Sometimes, investors just fall out of love with a certain stock. Maybe it’s because of a challenging environment, or a disappointment in earnings or an unrealistic valuation. At times, investors fall out of love with a stock that deserves to be unloved and just needs to be dumped. The fact is, most of the time, when investors’ hearts roam … there’s a good reason.
But then there are the “cherries.” These are stocks to buy because, while they’ve been battered, they still represent well-managed companies that have a strong economic engine.
As Warren Buffett has proven time and again, cherry picking those once-beloved stocks often delivers the best value. Because when investors do fall back in love with them, they come back in a big way.
If you’re looking to beat the market, consider these seven bargain stocks to buy that are just waiting for the comeback cannon to sound.
Stocks to Buy: Apple Inc. (AAPL)
This one is somewhat bewildering, one has to admit. A spectacular business like Apple Inc. (AAPL) lacks love from investors because of fear — fear that the company’s crown jewel, the iPhone, which represents roughly 68% of its revenue, will begin to lose dominance and market share.
But that fear is overplayed.
First, Apple has recently embarked on a new renewal program. In the program, Apple customers pay a monthly fee of $30-$45 (depending on the device) which allows them an annual upgrade of their iPhone. That guarantees that Apple will have steady cash flow from monthly subscription payments. Moreover, it removes the worry that each new iPhone model will be less popular, because users will be upgraded automatically.
And we haven’t even mentioned how the iPhone is just one part of a much bigger Apple environment that includes the iPad and Mac products, and more newly, Apple TV and Apple Watch. As Apple keeps bringing people into the ecosystem, they’re more compelled to buy other Apple products.
And despite worries about its revenue growth, Apple still can churn out profits thanks to net margins that still sit in the mid-20% area. That puts to shame competitors such as Samsung (SSNLF), with its 9.8% net margin.
Despite its strengths, AAPL stock has been battered down to a price-to-earnings multiple of just 10, which resembles a battered oil company than it does a technology darling.
Investors are being blinded by fear right now. Don’t miss out on buying Apple at these depressed valuations.
Stocks to Buy: Walt Disney Co (DIS)
Walt Disney Co. (DIS) has been butchered, and most fingers are pointed at ESPN, which continues to suffer from rising costs.
But in so doing, investors have chosen to ignore the long-term strength of DIS stock and strong earnings record.
Disney’s solid business model combines wide diversification with a strong connection among segments. Together, they give Disney an unmatchable advantage.
An example of the synergies Disney enjoys is its acquisitions of Marvel and Lucas FilmsOne classic example is the merger with Marvel and Lucasfilm. Disney tapped new audiences at theaters via movies in the Star Wars saga and among franchises like The Avengers. From there, the merchandise gears started to crank with toys and other products, and from there, Disney kept selling by jamming those franchises into its theme parks.
Meanwhile, Disney is a serial expectations-beater; the company has beaten or met earnings estimates every quarter for at least the past three years. That includes its most recent quarter, fiscal Q1, in which its $1.63 per share in profits beat the consensus estimate of $1.45. (Revenues of $15.24 billion were also better than the $14.75 billion mark set by Wall Street.)
Finally, the company is about to open its new Disneyland in Shanghai, which is expected to be a hit. and that is expected to be highly popular in Asia. Despite recent softness in the Chinese economy, investors should view this as a long-term value generator. It allows Disney to tap in on China’s mainland tourism even beyond its Hong Kong theme park. \
All of this was orchestrated by Bob Iger, who is viewed by many as one of the best CEOs in corporate America.
Investors are on focusing on short-term risk and ESPN’s woes. You should think a few more days down the road.
Stocks to Buy: U.S. Bancorp (USB)
U.S. Bancorp (USB) is among the best well-run banks in the US.
For one, USB is highly conservative. Unlike its peers that engage in complex businesses that are exposed to hefty regulatory supervision, U.S. Bancorp is more traditional, engaging instead in the good ol’ businesses of deposits and lending, which isn’t sexy, but certainly is safer.
This has allowed USB to avoid many landmines while staying highly profitable.
The strength of U.S. Bancorp becomes particularly evident when measuring the interest rate margin, a key barometer of a bank’s profitability. In that respect, USB stock shines. U.S. Bancorp’s interest rate margin is 3.1%, compared to 2.47% for larger bank JPMorgan Chase & Co. (JPM) and 2.69% for regional player PNC Financial Services Group Inc. (PNC).
Moreover, USB’s strong cash positions also come into play, as they fund a healthy dividend that currently yields 2.6%.
So, USB stock is safe, has a strong growth outlook and pays a handsome dividend … and yet it trades at 11 times next year’s earnings estimates? Something’s not right, and it’s most likely the bears.
Stocks to Buy: State Street Corp (STT)
State Street (STT) is among the largest asset managers and custodian banks in the United States. STT specializes in custodian and advisory services and, according to Morningstar, has roughly $28 trillion in assets under custody.
Many will recognize the exchange-traded fund management arm of State Street, State Street Global Advisors — the firm behind ETFs such as the SPDR S&P 500 ETF Trust (SPY) and the SPDR Gold Trust (ETF) (GLD)
But STT stock has been brutally hit by the global equities rout of the past few months. Of particular note: China’s stock market suffered a meltdown, which not only weighed on stock markets, but also commodities. Investors believed the massive outflows from stocks and ETFs would hit the custody and advisory business. And, of course, that is State Street’s bread and butter.
But that play is mostly done at this point. As the global selloff eases, investments will pour back into the stock market — including State Street’s products.
Not to mention the custodian business tends to gain from higher Federal Reserve rates, which is where we are heading.
Yes, STT’s profits have been stagnating. In 2015, earnings of $4.47 per share were down a dime from the year-ago period, but they still were higher than the $4.30 average of the past five years. And that also came on revenues of $10.3 billion, which was slightly better than the 2014 figure despite the aforementioned difficulties in its business.
At just 10 times earnings, STT is a steal. Cherry-pick this stock that will gain when equity appetites return.
Stocks to Buy: Chipotle Mexican Grill, Inc. (CMG)
Burrito slinger Chipotle Mexican Grill (CMG) was once an investment darling, but in the past few months, it has grabbed headlines in the wrong way.
CMG suffered a few incidences of E. coli outbreaks in some of its branches across the country, causing fear among diners and panic among investors. In turn, Chipotle stock was knocked down by almost half between its October highs and January lows.
But that scare is over now. The Centers for Disease Control officially declared Chipotle’s E. coli outbreak finished. Furthermore, Chipotle is reported to have taken broad measures in its restaurant chain stores to avoid such cases in the future.
One should remember that E. coli outbreaks aren’t always a death sentence.
This leaves CMG stock to be judged by its economic value. CMG has practically no debt, which means the company can use credit to increase its growth without raising risk too much.
Moreover, Chipotle is one of the pioneers in understanding fresh food in a fast-casual setting. Its products are fresh, premium and (considered to be) healthy.
And let’s not forget that Chipotle has minimum presence outside of the U.S., so the rest of the world is a potential growth source.
Stocks to Buy: Caterpillar Inc. (CAT)
Caterpillar (CAT) is the world’s largest construction and mining equipment maker … and unfortunately, that means CAT stock is exposed to a host of bruised commodity sectors.
Not the least of Caterpillar’s problems is the weakness in oil, which is in the doldrums thanks to a beleaguered mining sector, which lost its allure as China’s economic engine slowed.
Still, CAT is weathering the storm. While 2015 profits were down significantly (43%), there still were profits — of $2.1 billion, which was largely attributed to cost-control efforts. CAT stock also managed to generate more than $5 billion in 2015.
You can’t dismiss CAT’s very solid equipment leasing business. Even weak earnings for commodity producers don’t negate their need to renew equipment. Caterpillar’s ability to offer attractive trade-in deals for its tractors and heavy machinery is unmatched.
True, profitability is certainly down, but so is CAT stock, which is off nearly 30% since the start of 2015.
Most of the bad news is priced in here.
Stocks to Buy: International Business Machines Corp. (IBM)
IBM (IBM) is in choppy water.
IBM stock is being hit thanks to a 13-quarter streak of revenue declines, in part due to a tough transition of its business model from PC manufacturing to premium IT solutions.
Take for example a comparison between IBM and its largest competitor, Hitachi. IBM’s operating margin is roughly 20% while Hitachi’s operating margin is barely 5%. Moreover, IBM has the ability to create large-scale tailor-made solutions for its clients. That means that IBM’s clients tend to be much more loyal than is customary in this business.
And let’s not forget that IBM has its Watson supercomputer, which is gradually gaining more clientele in healthcare and other major sectors.
Investors are ignoring the greater profit potential of IBM’s new businesses and instead are focused on those declining revenues. That has driven IBM into the ground to a bargain-basement 9x P/E.
It’s time to pick up Big Blue.
As of this writing, Lior Alkalay did not hold a position in any of the aforementioned securities.