Remember the Forgotten Forty? It’s time to look at them again.
The early 2022 market has been punishing for most investors, regardless of their approach. Most sectors and styles are down year to date. But with a Federal Reserve set to begin tightening monetary policy and economic growth projected to remain strong, there are good arguments in favor of leadership by value and cyclically oriented companies.
The “everything rally” of the past year and a half appears to be finished, so it could be time for stock pickers to shine. “Looking at 2022, I think the money is going to be made outside of the major indexes or in stocks that aren’t well covered on Wall Street,” says Jon Boyar of the Boyar Value Group, which includes the Boyar Asset Management investment firm and a research division, Boyar’s Intrinsic Value Research.
Boyar and his team put together an annual list of 40 stocks they see as particularly appealing for the year ahead. They’re not always traditional value stocks with the cheapest valuations in the market; some may be unfairly discounted or overlooked relative to their potential.
Boyar’s Forgotten Forty portfolio has produced an average annual gain of 11.5% over the decade through the end of 2021, versus about 10%, on average, for the
Russell 1000 Value
index. The full
including growth components, has climbed about 14% a year during that period.
Boyar spoke to Barron’s about a half-dozen highlights from his 2022 Forgotten Forty portfolio.
Bank of America (ticker: BAC) is the most interest rate sensitive of the major U.S. banks, Boyar notes, with less investment banking and international exposure than peers. “That’s great when rates are going up and the economy is growing how it is,” Boyar says.
Banks’ bread-and-butter business is borrowing short in order to lend long, such as by taking in consumer deposits and writing mortgages. If long-term rates rise more than short-term rates, that makes lending more profitable.
About a third of
Bank of America‘s $1 trillion in deposits are in non-interest-bearing accounts, and the overall interest rate it pays on deposits is just 0.02%. So there’s lots of room for the bank’s net interest income to rise as rates do: A 1 percentage point rise in rates would add about $7.2 billion in net interest income over the next 12 months, according to management.
Boyar values Bank of America at 2.2 times estimated 2023 tangible book value per share, versus the stock’s current 1.9 times. His $61 target implies upside of roughly 30% from current levels around $47.
Walt Disney (DIS) is a returning name in the Forgotten Forty. The investment thesis is similar to what it was a year ago: a reopening boost in the short term and streaming growth for the long term. That call didn’t work out in 2021, as subscriber growth for Disney+ hit a speed bump and Covid-19 continued to weigh on profits at theme parks. Disney stock slid 14.5% last year, as the
returned almost 29% including dividends.
“I think the streaming strategy remains sound, no one should have expected it to be a straight line up,” Boyar says. “They’re still on track to meet all their subscriber targets and then some as they launch in more international markets and spend a lot of money on content.”
He’s bullish on a 2022 recovery at the parks segment, which was responsible for half of Disney’s annual profits before the pandemic. Pent-up demand and new features like the Genie+ app should help raise spending per guest as visitors return.
Boyar also sees Disney possibly bringing back its dividend once the parks’ reopening progresses further in 2022. He values the stock using a sum-of-the-parts approach, with a multiple of 11 times estimated 2023 Ebitda—short for earnings before interest, taxes, depreciation, and amortization—for the non-streaming businesses and 5.5 times estimated 2022 sales for the company’s streaming segment (
Netflix [NFLX] trades for 6.1 times that measure after recent declines). That yields a $240 price target for Disney stock, for potential upside of roughly 66%.
Another reopening play for 2022 could be Uber Technologies (UBER). “I think what will surprise people going forward is how profitable the mobility business is once people really start using it again,” Boyar says. “Delivery scaled up during the pandemic and is about break-even. And they own valuable equity stakes in other ride-hailing businesses that are worth probably $10 billion.”
That compares with a recent enterprise value of about $78 billion. Boyar values Uber at revenue multiples closer to where North America-based rivals
DoorDash (DASH) and
Lyft (LYFT) trade. That yields a target of $79, or more than double the stock’s recent level around $38.
A potentially overlooked name on the 2022 Forgotten Forty list is Scotts Miracle-Gro (SMG), which generates most of its sales and profits from its lawn and garden brands including Scotts, Miracle-Gro, Roundup, and Ortho. It also has a fast-growing division called Hawthorne, which makes and sells equipment and tools for hydroponic growers—a category that is almost equivalent to cannabis producers.
“At these levels you’re basically paying fair value for the traditional lawn business and getting the cannabis business—which grew more than 100% over the past two years—for free,” Boyar says. “To me, this is the best way to play cannabis.”
The pandemic trend of more Americans moving to the suburbs should be a demographic tailwind for the lawn-care business, Boyar says. He sees a potential split off of the cannabis business at some point, which should be a positive catalyst for the stock. Meanwhile,
Scotts Miracle-Gro intends to repurchase $300 million of stock during its current fiscal year, versus a recent market cap of $8.3 billion.
Boyar values the stock at $242 per share, or almost 40% above recent levels.
Another beneficiary of pandemic trends is Callaway Golf (ELY), Boyar says. Golf participation is booming, as an outdoor activity popular outside of urban areas. More flexible schedules during remote or hybrid work can’t hurt either. Calloway is a leading producer of golf clubs, balls, and apparel: Its equipment sales were up 39% year over year through the first three quarters of 2021.
Boyar also sees a reopening tailwind at Topgolf, which Callaway took control of early last year. The subsidiary’s entertainment venues are a mix of a driving range, sports bar, and party space. It’s expected to be a billion-dollar business in 2021, with 50% sales growth projected for 2022 as the pandemic continues to recede.
Boyar values the golf-equipment business at 14 times estimated 2022 adjusted Ebitda and 20 times for faster-growing Topgolf. That yields a $38 per share value, or 58% upside.
Hanesbrands (HBI), meanwhile, doesn’t get enough credit for the essentially recurring revenue-like features of its core basic apparel merchandise, Boyar says.
“We like the replenishment nature of their products, you don’t have the fashion risk there that most clothing brands do,” Boyar says. “Theoretically people should be replacing their undershirts and underwear and socks regularly.”
He also points to
Hanesbrands‘ Champion brand, which represented 29% of sales last year. That has a growth tailwind from the continuing popularity of athleisure.
A new management team at Hanesbrands has plans to simplify product offerings, boost online sales, and improve manufacturing efficiency. Boyar applies an 11 times multiple to estimated 2023 Ebitda, producing a target of $33.40 per share, or about double recent levels. The current annual dividend yield is 3.8%.
Write to Nicholas Jasinski at firstname.lastname@example.org