Value stocks

Are these 2 worst performing value stocks poised to soar in 2022?

Value stocks have long been eclipsed and outperformed by growth stocks, but they should have their day in 2022. The main reason is that the two dominant factors in the economy right now – inflation and rising rates of interest – generally favor value stocks.

Value stocks are typically those of more established companies that are better able to raise their prices in times of inflation, as demand for their products – think food and energy – remains high. Growth stocks are typically priced based on expected growth, so they may not have the current earnings to increase margins during inflation.

The financial sector is also a good place to watch right now, as inflation causes interest rates to rise, which generally benefits banks and other businesses that rely on interest income. Here are two value stocks from the financial sector that struggled in 2021 but are poised to rebound in 2022.

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Citigroup: Ongoing transformation

Citigroup (NYSE:C) is one of the big four national banks, so you would think it had a good year in 2021, given that it was a big rebound year for most banks after a disastrous 2020. But this was not the case, because Citigroup was far behind its competitors. The KBW Nasdaq Bank Index is up about 35% in 2021, while Citigroup is down 1.9% for the year.

The decline was largely due to Citigroup being in a year of transition in 2021. New CEO Jane Fraser took over a company that had problems with its internal controls and risk management, as the bank was ordered to pay a $400 million fine by the Office of the Comptroller of the Currency for unsafe and unsound practices. Perhaps the most egregious example is the $900 million sent to bad clients in 2020.

As a result, the bank invested $1 billion in updating its systems and improving its internal controls. Additionally, Fraser has taken significant steps to refocus its strategy, selling some of its international properties in underperforming markets and investing in other areas, such as wealth management. However, the changes have resulted in increased expenses. For example, the sale of its Australian retail banking division resulted in a pre-tax loss of $680 million.

But the changes and investments Citigroup made in 2021 set it up for success in 2022 and beyond. The stock is already up about 7% year-to-date, while the KBW Nasdaq Bank Index is up about 2% over the same period. So far this year, Citigroup has outperformed the two largest banks, JPMorgan Chase and Bank of America. Yet its valuation remains ridiculously low, with a price/earnings (P/E) ratio of around 6 and a price/earnings/growth (PEG) ratio of 0.73. These metrics indicate a stock that is significantly undervalued relative to its earnings potential. And it is trading below its book value, with a price-to-book (P/B) ratio of 0.70. This means that its stock price is lower than the value of its assets. This is a stock with room to run.

On the growth driver side, Citigroup will benefit from expected above-average growth in gross domestic product as well as the likelihood that the Federal Reserve will raise interest rates several times this year. The combination should result in more loans and higher interest income. Separately, the bank plans to resume share buybacks, which should help boost its share price.

The transformation under Fraser should begin to translate into greater operational efficiency and a more streamlined focus on the company’s strengths, driving earnings growth over time.

Rocket Companies: Gaining market share

Rocket companies (NYSE: RKT) has been a bit of a headache for investors since going public in August 2020 at around $18 per share. The home loan market leader had a record year in 2020 with $320 billion in loans. Additionally, it posted record revenue and net profit in 2020, but the share price barely budged.

In 2021, revenue and earnings were down in the first three quarters, but that compared to a record high in 2020. Still, the company still beat analyst estimates in the third quarter and is on track to hit the 2020 record for loan origination, CEO Jay Farner said on the third-quarter earnings call. But the stock price fell about 27% in 2021. The fall continued into 2022, and it was down about 10% as of January 31 and trades at around $13 per share.

The market undervalued this stock, which has a 12-month P/E ratio of around 4. But the company managed to increase its market share in an otherwise difficult year for mortgage companies to 9.5% compared to 8.5% in 2020. It plans to increase this figure to 10% in 2022, and has an operating margin of 56% and an excellent return on equity of 74%.

The company recently took steps that should propel its stock price into 2022 and beyond. Late last year, it formed a partnership with Salesforce to launch a mortgage-as-a-service offering to banks and credit unions through Salesforce’s Financial Service Cloud. The Company may use Rocket’s technology, brand and platform to offer mortgages. This will be particularly useful for small and medium banks that do not have the resources to manage their own operations. Farner sees this as an opportunity to expand Rocket’s market and increase its market share.

Overall, while rising rates could slow things down in the housing market, it could lower or stabilize house prices. And if inflation pushes up rents, that could be a plus for home sales.

While neither of these stocks can surge in 2022, both should have nice rebounds from a lower 2021.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.