Growth stocks have been all the rage over the past year, but that may be changing. A recent spike in U.S. Treasury yields sent shares of many growth stocks tumbling last week, and more pain could be coming if rates continue to rise.
Value stocks are a good bet for investors who want the potential for big gains without the risk that comes along with sky-high valuations. General Motors (GM 2.58%) and Hanesbrands (HBI +0.00%) are two value stocks that could easily double if the market buys into their respective strategies. Here's what you need to know.
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General Motors
The internal combustion engine finally appears to be on its way out. While electric vehicles still account for a small portion of overall vehicle sales today, that's almost guaranteed to change over the next decade. Tesla is an early leader, selling around half a million electric cars annually, but the traditional automakers shouldn't be counted out.
General Motors plans to launch 30 electric vehicle models by 2025, and it hopes to only be selling zero-emissions vehicles by 2035. The company is banking on its Ultium battery technology to vastly lower battery pack costs and make the whole electric vehicle operation profitable.
GM is also aiming beyond passenger vehicles. The company recently announced BrightDrop, a new brand that will focus on electric delivery vehicles and related products and services. BrightDrop could eventually become a significant business for GM; it hit the ground running with FedEx as a major customer.
On top of GM's electric vehicle ambitions, the company owns a majority stake in autonomous vehicle start-up Cruise, which was valued at $30 billion after its latest funding round. The long-term potential of autonomous vehicle technology is enormous, even if it takes a very long time for fully self-driving personal vehicles to become a reality. Autonomous tech should find applications in logistics and other commercial markets, and it may enable GM to offer subscription services that improve the company's profitability.
The market is valuing GM stock at a steep discount to the broad market indices. GM expects to produce adjusted earnings per share between $4.50 and $5.25 in 2021, which puts the price-to-earnings ratio at roughly 10. That guidance includes the negative impact of the ongoing global semiconductor shortage, and the PE ratio doesn't factor in GM's stake in Cruise.
GM still needs to prove itself in the electric car market. But if the company can convince investors that it can smoothly make the transition away from gas-powered vehicles, a more optimistic valuation and a much higher stock price could be in GMs' future.
Hanesbrands
Basic apparel and activewear manufacturer Hanesbrands got through the pandemic by spinning up a personal protective equipment business, selling masks and other garments and generating hundreds of millions of dollars in revenue in the process.
While the PPE business was once viewed as a long-term opportunity, Hanesbrands has now shifted gears. The company wrote off its PPE inventory and is now focused on going after younger consumers and growing its e-commerce business. The company's Champion brand has been growing in popularity, but its core Hanes brand doesn't have the same appeal.
Hanesbrands' plan involves cutting its lineup of SKUs by 20% to focus on high-volume products, exploring strategic alternatives for its European innerwear business, further growing the Champion brand, launching innerwear brands and products that appeal to younger consumers, and building out a bigger e-commerce business. Hanesbrands currently depends heavily on big-box retailers and department stores.
If Hanesbrands' strategy pays off in the form of sustainable growth and improved profitability, the stock could soar. Analysts are expecting Hanesbrands to produce adjusted earnings per share of $1.60 this year, which works out to a price-to-earnings ratio of just over 11. Similar to GM, a higher multiple and stock price could be in order if Hanesbrands can sell investors on its growth story.
