could potentially grow its earnings per share at a rate of about 9% over the next couple of years.
Multiple times since 2020, the value stock was able to trade at 15 times earnings. If it traded at that level today, the stock price would be over $41 per share, equating to upside of 28%. The 12-month analyst consensus price target on Yahoo Finance is more conservative at $37.86, which still represents decent near-term upside potential of 17%. The stock offers a dividend yield of just under 2.3%.
Rogers Communications
Rogers Communications (TSX: RCI.B) also appears to be a cheap stock due to generally higher interest rates since 2022. Although the Bank of Canada cut the policy interest rate by 0.25% this month, it doesn’t make much of an impact compared to the 4.75% raise it made since early 2022. Canadians shouldn’t expect the Bank of Canada to reduce the policy interest rate back to 0.25% any time soon, as the Bank would keep watch on changes in the economic data and make adjustments to the policy interest rate as needed.
Big telecoms generally have large capital investments funded by debt. In the case of Rogers, its long-term debt-to-capital ratio is high at about 72.5%. However, it still maintains an investment-grade S&P credit rating of BBB-.
In a higher interest rate environment, investors have the opportunity to buy Rogers stock at a blended P/E of about 11 at the recent price of $51.88 per share. This is a value stock that can also trade at a P/E of 15 given the right environment.
If it were to trade at a multiple of 15 today, the stock should be at north of $70. So, it’s probably not a coincidence that the 12-month analyst consensus price target on Yahoo Finance is $70.70, which represents nice near-term upside potential of 36%.
It also offers a dividend yield of almost 3.9% sustained by a payout ratio of about 41% of adjusted earnings this year.
Food for thought
The problem with value stocks is that there are reasons for the pressure on the stocks. Furthermore, although they appear to be cheap, it doesn’t mean they can’t get cheaper. There’s also no way of knowing when or if the right catalysts will prop up the stocks and help investors realize sizeable gains.
So, investors should have high conviction and be ready to stay with the stock for years before taking a position. It goes without saying that it always helps if value stocks pay out safe dividends, which provide periodic income for investors.
