In this article, we will take a look at the 10 most profitable value stocks to invest in.
Rotating Back to Value Sectors is the Better Option
Value investing is essentially focused on looking at stocks trading at a discount to their intrinsic value. Such stocks happen to be more mature, less volatile and have strong fundamentals. 2024 has been significant for defensive and value stocks, especially considering that growth stocks have been trading at high valuations all year round. Analysts expect the Magnificent Seven to shed their valuation significantly and investors continue to remain cautious amid a turbulent market environment.
On October 22, Brian Mulberry, Zacks Investment Management client portfolio manager, joined Wealth! on Yahoo Finance to discuss his market thesis and share why he prefers value stocks over growth stocks under the current macroeconomic backdrop. The S&P 500, in terms of the broader market, is currently trading at 22 times its forward earnings. Speaking of the magnificent seven, their valuations are getting a bit “top-heavy” and have been consistently trading between the mid to high 30s, adds Mulberry.
READ ALSO 10 Stocks with Consistent Growth to Buy and 8 Most Undervalued Value Stocks To Buy According To Analysts.
On the flip side, looking at utilities’ earnings growth and forward P/E, these companies are trading at a FWD P/E of only 9 or 10. Additionally, within these sectors, multiple better-performing individual stocks are expected to post sustainable or “durable earnings growth.“
Mulberry suggests that investors can do much better at current valuation levels if they are rotating back to some traditional sectors and value stocks. He adds that the big banks also expect to report strong earnings and will continue to do so as the interest rates go down even further in 2025.
Value stocks not only have stronger fundamentals, but they also have legacy businesses with sustainable business models. With the current backdrop of uncertainty, many analysts and strategists alike believe that low-risk and value businesses are the best bets for investors. That said, let’s take a look at the 10 most profitable value stocks to invest in.
A financial professional looking at a computer screen, with a graph of stocks increasing in value.
Our Methodology
To come up with the 10 most profitable value stocks to invest in we used the Finviz stock screener to identify stocks in value-oriented sectors like consumer staples, financials, energy, healthcare, and more, with forward PE ratios of less than 15, positive 10-year revenue growth rates, and positive trailing 12-month net income. We then examined the hedge fund sentiment of each stock and picked the most popular ones. Our list is in ascending order of the number of hedge fund holders as of Q2 2024 primarily and 10-year revenue growth rates, forward P/E, and TTM net income secondarily.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
10 Most Profitable Value Stocks To Invest In
10. Arch Capital Group Ltd. (NASDAQ:ACGL)
Number of Hedge Fund Holders: 37
Forward P/E as of October 23, 2024: 11.9
10 Year Revenue Growth Rate: 15.2%
Trailing 12 Month (TTM) Net Income (June 30): $5.41 Billion
Arch Capital Group Ltd. (NASDAQ:ACGL) ranks 10th on our list of the most profitable value stocks to invest in. The insurance company provides specialty insurance, reinsurance, and mortgage insurance solutions.
The company’s former chairman introduced a unique underwriting process, called the “Insurance Clock,” under which the company can measure the insurance underwriting cycle. Three decades later, the company is still working around the same Insurance Clock, contributing to its efficacy and high customer value. In the second quarter of 2024, Arch Capital Group Ltd. (NASDAQ:ACGL) logged $3.78 billion in revenue, up by 10.3% year-over-year. As of June 30, the company had $5.41 billion in trailing 12-month net income and $17.4 billion in total net reserves.
The company is consistently working to expand its market share and position in the industry. On August 1, the company’s insurance business, Arch Insurance, closed the acquisition of Allianz’s US MidCorp and Entertainment insurance business. Nearly 500 employees from Allianz joined Arch Capital Group Ltd. (NASDAQ:ACGL), expanding its position as an emerging provider of middle-market insurance services.
The company’s position in the industry is not an exaggeration. As of June 30, Arch Capital Group Ltd. (NASDAQ:ACGL) had $65.5 billion in total assets and wrote gross premiums worth $20.1 billion. Analysts are also bullish on the stock and their median price target represents an upside of 15% from current levels.
Baron Partners Fund stated the following regarding Arch Capital Group Ltd. (NASDAQ:ACGL) in its Q2 2024 investor letter:
“Specialty insurer Arch Capital Group Ltd. (NASDAQ:ACGL) contributed to performance after reporting positive financial results that exceeded Street expectations. Operating ROE was 21% in the first quarter, and book value per share rose 40% due to strong underwriting profitability and the establishment of a deferred tax asset at the end of 2023. Favorable conditions persist in the P&C insurance market with strong growth and attractive returns despite signs of increasing competition. We continue to own the stock due to Arch’s capable management team and our expectation of significant growth in earnings and book value.”
9. Diamondback Energy, Inc. (NASDAQ:FANG)
Number of Hedge Fund Holders: 44
Forward P/E as of October 23, 2024: 10.8
10 Year Revenue Growth Rate: 37.8%
Trailing 12 Month (TTM) Net Income (June 30): $3.48 Billion
Diamondback Energy, Inc. (NASDAQ:FANG) is an oil and natural gas company. The company is engaged in the acquisition, development, and exploration of onshore oil and natural gas reserves.
On September 10, Diamondback Energy, Inc. (NASDAQ:FANG) closed a merger deal with Endeavor Energy Resources, L.P., positioning FANG as a leading energy and independent oil company in the United States. The agreement was signed earlier in February and was worth a staggering $26 billion, inclusive of Endeavor’s net debt. The two well-established companies have now come together to deliver significant cost reductions and differentiated value propositions. The transaction will deliver annual synergies of $550 million, representing $3 billion in net present value (at a 10% discount) over the next 10 years.
As a consequence of its solid financial performance and successful merger completed on September 10, Diamondback Energy, Inc. (NASDAQ:FANG) revised its third quarter and capital guidance on October 1. In the third quarter of 2024, the company expects oil production to reach 319 to 321 MBO/d (one thousand barrels of oil per day) and expects capital expenditure to range between $675 million and $700 million.
Overall, the company has an immense focus on generating free cash flow and the merger is expected to bring solid gains in the cash flow department. In addition to that, the merger will also enhance Diamondback Energy’s (NASDAQ:FANG) position in the industry. Analysts are also bullish on the stock and their median price target represents an upside of 19% from current levels.
ClearBridge Investments ClearBridge Select Strategy stated the following regarding Diamondback Energy, Inc. (NASDAQ:FANG) in its first quarter 2024 investor letter:
“Our final addition was Diamondback Energy, Inc. (NASDAQ:FANG), a leading oil and gas producer that agreed to acquire fellow exploration and production company Endeavor Energy Resources in the quarter. The deal should allow Diamondback to capture operating synergies and streamline costs by reducing rig redundancies and optimizing production techniques. Endeavor has previously prioritized double-digit production growth over capital discipline, leading to the quick depletion of its core inventory in the oil-rich Midland Basin. Diamondback’s focus on free cash flow generation should allow the combined entity, which we consider an evolving opportunity, to rein back its production levels and extend the longevity of this high-quality acreage to fund cash returns. Diamondback replaces the energy exposure the portfolio will lose with the pending acquisition of top 15 holding Pioneer Natural Resources by Exxon Mobil.”