Over the past couple of years, I have written about some really great companies. However, more often than not, when I excitedly look to see if they are value stocks, I am dismayed to find they are anything but.
The market has soared since bottoming in the financial crisis. A lot of stocks, particularly blue chips, have flown to valuations that are out of the realm of reason. I refuse to buy into a great company that is overvalued, because its day of reckoning will come at some point. It might take a long time, but I’d rather wait until stocks get clobbered and become true value stocks before I get in.
Indeed, all these value stocks I’m about to mention have been hit with selloffs that I feel are totally unjustified.
So, here are seven value stocks across the entire spectrum. Some of these are well-worn names, but as Peter Lynch said, you will often find the best returns in value stocks that nobody has heard of.
It requires patience, but can be very rewarding.
Value Stocks to Buy: Wynn Resorts (WYNN)
How can I think of Wynn Resorts (WYNN) as being in the set of value stocks given what’s happening in Macau?
Actually, of all things, it was a recent lunch with a friend who does a lot of business in China.
In asking about Macau, I was reminded that the key to China is understanding that “The Party” has to feed, clothe and house 1.4 billion people every day. It cannot appear to grant favoritism to corrupt wealthy individuals, hence the “crackdown on corruption” quoted in all the casino analyst reports. It keeps the have-nots from turning into Occupy Wall Street, or worse. Thus, rich folks who normally would spend a lot of money in Macau are keeping a low profile.
But China does want its consumers to spend — just look at the country’s latest push to help boost tourism. The crackdown on Macau will end at some point, the VIPs will return and Macau will be off to the races again.
So considering that WYNN stock is 60% off its all-time high set in 2014, it’s as much a value play as you’ll find.
Value Stocks to Buy: Apple (AAPL)
Next up is Apple (AAPL), which I consider to be a GARP (growth at a reasonable price) stock. Think of GARP stocks as the value plays in the growth field.
Following a double-digit pullback on news that … well, that Apple is doing phenomenally well, AAPL stock is trading for about $115. But Apple also has about $35 per share in cash and investments, giving it an effective price of $80 per share.
Viewed through that lens, it trades at less than 9 times FY15 earnings estimates of $9.13. That sounds good when you combine long-term analyst growth estimates of 14.76% plus a 1.7% dividend yield — so 16.5% total growth prospects.
Even if you assume that those earnings are getting a 5% to 10% boost from share buybacks — so we’ll put organic EPS at as low as $8 per share — you’re still getting AAPL for 10 times earnings.
And frankly, I give Apple a valuation premium for its brand name, cash on hand and plentiful free cash flow.
No matter how you slice it, Apple is a value stock.
Value Stocks to Buy: Energy SPDR (XLE)
With oil having been hammered down to less than $45 per barrel, many of the energy sector’s stocks have been clocked.
Sure, some are in better positions than others. Chevron (CVX), for example, has been pouring money into capex for new revenue sources while Exxon Mobil (XOM) has a massive Russian investment. Really, there are probably about 20 other value stocks in the energy space that I could rattle off the top of my brain. So … which do you buy?
All of them!
The Energy SPDR (XLE) exchange-traded fund exposes you to a good chunk of America’s major oil and gas companies, and does so for a pittance of just 0.15%, or $15 annually for every $10,000 invested.
Nobody expects oil to stay low for very long, yet even if they did (and even went lower), they will bounce back eventually. We went through this same story in the late 1990s when oil hit $10 per barrel, and you could have made a fortune buying then.
I have been accumulating every time the XLE falls 10%.
Value Stocks to Buy: Ashford Hospitality Trust (AHT)
I’ve written many times that Ashford Hospitality Trust (AHT) is the best name in the hotel REIT sector. If you examine its investor presentation, you’ll see AHT stock beats virtually every other REIT on virtually every metric, especially insider ownership.
Ashford also has the best management of both company and individual hotels in the sector. It has always maintained a conservative debt-to-equity ratio and cash-to-equity market capitalization so it can not only meet capex needs, but buy back stock and purchase hotels.
Tuesday’s press release announcing second-quarter earnings explains exactly why AHT is a value stock:
“The Company’s common stock is currently trading at a trailing 12-month NOI cap rate of approximately 8.4%, while similar assets to those in its portfolio are trading in the private market at an approximate average trailing 12-month NOI cap rate of 7.0%. A 7.0% cap rate implies a share price for the Company’s common stock of $15.85”.
The actual share price as of this writing is $8.30, which means by this calculation, Ashford is trading at almost half of what it should be.
Tack on a 5.8% dividend yield, and AHT looks like a steal.
Value Stocks to Buy: PRA Group (PRA)
A great example of an unloved sector is debt collection. For three years, the two big names in this sector were up five-fold. Then they hit a wall two years ago and have been in a trading range.
The market seems to fear that the Consumer Financial Protection Bureau has been scrutinizing how debt gets sold to companies like PRA Group (PRAA), and that this would curtail purchases of bad debt. Without bad debt, there’s no debt to collect on (other than the backlog of about $2 billion the company already has). Then the CFPB came after PRA Group for violating certain debt collection practices laws. These issues soured sentiment on PRA Group.
However, I can tell you with fairly high confidence that the worst the CFPB will do is hit PRA Group with a fine. It might also try to force certain collection practices, but PRAA has been making these changes itself already.
Meanwhile, the company grew second-quarter earnings at a rate of 17% and is expected to achieve long-term EPS growth of 15%. If you accept a 15x multiple on FY15’s earnings, then, PRAA should be trading at $70, not $58 where it is now.
Value Stocks to Buy: Amaya Gaming (AYA)
A longer-term play is Amaya Gaming (AYA), which owns the FullTilt Poker and PokerStars online poker names.
As it stands, the AYA’s numbers look great just from its international poker business. It is adding casino games, which will only help. However, I am holding for the very long term, with the expectation that online poker will be permitted back in the U.S. in the next three to five years. That will mean blockbuster business for the company.
In the meantime, Amaya Gaming expects between $1.62 billion to $1.74 billion in revenues and adjusted EBITDA of $670 million to $715 million. Net income guidance is between $367 and $415 million. If AYA stock hits the middle of that range, or around $391 million, that means it is presently trading at 11 times earnings.
That’s incredibly cheap for a company with this much cash flow, and on the non-U.S. gaming possibilities alone.
Again, this will require patience.
Value Stocks to Buy: Enova International (ENVA)
Finally, I have a more speculative value play to consider.
Enova International (ENVA) is an online consumer lending company that has extraordinary cash flow and earnings.
Alas, the CFPB has issued proposed rules that would kill much of Enova’s U.S. online short-term business. This comes on top of U.K. regulators gutting Enova’s operations there, forcing it to restructure to less-profitable products.
However, my sources deep in the lending industry tell me that if the CFPB doesn’t change its tune about the new rules, they will litigate — and they have a multitude of viable challenges, not the least of which is that the CFPB has never proven consumer harm from the products.
I just went long yesterday as the stock reached $11.50, which I regard as stupid cheap for a stock with the potential for multibagger upside and limited downside.
Again, Enova might be too speculative for many investors, and that’s fine. You can do just fine with the better-known names on the list.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance, and is a nationally recognized expert in consumer lending. As of this writing, he owned WYNN, AAPL, XLE, AHT, AYA, ENVA, and was considering buying PRAA. He also is long January 2017 WYNN $115 calls, as well as ENVA March 2016 $17.50 and $20 calls.