This Value Move May Have Legs

 | Mar 25, 2014 | 3:38 PM EDT
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Value matters. Value is playing a role. Long-term value is springing up everywhere -- just as I wish the real spring season would make itself known.

I know, it seems that I am being facetious. Doesn't the market always care about value? But the simple answer is no. There are plenty of times that the predominate investors -- who are all we really care about because they move stocks -- only care about growth. Value gets ignored because value doesn't move unless someone tries to bring value out. But growth? Growth rolls higher.

Over the last week, a transference has occurred. The aggressive buyers are seeing value if the economy gets better, and they are taking no prisoners as they buy stocks.

Let's go over a couple of value names and you will see what I mean. First, there's Caterpillar (CAT), which is one of the best stocks in the entire market. Caterpillar has been a chronic underperformer for several years, mostly because it has consistently missed earnings estimates. In the meantime, the stock market as a whole has gotten very expensive relative to Caterpillar. Right now, Caterpillar's trading at about 14x heavily reduced earnings estimates. That's much lower than the 17.2x earnings of the S&P 500.

Now, until recently that meant nothing. Who cares about value if you can buy a stock like Twitter (TWTR) that keeps going higher? Why bother with value when Chipotle (CMG) is steaming ahead? But now those admittedly expensive stocks are going down and the growth buyers are either flummoxed or reaching for initial public offerings (IPOs) -- as I will discuss later.

Now , though, we have to recognize that there are things that can not only go wrong with Caterpillar but also go right. Consider these three positives. First, we had United Rentals (URI) on Mad Money not that long ago and it is the biggest buyer of Caterpillar products. We know from Mike Kneeland, the United Rentals CEO, that his order book is brimming and that the optimism for commercial construction, which is what Caterpillar is all about, is seeing a renaissance.

Next, consider the Fed's comments last week. The Fed is saying that business is getting better and that means there is going to be a need for non-residential building. That's right in Caterpillar's wheelhouse.

Plus, we have been hearing a lot of calls about how coal has at last bottomed out. If you recall, Michael Ward, the CEO of coal-hauler CSX (CSX) told us recently. The action in Joy Global (JOY), the biggest stand-alone coal equipment company, rallied big today. We know that Caterpillar is Joy's biggest competitor. A bottom in coal means big numbers for Caterpillar.

Finally, all over the Street today we heard about a revival in trucking, for the first time in ages. Caterpillar makes engines, so you can't have a rally in trucking without it benefiting Caterpillar.

So, the stock runs with the idea that even if it screws up, how much more can the stock fall? After all, it reported a hideous number last time and the stock didn't go down. What if it reports a good one? The stock will certainly be trading much higher than it is now.

Second, how about looking at a value play? Johnson & Johnson (JNJ) is my favorite large-capitalization pharmaceutical name. This company has the highest growth rate of all the major pharmaceuticals, yet it has done nothing, nothing at all since it reported a good quarter but gave lukewarm guidance. The stock has since languished in the wilderness and is actually trading at a discount to the average stock in the S&P.

Value buyers know that disparity can't last: It is the fastest growing major drug company, with the best balance sheet of any company in the U.S. and the best management in CEO Alex Gorsky -- who has talked openly about shaking the company up to have only top-tier divisions -- and yet the stock trades at a discount to the rest of the market. That's preposterous. But as the money poured out of the speculative biotechs in the last few days, it has come back to Johnson & Johnson.

Then there's IBM (IBM), which I praised yesterday. Without a single whisper of analyst love, the stock is ramping like I haven't seen in years.

How can it rally like this on nothing? Same as Caterpillar: It got too darned cheap. Yes, IBM missed the last quarter, but the company is rapidly transitioning to the cloud. It is much more of a software than a hardware company. Yet it sells for 10x earnings -- not revenues but earnings. Again, I know that IBM, like Caterpillar, hasn't made the numbers. However, at 10x earnings with a new mainframe cycle coming and oodles of cash flow, the value guys are saying, who cares? The stock is too cheap.

Then there's Microsoft (MSFT), which hit a 52-week high today in part because it is going to spell out its new strategy on March 27. I think that the company's new CEO, Satya Nadella, will usher in a new era of glasnost in which everything is on the table. No sacred cows. That alone could take this stock, which is trading at 14x earnings and yielding almost 3%, still higher. By the way, this is the same logic that has quietly produced a stealth move higher in Apple (AAPL), which is another stock that is selling at 12x earnings. The only differences are that Apple has a slower growth rate and a shareholder base that is frustrated and restive.

Or how about Schlumberger (SLB)? This company also got left behind by the market. This is the finest oil service company in the world with the best technology and the best minds. I have seen this stock trade at a premium to the S&P for ages. But of late, because of some tepid guidance, it has slipped to become a discount stock. That ended today when management spoke at that Howard Weil conference I talked about. They gave a tremendous outlook that shows we really are in a golden age for drilling. They used the fabled "strong year-over-year growth" line that really gets stocks going -- and it sure did, as the stock has roared all day from the get-go.

Finally , you want a totally wild one? You know what hit my value screen today? Are you ready skidaddy? Celgene (CELG). Yes, the biotech stock that today hit $142 is down a staggering 32 points from the high. Here's a shocker: Did you know that at $142 Celgene is now dramatically cheaper in 2016 earnings than Pfizer (PFE) or Merck (MRK)? Can you imagine? A company with the kind of growth that Celgene has is trading at a discount to two slow-growing behemoths? When I put pen to paper, I couldn't believe it that it could be that cheap. But when stocks get hit as hard as Celgene has, you get some real value. That's why the trust had to go in and buy some more even as it paid too much not long ago.

Now, I know there are still plenty of pockets of overvaluation. Plenty of reckless IPOs. Plenty of hyped fuel-cell and marijuana stocks, as well as too many newly minted Software as a Service (SaaS) companies and development stage biotechs that will never develop.

Yep, right now, the value money managers are stepping up and taking stocks while the growth managers are licking their wounds. Now here's the bottom line: This value move may have some real legs. The stocks they are taking up are so much cheaper than the average equity that they could rally for days without running into valuation ceilings.

True, they have now run a bit. But only a miser a real Scrooge McDuck would think they are too expensive.

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