Value Stocks Defy Rate Hikes: 3 Blue Chips Showing Resilience In The Face Of Federal Reserve's Tightening

U.S. large-cap value stocks have outperformed growth peers by a modest margin in July, potentially indicating a reversal of the trend witnessed throughout 2023.

The Vanguard Value ETF VTV, the largest and most liquid exchange traded fund investing in U.S. large-cap value stocks, has outperformed the Vanguard Growth ETF VUG by around 2 percentage points so far this month.

Despite the recent outperformance of value stocks over growth stocks, they are still trailing by approximately 22% for the year-to-date, erasing a significant part of the gains that value stocks achieved in 2022.

The strong rally of blue-chip companies within the Dow Jones Industrial Average index reflects the recent upswing observed in value stocks. The blue chips’ index posted its 12th straight profitable session on July 25, a feat that has only twice been accomplished since the end of World War II.

In July, the Dow Jones Index, as closely tracked by the Dow Jones Industrial Average ETF DIA, similarly outperformed the Nasdaq 100 index, represented by the Invesco QQQ Trust QQQ.

Chart: Value vs Growth Mirrored Dow vs Nasdaq in July

Major Contributors To The Value Rally

Financial stocks contributed significantly to the value’s rally in July, as they hold a 20% weight in the VTV ETF’s portfolio. Banks such as JP Morgan Chase & Co. JPM, Bank of America Corp. BAC, Wells Fargo Co. WFC, and The Charles Schwab Corp. SCHW delivered significant weighted returns ranging from 12% to 23%.

Stocks in the industrials and energy sectors, such as Caterpillar Inc. CAT, General Electric Co. GE, Chevron Corp. CVX, and ConocoPhillips COP, also contributed favorably to the value outperformance.

Except for ConocoPhillips, which will report on Aug. 3, all of them beat Wall Street expectations both in terms of earnings per share (EPS) and revenues last quarter.

Value Investing In A Rising Rate Scenario: 3 Stocks To Hedge Against Fed Uncertainty

The Federal Reserve is expected to announce a rate hike by 0.25% on Wednesday, pushing borrowing costs to a range between 5.25% and 5.5%, the highest since February 2001.

Much of the uncertainty revolves around whether the Fed will continue to raise interest rates this year, and how long it intends to keep rates elevated before cutting them.

In such an uncertain environment, some value stocks that demonstrated extreme resilience during the Fed’s aggressive hikes last year and that show compelling valuations may provide an important hedge for investors.

1) The Kraft Heinz Company KHC

The prospect of the Fed raising interest rates further or keeping them elevated for longer won’t significantly deter people from adding sauces and condiments on their burgers.

Over the past three years, The Kraft Heinz Company has consistently exceeded Wall Street’s earnings estimates each quarter, and the stock managed to surge 11% from March to the end of 2022, even amid broader risk-off sentiments in the market.

KHC stands out as an attractive value play during periods of market turmoil and Federal Reserve rate risks due to its elevated dividend yields (currently at 4.4%) and appealing cheap valuations (forward P/E ratio at 12x).

2) Exxon Mobil Corp. XOM

Although oil prices usually fall when interest rates rise, the robustness of the U.S. economy has supported crude recently. The cost of a barrel of West Texas Intermediate (WTI) crude has increased by 13% in July, reaching nearly $80.

Exxon Mobil Corporation, the largest publicly traded oil and gas company in the United States, enjoys a very strong balance sheet and attractive valuations.

The company sits on a $32 billion cash reserve, shows a net debt-EBITDA ratio that is among the lowest in the markets (0.1x), and earnings before interest and taxes (EBIT) that are 100 times higher than the interest paid on debt.

3) Lockheed Martin Corp. LMT

The U.S. defense and aerospace industry is almost insensitive to interest-rate risks.

In 2022, the stock market experienced its most challenging year since 2008, with the S&P 500 declining by 20% due to the Federal Reserve’s aggressive rate hikes. Despite this turbulent market environment, Lockheed Martin emerged as a standout performer, with its stock soaring by an impressive 37%.

Presently, Lockheed Martin remains an attractive value stock, supported by compelling valuations, with a forward P/E ratio at 16x. Additionally, the company maintains a solid financial position, further enhancing its appeal to investors seeking stability and growth in uncertain market conditions.

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