Welcome to Episode #22 of the Value Investor Podcast

Every week, Zacks value stock strategist and the Editor of Zacks Value Investor portfolio service, Tracey Ryniec, talks about all things happening in the value stock universe, including her top stock picks.

2016 is winding down so that means looking forward to next year’s investing strategies. With US stock indexes still trading at new record highs, that leaves value investors wondering: where will the value stocks be in 2017?

By its very definition, being a value stock means that that stock is out of favor with investors and Wall Street. It might not be in a favored industry or maybe it is having management issues.

Sometimes, value investors find themselves looking at companies that are in industries or sectors that everyone hates. Who wants to invest in the extreme out-of-favor areas? It may even result in having to hold the nose and dive in.

2017 could be one of those years.

But that is the nature of value investing. It can mean getting into areas that seem unappetizing, or even boring, at least at first. After all, if I told you a year ago that the community banks would be a red hot investment at the end of 2016, would you have believed me?

3 Hated Areas to Find Value Stocks in 2017

1. International stocks have underperformed since 2008. Because of that under performance, the Mom and Pop investor hates them. But this is the very time when you should be looking at them. You can buy a basket of small cap stocks through the Vanguard All-World ex-US small cap ETF (VSS). It has forward P/E of 14.4. It also has an attractive price-to-sales ratio of 0.8 and a price-to-book ratio of just 1.3. You get some reward with a dividend yielding 2.7%.

Or, if you want to play individual international companies, check out Brazilian regional jet maker Embraer Air (ERJ). It is trading with a forward P/E of 13.

2. The Homebuilders. They were the best performing sector in 2012 and since then, they’ve done nothing. With mortgage rates rising, this also seems like a risky play. But some of them are cheap. The industry is worth a look. Toll Brothers (TOL) targets the more affluent buyers, who should be helped by Trump tax breaks. It is also starting a brand to target affluent Millennials. Shares are cheap, with a forward P/E of only 10.

3. Everyone says the mall is dead, so why would you want to buy the mall retailers? JC Penney (JCP) has been trying to turn it around for a few years, but earnings haven’t caught up yet. It’s not cheap, with a forward P/E of 186.

A better option would be a hybrid mall and strip mall player like Kohl’s (KSS). It is expected to grow earnings by 7% next year but shares are still cheap, with a forward P/E of 13.2. Be careful of value traps in this area.

Value investors are known for their ability to look outside the box for stock ideas.

You might not always like the options, but don’t dismiss a stock solely because it’s in a sector or industry that you cringe at.

Find out more about where Tracey is looking for value stocks in 2017 on this week’s podcast.

Happy New Year!

VANGUARD FTSE ALL-WORLD EX-US SMALL-CAP: https://www.zacks.com/funds/etf/VSS/profile?cid=cs-soundcloud-ft-pod

Embraer Air: https://www.zacks.com/stock/quote/ERJ?cid=cs-soundcloud-ft-pod

Toll Brothers: https://www.zacks.com/stock/quote/TOL?cid=cs-soundcloud-ft-pod

Khols Corp: https://www.zacks.com/stock/quote/ERJ?cid=cs-soundcloud-ft-pod

JC Penney: https://www.zacks.com/stock/quote/JCP?cid=cs-soundcloud-ft-pod

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