Here are five stock picks of securities that set up your portfolio for a pandemic recovery

This year’s stock has exacerbated the long-term trend, setting a broad recovery move for value stocks and dividend stocks, according to Bill McMahon, director of active business strategy investment at Charles Schwab Corp.

McMahon was promoted to his current position in November. He was previously chief investment officer at ThomasPartners, which directs the largest of Charles Schwab Investment Management’s active strategies for which he is now responsible. (McMahon joined ThomasPartners when it was established in 2001. Schwab acquired that firm in 2012).

During an interview, McMahon said the difference between value stocks and growth stock valuations was “broad, historically,” and that “if you were inclined to nibble on value, this is not a bad time to do it.”

“In the long term, it benefits from having companies pay dividends, but in the short term it has not worked that way,” he said.

This year’s divergence in growth and value performance is outlined below, where McMahon also comments on the super-popular FAANG stocks and the big-tech name he currently favors.

Five selections of values

McMahon discussed five stocks that he believes “represent good value,” with an emphasis on attractive and safe dividends for several of them.

• Raytheon Technologies Corp. RTX Shares,
-0.14%
They are down 30% this year. (All returns in this article assume dividends are reinvested.) “The business is divided between defense, which is stable on long-term contracts, and commercial aerospace, which is not,” McMahon said. The closure of most passenger air travel during the pandemic has been an obvious problem. But McMahon believes that the shares will recover in the long term and that the dividend is safe. The yield is 3.11%, which is not negligible when the 10-year Treasury bonds TMUBMUSD10Y,
0.580%
they are yielding only 0.59%.

• PPG Industries Inc. PPG,
-1.49%
manufactures paints and coatings used in various industries. The share has a dividend yield of 1.96%. It has fallen 17% this year due to “a lot of economic sensitivity,” especially for car sales and airplane production, McMahon said. He likes the company for its “really strong management team and good bottom line,” and believes the action “will have many advantages” for long-term investors who can expect post-pandemic economic recovery.

• Coca-Cola Co. KO,
-0.61%
It hit the headlines with a 28% decline in second-quarter revenue, but indicated the worst was over as sales improved during May and June. McMahon said the company’s management is “very committed to the dividend.” The yield is 3.38%. He is also satisfied with Coca-Cola’s plan to “get rid of the smaller brands.” Shares fell 11% this year, but McMahon expects a resurgence “when business resumes and people return to restaurants and stadiums.”

• Home Depot Inc. HD,
-0.80%
It always seems to be in a sweet spot. When the real estate market is strong, it helps the company. When the property market is weak, people do more renovations, which helps the company. McMahon called the business “fairly immune to online competition.” The stock rose 24% this year and has a 2.44% dividend yield. McMahon expects the “good dynamic” to continue for the housing market to continue as city residents look to the suburbs and coastal areas to the summer houses.

• Abbott Laboratories ABT,
-0.13%
It has the lowest dividend yield among the shares McMahon named: 1.44%. He noted the “good growth characteristics” of the company, especially through its Freestyle Libre glucose monitoring system and Guaranteed Nutrition products. McMahon added that Abbott “has been very good with mergers and acquisitions in the past.”

Growth trend on value accelerates

Here are two charts showing the movement of price ratios to final and forward earnings for the iShares Russell 1000 Growth ETF IWF,
-0.97%
and the iShares Russell 1000 Value ETF IWD,
-0.32%
In the last five years:

We have included charts based on earnings results for the past 12 months, as well as consensus earnings estimates for the next 12 months, because current future estimates are suspect for many sectors; We cannot know how long the economic recovery of the United States will take.

The final P / E rating for the Russell 1000 Growth Index RLG,
-1.03%
has skyrocketed this year, while the Russell 1000 Value Index RLV valuation,
-0.32%
It has been flat. On the lead P / E chart, the stock group’s P / E has risen sharply this year due to a sharp decline in earnings estimates, but the spread between index valuations has widened.

McMahon noted the incredible performance of Tesla TSLA,
-4.09%,
which increased 268% for 2020 until July 27.

“Tesla has become the poster child” for investors’ love of momentum transactions, he said. “Stock performance has been staggering,” with investors clamoring to buy “regardless of long-term fundamentals or business valuation.”

Asset inflation caused in large part by the Federal Reserve’s necessary steps to shore up the U.S. economy has also fueled valuations of the biggest tech names. The S&P 500’s information technology sector has increased 17.5% this year, compared to 1.4% performance for the entire S&P 500 SPX,
-0.64%.

FAANGs plus Microsoft

The shares of FAANG (Facebook Inc. FB,
-1.44%,
Apple Inc. AAPL,
-1.64%,
Amazon.com Inc. AMZN,
-1.79%,
Netflix Inc. NFLX,
-1.44%
and the Google holding company Alphabet Inc.Co,
-1.95%
GOOGL,
-1.68%
) have also had an excellent streak. We can add Microsoft Corp. MSFT,
-0.89%
to that list:

These six companies have a combined market capitalization equal to 24% of the entire S&P 500 SPX index,
-0.64%.
That is a large concentration of risk. Among the six, the only one McMahon favors right now is Microsoft.

Microsoft “has a very strong cloud business and we believe its focus on business customers is the right one,” said McMahon. He also pointed out the risk of regulatory action against Facebook, Alphabet and Amazon.com, due to concerns about anti-competitive practices, dominance in online advertising and consumer privacy.

“Microsoft has stayed away from those areas, which is a pen at its limit,” he said.