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Home » Banyan Edge » The Value Investor’s Only Good Buy in 2023

THE VALUE INVESTOR’S ONLY GOOD BUY IN 2023

Posted by Michael Carr | Dec 29, 2022 | Banyan Edge, Investing, Stocks

8 minute, 58 second read

Value investing is hard to define.

Not that the meaning of “value” is elusive. It’s not. More because defining
what’s actually valuable in the market is difficult.

This might surprise anyone who thinks they’re a value investor because they buy
stocks with a low price-to-earnings (P/E) ratio. That’s a popular — but
inadequate — way to look for value.

The problem with buying “low-P/E stocks” is what “low” actually means. Some
investors say a P/E of 15 is low. Others want 12, or … some other number.

But a simple number won’t ever beat the market. To do that, you need to analyze
value in context. You need to understand a stock’s relative value, not just its
absolute value. And to do that, you need to look at more than one number.

That’s a lot of work, which is why so few people do it. Luckily, because you’re
reading this, you don’t have to.

I’ve done a lot of relative value analysis over the decades. It’s always pointed
me toward stocks and sectors that are poised to beat the market in both good
times and bad.

I’ve run the numbers once again. And it’s telling me just one sector
presents the golden crossover of value and growth to make it an attractive
investment for 2023. So much so, it’s practically the only place a value
investor should look.

If you’ve been paying attention to The Banyan Edge these past few weeks, you
probably know what it is. And if you made the smart decision to join Adam O’Dell
for the debut of his research presentation yesterday, you definitely do.

If not, read on to learn which sector will be the only one a value investor can
stomach in 2023, and the best way for you to get involved right now…

STILL CHEAP ON 3 DIFFERENT METRICS

For my money, you shouldn’t just use the standard P/E ratio to measure value.
You should, at the very least, also use the forward P/E ratio.

The forward P/E ratio uses expected earnings, where the standard P/E ratio uses
earnings from the past 12 months. In other words, it’s backward-looking,
and therefore not much help in making investment decisions.

Buyers expect the stock to move up because of future earnings, not past
earnings. Sellers expect the future to be less enticing than the past. So, using
expected (forward) earnings aligns the P/E ratio with the actions of current
buyers and sellers — who ultimately move the market.

With that in mind, here’s a look at the forward P/E ratio of every sector
in the S&P 500.

(Click here to view larger image.)

Source: Standard & Poor’s

Energy has the lowest forward P/E than any other sector. That tells us 12 months
from now, and even after rising 50% in 2022, energy stocks are expected to
have the best value.

Using forward earnings corrects one problem with the P/E ratio. But there’s no
escaping the second problem: the fact that management manipulates earnings.

The word “manipulates” sounds nefarious, but it’s just part of the process. All
companies who report earnings have to make assumptions about expenses. Many have
to make assumptions about revenue. And every assumption affects earnings
numbers.

Aggressive management teams make earnings look better with some assumptions.
Meanwhile, conservative managers understate earnings. They do this to make
sure they’re reporting accurate earnings, or alluring earnings, or often some
combination of the two.

The result is that earnings are never quite what companies say they are.

Individual investors might ignore all this, but investment bankers don’t. That’s
why they use another valuation metric called Total Enterprise Value to Earnings
Before Interest, Taxes, Depreciation and Amortization, or TEV/EBITDA.

TEV accounts for all of a company’s debt and equity. EBITDA factors out many
assumptions. Put them together and you have a much more comprehensive look at a
company’s valuation. That’s why mergers and acquisitions — some of the most
important dealmaking that occurs in markets — rely on TEV/EBITDA calculations.

Here again, energy holds the highest value in the S&P 500, according to its
TEV/EBITDA.

(Click here to view larger image.)

Source: Standard & Poor’s

(Note: There is no TEV/EBITDA metric for the financials sector. Debt carries a
different meaning for banks than a company providing goods or nonfinancial
services. TEV also doesn’t mean the same thing in that context. So that column
is blank.)

The low TEV/EBITDA indicates we may see a lot of M&A activity in the energy
sector. More mergers and acquisitions means more investment interest
in the energy space, which is naturally bullish for energy.

Then there’s one last important fundamental metric — the price-to-book value
(P/B). Book value is a conservative measure of a company’s value. Here again,
energy is near the bottom of the list, indicating a high degree of relative
value.

(Click here to view larger image.)

Source: Standard & Poor’s

These charts all show energy is undervalued. That’s relative to other sectors
and the broader market.

But there’s a second, even more effective way to find relative valuations.

The last chart I have to share today does that.

BRINGING IT ALL TOGETHER

Remember when I said value investing is hard? You’re about to see exactly why.

The final chart I want to share today compares the current values of each
of the above valuation metrics to its 10-year average. Those values are then
compared to the S&P 500.

Values less than 1 are undervalued, where values over 1 are overvalued.

The color spectrum below indicates where each sector scores on each relative
metric. Green indicates a value that’s well under the benchmark, where red
indicates a value high above.

The chart confirms energy is highly undervalued compared to both its 10-year
average and the S&P 500 on two metrics.

(Click here to view larger image.)

This is the kind of relative value analysis that helps show the future winners
and losers in the market. And we can see clearly that energy shows the best
overall value.

That means these stocks could deliver strong gains in 2023 no matter
what the broad market does.

In no shortage of words, you should be invested in energy stocks.

Whether you choose to buy the Energy Select Sector ETF (XLE), one of the major
companies like Exxon-Mobil (XOM), or a smaller-cap play is entirely up to you.

But you’d do yourself a grand disservice not to hear what Adam O’Dell has
uncovered in his recent presentation.

Adam’s claim that this stock could rise 100% in 100 days shook up quite a few
people in our business, and I understand why. It sounds unthinkable.

But Adam has the conviction, and the facts, to back up that claim several times
over. Click here to see what he has to say.

Regards,

Michael Carr
Editor, One Trade

MARKET EDGE: HOW TO START 2023 ON THE RIGHT FOOT

I don’t know about you … but I’m ready for 2022 to end.

All told, it wasn’t a bad year for me. I had a few investments go the wrong way,
particularly in the first quarter, but I managed to pivot quickly and actually
grow my net worth this year … though perhaps less than I would have liked.

But all the same, this year was exhausting and I’m ready for a fresh start. I’m
betting you are too.

As we enter 2023, I’m not going to give you yet another stock or sector pick.
We’re going high level with this one. The best way to build, preserve and grow a
nest egg is to break down the investment process into smaller, digestible
pieces.

So, consider this a fresh to-do list for the new year.

CHECK YOUR 401(K) CONTRIBUTIONS

Let’s start with the lowest-hanging fruit. The humble 401(k) is still the single
best tax shelter for the vast majority of Americans. It’s automatic — coming
directly out of your paycheck — which takes a lot of the difficulty out of
saving.

In 2023, the maximum salary deferral into a 401(k) rises from $20,500 to
$22,500. If you’re 50 or older, it jumps to $30,000.

That’s great, but it gets a lot harder to meet those maximums the longer you
wait. Assuming 26 paychecks in a year, you can get to $30,000 by carving out
$1,154 per paycheck. But if you contribute less than that in the early months,
it’s going to get harder and harder to catch up as the year goes on.

So, start 2023 right by bumping up your contributions as much as you can as
early as you can.

LOOK TO PRUNE YOUR PORTFOLIO

We’re cutting it close, but if you read this on or before Friday, December 30,
you still have time to harvest tax losses. So, if you have any investments that
didn’t quite go your way in 2022, you might as well sell them now and
take the tax loss.

But pruning your portfolio is about more than just tax savings. It’s also about
maintaining a positive attitude. It affects my moods when I look at my brokerage
account and see a losing position. It clouds my judgement and I fixate on it. It
negatively impacts my decision making.

So, apart from the obvious benefits of stopping your losses in a losing position
or getting a tax write-off, consider the psychological benefits as well.
Start the new year with a fresh portfolio free of any nagging eyesores.

FOLLOW WHAT’S ACTUALLY WORKING

Always remember that the trend is your friend. Especially in a bear market, it
helps to find the sectors that are moving up, and avoiding the ones going down.

So, look at your portfolio. Are you fighting the trend, or are you following it?
If you’re fighting it … well, stop!

At the moment, energy is one of the few sectors showing durable momentum…

If you haven’t already, add a little energy to your portfolio. And about that…

Later today, my friend Adam O’Dell will reveal his favorite play in the energy
space.

He believes this stock could rise by 100% in as little as 100 days … and is
perfectly positioned for a long and strong bull market that Adam believes could
last the rest of this decade.

To find out more … click here and put down your name to make sure you have a
front-row seat.

Adam goes live at 4 p.m. ET today, so make sure you don’t miss a single second.
I’ll be watching the event as it debuts, and I highly recommend you do, too.

Charles Sizemore
Chief Editor, The Banyan Edge

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