I’m traditionally a value investor. Growth stocks scare me because once growth flags, the high flying stocks tend to crater.
Value investors require patience, but are often richly rewarded. I liken value stocks to finding gems that are all covered in soot and dirt, and need careful handling for their value to shine. They are the unloved stocks of the market.
When you examine today’s market, you’ll find tons of overpriced “safe” stocks and insanely valued “hot” stocks. But there are plenty of unloved stocks, and these often tread in the area that Peter Lynch talked about. They are businesses that people don’t find sexy, or they are somehow unloved stocks because they do something distasteful.
Not all unloved stocks will see their true value become realized. Some just remain unloved forever. However, having a few unloved stocks in your portfolio is a necessity.
Unloved Stocks to Buy: Seagate Technology PLC (STX)
Seagate Technology PLC (STX) is actually on my radar thanks to my father, who likes the stock.
This $6.4 billion data storage provider is one of the big providers of free cash flow in the technology sector. It regularly pumps out about $2 billion in free cash flow and only pays out about 40% of it as a dividend. But what a dividend! It’s now at 12%, thanks to STX stock falling from $56 to $21.
Everyone seems to hate Seagate right now, probably because they think that the slowing PC market means stuff won’t need to be stored. That discounts all the data generated by our consumer handhelds and everything else we buy.
Heck, STX stock is now at 11x forward earnings, has $1.2 billion in cash and business is doing fine. This is one of the unloved stocks that deserves some loving by the market. Dividend investors should like it.
Unloved Stocks to Buy: BP Plc (ADR) (BP)
After the Gulf oil spill, many people wondered if BP Plc (ADR) (BP) would ever recover.
Amazingly, after falling from $70 to $28, it rebounded to $52. However, the oil price crash hit BP stock again, and it just bounced off $27, and trades at $32. If there was ever an unloved stock, it’s BP.
I get it. There are a lot of rumors and concerns swirling around BP stock, but the truth is that the worst has passed and BP has a solid balance sheet. It has $26.5 billion in cash, $28 billion in long-term investments and $49 billion in long-term debt that costs it a mere 2.6% in interest every year.
BP recorded a $6 billion loss in FY15, and a modest $4 billion profit in FY14. However, in FY13, when the oil patch was running at normal capacity, it delivered more than $23 billion in profit. Add in a 7.6% yield, and BP stock is worth looking at.
Unloved Stocks to Buy: Icahn Enterprises LP (IEP)
Poor Carl Icahn! Can you imagine him being unloved?
Amazingly, his Icahn Enterprises LP (IEP) is trading at $54, down from an all-time high of $128. With a $7.2 billion market cap, the market seems to have lost faith in a man who is — literally — a better investor than Warren Buffett.
For the long term, I think it is extremely unwise to bet against Carl Icahn. Yes, he makes big bets and some of them strike out, but for the most part, he’s a big winner.
In Q1, for example, he started reaping the rewards of buying into the auto parts sector, with that sector’s revenues increased by 26%. Railcar revenues rose 16%, gaming revenues were up 13% and home fashion was up 6%.
Yet despite the discount and what is now an 11% yield, Uncle Carl wants your attention.
Unloved Stocks to Buy: Expedia Inc (EXPE)
This $16.7 billion company’s stock is 20% off its 52-week high, and it is a now-unloved stock after enjoying a lot of attention the past few years.
I’m talking about Expedia Inc (EXPE). I’m baffled by this. Q1 results weren’t quite as fantastic as previous quarters, yet they were still solid. Travel has been booming. Online travel agencies also have a huge advantage — they have very little capital expenditure needs. Thus, operating cash flow excels.
Last year, EXPE did put more money into capex, so FCF was only about $600 million, compared to $1 billion the year before. Yet real net income growth in FY15 was about 75%, with net income rising from $398 million to $764 million.
Sure, nobody likes to see slowing growth, but things are going gangbusters in the sector, and there are plenty of acquisition targets for EXPE to gobble up.
Unloved Stocks to Buy: OneMain Holdings Inc (OMF)
Next, we have a $4.2 billion company that used to be a $7 billion company. It is a combination of two consumer finance entities that recently merged into a massive, country-spanning provider of all kinds of consumer credit.
OneMain Holdings Inc (OMF) is totally unloved for two reasons.
First, investors still think that one of its predecessors is holding tons of toxic mortgages. Those liabilities have been mostly run off and provide no impact on earnings.
Second, investors think the products offered by OMF will either be part of the Consumer Financial Protection Bureau’s coming rules on payday lending (OMF doesn’t offer that product) or future assaults (highly unlikely).
Meanwhile, OMF is a cash machine, generating hundreds of millions of dollars in free cash flow.
Unloved Stocks to Buy: Valeant Pharmaceuticals Intl Inc (VRX)
You want to hear my craziest thought? Perhaps the single most unloved stock on the market was destroyed by a famous short seller who is now long the stock.
Heaven knows that VRX is in deep trouble. However, there are times when a stock can get destroyed like this and yet still have life in it.
That Left has said what he did is an extremely telling statement. Even he thinks the stock is oversold based on recent events, and that seems like a green light to at least go long for a trade. Just set your stops very tight.
As of this writing, Lawrence Meyers had no position in any security mentioned.