Now that the markets have come back to earth in 2016, it’s hard to tell the winners from the losers … because just about everything looks like a loser.
However, buried in the rubble are a number of attractive stocks to buy — quality companies that simply slid along with the rest of the market, and now are merely priced better than they were.
Rest assured that most stock analysts surveying the wreckage will go through the usual suspects — big, well-traded blue chips that everyone knows about, and that most smart money already has its eye on, for one direction or the other.
But if you’re looking for some stocks to buy that the market isn’t already starting to crowd into, consider the following list of seven stocks. They’re a little smaller, and they certainly don’t see much media spotlight, but they’ve got it where it counts — big potential upside.
In no particular order …
Value Stocks to Buy: Popular Inc (BPOP)
Puerto Rico has been through the wringer in recent months as its government continues to grapple with its $70 billion debt load. Will it or won’t it get a lifeline from Congress? Governor Alejandro Garcia Padilla questioned the actions of U.S. lawmakers this week, stating, “Denying any congressional assistance … on the basis that the commonwealth has not issued any financial statements is simply an excuse for inaction.”
Puerto Rico is broke, no question, but that doesn’t mean you should ignore its largest bank, Popular Inc (BPOP), which ranks among the largest 50 banks in the U.S. by assets.
In late January, Popular reported its 2015 year-end results, and they were solid despite the problems Puerto Rico is facing at the moment. Adjusted net income was $375 million for the year with a tangible book value per share of $42.18, a 17.5% increase from fiscal 2014. Financially sound, BPOP finished 2015 with a Tier 1 common equity ratio of 16.2%, 460 basis points higher than JPMorgan Chase & Co. (JPM).
At the end of the day, this is one of my seven value stocks to buy because BPOP trades at 0.62 times tangible book value per share compared to 1.22 times for JPM.
Problems or not, this is a quality bank being punished by investors, and once Puerto Rico’s issues are resolved, its stock price will take flight.
Value Stocks to Buy: Dillard’s, Inc. (DDS)
Greenlight Capital, David Einhorn’s hedge fund, upped its position in Dillard’s, Inc. (DDS) in the fourth quarter by 40.4% to 1.74 million shares. The hedge fund now owns 5.2% of the Arkansas-based department store, making Greenlight one of the company’s largest shareholders.
DDS has lost almost 50% of its value since its five-year high of $144.21 in April 2015 despite the fact it’s still generating a decent, if not spectacular, bottom line. For the first 39 weeks of fiscal 2015, DDS reported $185.3 million in net income compared to $201.4 million in the first three quarters of fiscal 2014, an 8% decline year-over-year.
At this rate, Dillard’s looks like it will finish fiscal 2015 with approximately $300 million in net income (10% less than in 2014), or $7.52 per share thanks to ongoing share repurchases that have lowered share count by 3.7 million over the past 52 weeks.
With an earnings yield approaching 11% compared to 9.5% for Macy’s, Inc. (M), it’s the better value buy when it comes to department stores.
Value Stocks to Buy: Tribune Media Co (TRCO)
There’s no money in media, right?
Tribune announced Q3 results in November that delivered growth from all its major revenue streams — advertising, carriage fees and retransmission fees.
Advertising, by far its biggest revenue generator (74% overall) saw an increase of 4.3% to $319.5 million excluding political advertising which was lower due to 2015 being an off-year for the political cycle; carriage fees jumped by 39% year-over-year to $19.5 million thanks to higher rates for the distribution of WGN America, its newly converted cable network (was a superstation) that reaches more than 80 million subscribers; lastly, its retransmission consent fees increased 20% year-over-year to $69.9 million on higher fees from retransmission consent agreement renewals.
Tribune announces Q4 results on Feb. 29, and management expects adjusted EBITDA of just less than $500 million on net revenue of at least $2 billion. That’s a current multiple of less than six times adjusted EBITDA which isn’t much compared to its peers who on average have P/E ratios more than double its multiple.
But the real value proposition and what makes it one of the seven value stocks to buy is its real estate holdings, 70% of which are premier redevelopment properties Chicago, Los Angeles and Florida, and is valued on the books at $650 million but could be worth as much as $1 billion or more than $10 per share.
This could be the best buy of the bunch.
Value Stocks to Buy: Penske Automotive Group, Inc. (PAG)
Who wouldn’t want to invest alongside Roger Penske, one of automotive racing’s most successful team owners on any circuit?
Of course, a share of Penske Automotive Group, Inc. (PAG) doesn’t get you an ownership interest in that side of Penske’s life. Rather, it gives you a partial interest in a massive car and truck dealership network that spans the U.S., U.K. and elsewhere.
2015 was quite the year, delivering record profitability.
Highlights included a 12% increase in revenue to $19.3 billion, a 4.8% same-store retail revenue increase, a 13.2% increase in EBITDA, and a significant increase in the number of cars and trucks sold at retail.
Penske might not have made quite as much per car, but at the end of the day it made up for the shortfall with a big jump in volume — and that’s ultimately what matters. With its stock down 30% over the past 52 weeks, its annual dividend of $1.04 is yielding roughly 30% at current prices.
PAG hasn’t had a good year since 2013, and 2016 is off to a bad start, but given the fundamentals, look for Penske to finally round the bend.
Value Stocks to Buy: Cal-Maine Foods Inc (CALM)
Since trying out the vegetarian lifestyle in recent months, my protein of choice has unquestionably been eggs: fried, scrambled, boiled and whatever other methods one uses to cook them. I’ve done it all.
Cal-Maine Foods Inc (CALM) is a vertically integrated egg producer based in Mississippi that looks to benefit from growing egg demand. Currently, it holds about 23% of the market share in the U.S. — a market that’s seen annual per capita egg consumption grow by more than 5% over the past five years, according to the USDA. People just like me are consuming 14 additional eggs each year on top of the 249 they already consumed during a 12-month period.
According to Cal-Maine, egg consumption has averaged 2% annually over the past three years, double the historical average. Again, that’s not a huge number until you multiply that increase by the approximately 52 billion shell eggs (CALM sold 12 billion, and it has 23% market share) sold in the U.S. in 2015.
Egg prices in 2015 were higher than they’ve ever been at $1.53 per dozen. Meanwhile the feed costs per dozen haven’t been this low since 2011. It’s the perfect storm. And yet Cal-Maine’s stock is off by more than 15% since October 2015.
While egg price volatility is indeed a considerable problem at the moment, it’s not enough of a concern to warrant such an overreaction to its stock. Soon enough, CALM will be back over $60.
Value Stocks to Buy: DST Systems, Inc. (DST)
If there’s a stock in this group of seven that investors haven’t heard of, it’s DST Systems, Inc. (DST) — a global provider of technology-based service solutions that enables clients to grow their businesses by providing exceptional customer experiences primarily through the safeguarding of critical information.
In short, they’re into big data.
DST stock has been on tear over the past decade, with its stock notching positive returns in nine of the 10 years (2008, unsurprisingly, was the down year).
Yes, DST is off to a slow start in 2016, off 7% year-to-date, and the company delivered some mixed results in its Q4 report at the end of January. And the general consensus is that Wall Street is going to go through a rough patch in 2016 and DST, as a big player in administering data for big financial services companies, is going to go along for the ride. So there could be more downside on this one.
The important thing to keep in mind is that DST has won some big accounts in recent months, and that’s going to help them get through this difficult time.
Is DST cheap? I think so. So does the website GuruFocus.com, which gives it a fair value of between $210-$220, depending on what valuation method one uses.
DST currently trades at about half that.
Value Stocks to Buy: ITT Corp (ITT)
ITT Corp (ITT) is working on a third straight losing year, with shares off 8% so far in 2016. The S&P 500 has beaten ITT by about 30 percentage points since the start of 2014. So … ITT is bound to come to life at some point, isn’t it?
Everything about ITT suggests this is a value stock: Earnings yield close to 11%, cash return of 6% and various ratios such as price-to-earnings that haven’t been this low since 2013 — just ready to deliver to the upside.
If only ITT stock had a catalyst.
Of the seven value stocks to buy, ITT is the one you’re going to need a great deal of faith to jump in at this point because its Q4 report did not inspire investor confidence. From CEO Denise Ramos:
“As we look ahead to 2016, we remain mindful of the ongoing volatility in the global macroeconomic environment and the impact these conditions will continue to have on our businesses. As a result, we will maintain our strong focus on managing those areas over which we have control by optimizing and aligning our businesses and their respective cost structures to drive enhanced long-term value for shareowners.”
The upside of this is that ITT delivered 12.8% adjusted operating margins in 2015, a company record. If the company can continue to control costs until growth is reignited, then this value stock might just be the biggest surprise in the bunch — in a few years.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.