Value Stocks: A Promising Outlook for Investors

Value stocks have faced significant challenges in recent years, but the tide may be turning, particularly for investors willing to explore lesser-known opportunities. In recent discussions, investment experts from Lowell Capital and TMR Capital shared their insights on under-the-radar stock picks that could offer substantial returns for those seeking value in the market. These recommendations highlight companies with strong financial fundamentals, resilient business models, and attractive valuations, making them compelling choices for investors looking to capitalize on the potential resurgence of value stocks.

Macfarlane Group: A Resilient Business Model with Growth Potential

One of the top picks from Lowell Capital is Macfarlane Group, a leading distributor of protective packaging materials in the U.K. and other European markets. The company’s highly cash-generative business model, strong balance sheet, and disciplined management team make it an attractive investment opportunity. Macfarlane Group has demonstrated its ability to consistently pass along raw material pricing changes to customers, focusing on maintaining gross profits rather than top-line revenues. This approach has been supported by high switching costs among its customers, ensuring a stable revenue stream.

Under the leadership of CEO Peter Atkinson, Macfarlane Group has successfully executed a turnaround and growth strategy, positioning itself for future expansion. Lowell Capital believes that the company can drive sales growth through accretive acquisitions and modest organic growth, with the potential to increase adjusted EBITDA from £36 million in 2023 to £45 million by 2027. Trading at a valuation of 8x adjusted EBITDA, Macfarlane Group offers a market cap and enterprise value of £360 million, with an estimated upside of £2.25 per share compared to its current price of around £1.12. Additionally, the company’s strong financial position and attractive valuation make it a potential target for mergers and acquisitions.

Academy Sports and Outdoors: A Recession-Resistant Retailer with Growth Ambitions

Another top pick from Lowell Capital is Academy Sports and Outdoors, a leading sporting goods retailer in the U.S. with 282 stores across 18 states. The company’s high cash generation, strong balance sheet, and attractive valuation make it a standout investment opportunity. Academy Sports and Outdoors operates a resilient business model, focusing on value-added services and maintaining a disciplined management approach.

The company’s valuation is particularly attractive, trading at less than 5x adjusted EBITDA with a high single-digit free cash flow yield. Lowell Capital highlights Academy’s record of strong sales and profit growth, supported by a “Fort Knox” balance sheet with net debt of approximately $100 million. The company’s long-term strategy aims to grow sales to $10 billion and achieve a net income margin of 10% by 2028, driven by a high-ROIC business model with limited capital requirements. With its strong financial position and growth prospects, Academy Sports and Outdoors is well-positioned to capitalize on a rebound in consumer spending.

REV Group: A Specialty Vehicle Manufacturer with Strong Market Position

Ted Rosenthal of TMR Capital identified REV Group as a compelling investment opportunity, initially considering it as a short position due to concerns about overearning. However, Rosenthal reversed his thesis as the company demonstrated strong backlog growth and pricing power, particularly in its Specialty Vehicles segment. REV Group designs, manufactures, and distributes specialty vehicles, including fire and emergency vehicles, commercial vehicles, and RVs, operating in an attractive oligopoly industry with stable demand driven by replacement cycles.

Rosenthal expects REV Group’s EBITDA margins to expand to 11% by 2026 as throughput and margins normalize in the Specialty Vehicles segment and the RV business rebounds from depressed levels. This projected growth could result in a 144% upside for investors, representing a 49% internal rate of return. REV Group’s strong market share, variable cost structure, and low maintenance capital expenditures further enhance its attractiveness as a value stock with strong revenue visibility and structural advantages.

Celestica: An Undervalued Play in the AI Sector

Celestica, a leading electronics manufacturing services (EMS) provider, is another top pick from Rosenthal. Despite trading at a low valuation multiple due to its thin operating margins and competitive industry, Celestica offers an underappreciated exposure to the artificial intelligence sector. The company’s ability to deliver customized supply chain solutions positions it well to benefit from the growth of AI, which is driving demand for specialized electronics manufacturing services.

Rosenthal estimates that Celestica could trade at 12x 2026 EBITDA, representing an 83% upside and a 22% return on investment. While the EMS industry is highly competitive, Celestica’s focus on non-consumer electronics and its expertise in managing complex supply chains provide a degree of insulation from broader market volatility. With its low valuation and exposure to a high-growth sector, Celestica represents a compelling value investment opportunity for those willing to look beyond the surface.

Preparing for the Comeback of Value Stocks

As we approach the end of 2024, market breadth has begun to improve, providing a boost to value stocks relative to their growth counterparts. However, many investors remain underexposed to value investing due to its limited representation in market indexes. To capitalize on the potential resurgence of value stocks, investors may need to take a more active approach, whether through value-focused ETFs like the SPDR S&P 500 Value ETF or through actively managed funds.

While it remains uncertain whether value stocks will continue their upward trajectory in 2025, early signs are encouraging. The SPDR Value ETF has performed in line with the growth-oriented S&P 500, with both up over 3% year to date. This holding pattern between growth and value stocks suggests that it may be a good time to maintain exposure to both, allowing investors to benefit from a potential shift in market dynamics. For those who are prepared to dive deeper into the value segment, the rewards could be significant as undervalued companies like Macfarlane Group, Academy Sports and Outdoors, REV Group, and Celestica begin to realize their growth potential.