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10 Stocks to Buy Currently Selling at a Discount to Free Cash Flow


stocks to buy - 10 Stocks to Buy Currently Selling at a Discount to Free Cash Flow

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If you’re looking for stocks to buy that are selling at a discount, that shouldn’t be too hard.

According to Morningstar.com, the past year delivered one of the worst years on record for value stocks. At least, when compared to growth stocks. Large-cap growth funds averaged a return in 2020 of 34.8%, 32 percentage points higher than large-cap value funds. 

32 percentage points. That’s an average annual return of 2.8% for large-cap value funds. I bet you could find a high-interest savings account that gives that a run for its money. 

Value supporters continue to bang the drum for stocks to buy that are selling at a discount. Morningstar’s data shows that the disparity isn’t confined to just large-cap stocks: mid-cap value stocks underperformed their growth brethren in 2020 by 34.5%, while small-cap value stocks underperformed by 33.1%.

Across the board, value stocks got taken to school. One wonders if the mean reversion of value stocks is ever going to materialize. Value investing may have taken a permanent hiatus. 

Here are 10 stocks to buy that are selling at a discount for those who still hold hope. 

For this article, my 10 selections will include at least five different sectors, have a price-to-free-cash-flow multiple less than 20, and have at least $100 million in trailing 12-month free cash flow.

  • Commercial Metals (NYSE:CMC)
  • Discovery (NASDAQ:DISCK)
  • Camping World (NYSE:CWH)
  • Foot Locker (NYSE:FL)
  • Whirlpool (NYSE:WHR)
  • JM Smucker (NYSE:SJM)
  • Orix (NYSE:IX)
  • CVS Health (NYSE:CVS)
  • Acuity Brands (NYSE:AYI)
  • CGI Group (NYSE:GIB)

Yes, this will eliminate some industries, but the task at hand is to recommend stocks that will actually do well over the next one, three, and five-year periods.

Happy investing!

Stocks to Buy Selling at a Discount: Commercial Metals (CMC)

a person presses "buy" on a smartphone
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First up on this list of stocks to buy is Commercial Metals. The company operates steel mills, fabrication plants, and metal recycling facilities in the U.S. and Poland. It has a trailing 12-month (TTM) free cash flow (FCF) of $450 million, an enterprise value of $3.2 billion, and a P/FCF of 7.     

Why’s it on my list? The company reported Q1 2020 results on Jan. 11 that were better than expected.  

Commercial Metals had sales of $1.39 billion in the first quarter, up slightly from a year earlier and 2.4% higher than the consensus estimate. On the bottom line, it earned 58 cents in the first quarter, one cent better than the analysts were expecting. In Q4 2020, the company delivered a 32% earnings surprise. 

As Chief Executive Officer Barbara Smith said in its earnings press release, the company delivered its seventh consecutive quarter with adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) near or above $150 million. 

With plenty of cash on its balance sheet and long-term debt that’s under control, Commercial Metals could surprise investors in 2021. 

Discovery (DISCK)

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If you’re like me, you probably are familiar with Discovery because it owns HGTV, a hopelessly addictive channel for anyone interested in home renovation and design. 

However, it didn’t always own the home of Home Town and other great shows. It had to buy HGTV and other channels for $12 billion from Scripps Networks Interactive in 2018. Scripps Networks was a media company spun off from E.W. Scripps (NASDAQ:SSP) in 2008.

Discovery has a TTM FCF of $3.03 billion, an enterprise value of $30 billion, and a P/FCF of 9.9.     

Why’s it on my list? 

It generates great cash flow, of course. But you have to consider what the launch of Discovery+, its streaming service, will do to its position in television media. 

I believe it will really help. And so does CEO David Zaslav.

“We think … that we can be very, very big,” Zaslav said on Jan. 4 about the streaming service’s launch. “That’s our bet, we’re putting a lot of resources behind it, and over the next couple of quarters we’ll be reporting out our numbers and then we’ll be projecting out how big big really is.”

Camping World (CWH)

Camping World (CWH) logo on a smartphone in front of an American flag background.
Source: IgorGolovniov / Shutterstock.com

It seems like I’ve been writing about Camping World a lot in recent months. In November, I named it one of 10 stocks to buy for investors under 30. Less than a month later, I included it in a list of 10 undervalued stocks ready to blast off.  

What specifically do I like about the operator of recreational vehicle dealerships? 

Well, there’s the fact I enjoy CEO Marcus Lemonis’ work on CNBC’s “The Profit.” However, from a business perspective, I think its peer-to-peer RV rental marketplace it’s launching in 2021 will deliver plenty of future buyers.

That’s a good thing considering top-of-the-line RVs aren’t cheap. 

Camping World has a TTM FCF of $820 million, an enterprise value of $4.9 billion, and a P/FCF of 6.

If nothing else, owning CWH stock would be entertaining with Lemonis at the helm. However, on a serious note, long-term, I think the trend to outdoor entertainment works in its favor.   

And it’s one of the cheapest options on this list of stocks to buy.

Foot Locker (FL)

Source: Roman Tiraspolsky / Shutterstock.com

Riley analyst Susan Anderson recently upgraded Foot Locker to buy from hold and raised her price target by almost 50% to $58. As I write this, that’s 12-month upside potential of 21%.

I’ll take those returns, especially after 2020’s strong year. 

Anderson likes three things about Footlocker: 1) Americans will take their stimulus checks and spend it on sneakers, 2) It’s got excellent inventory control, and 3) It owns a chunk of GOAT Group, a platform for reselling sneakers.  

You have to like that the retailer is thinking innovation and growth instead of doing things the way they’ve always been done. 

“Making the moves to stay relevant with this digital consumer is really important to us,” said Foot Locker CEO Richard Johnson in February 2019 when it made the $100 million investment in GOAT. 

Foot Locker has a TTM FCF of $799 million, an enterprise value of $6.8 billion, and a P/FCF of 8.5.

I’m with the analyst. FL is ready to go on a multi-year run. 

Whirlpool (WHR)

the Whirlpool (WHR) logo on a corporate building
Source: Grand Warszawski / Shutterstock.com

As far as I can tell, the last time I wrote about Whirlpool was in April 2018. At the time, I said that Whirlpool stock was in for a bumpy ride.

My rationale for this assessment revolved around the fact the maker of fridges, stoves, laundry machines, and other home appliances was having trouble growing its operating margins. Never a good thing if you want investors to flock to your stock. 

“Whirlpool came close to hitting 8% operating margins in 2013, but it hasn’t been any closer since. Nothing in the company’s Q1 2018 results suggests this number is even on its radar. Right now, Whirlpool’s merely trying to hang on,” I wrote on April 30, 2018.

“At this point, I’d lean toward Whirlpool being a value buy, but I wouldn’t use your retirement portfolio to place a bet because the next 12-24 months could be a very bumpy ride.”

How’s it done since? WHR stock’s gained approximately 23% in the 33 months since, but not without a whole bunch of that volatility I mentioned. 

However, Whirlpool has a TTM FCF of $1.7 billion, an enterprise value of $16.5 billion, and a P/FCF of 9.7. The inverse of P/CF is FCF Yield. It’s currently 10.3%. Anything above 8% is value territory, in my opinion. 

Keep an eye on its operating margins. They seem to be getting slightly better but still aren’t consistently above 8%.  

JM Smucker (SJM)

company sign outside smucker's headquarters SJM stock
Source: JHVEPhoto / Shutterstock.com

It’s hard to believe that it’s been more than 12 years since Smucker bought Procter & Gamble’s (NYSE:PG) Folger’s coffee business. At the time of the deal, SJM shareholders loved the boost to profits the acquisition provided the company. 

Fast-forward to today. You have to wonder how many P&G shareholders stuck around — its shareholders got 53.5% of Smucker in the $3 billion all-stock deal — given the performance of SJM over the next 12 years. 

SJM stock gained 119% over 12.5 years, an annualized return (doesn’t include dividends) of 6.5%. Over the same period, PG stock delivered an annualized return of 5.6%. Even worse. 

Of course, if you bought the SPDR S&P 500 Trust (NYSEARCA:SPY), you would be sitting on an annualized return of 8.7%, well clear of both companies.

A quick look at the company’s second-quarter 2021 results shows that despite some of the woes its coffee business has had since Smucker bought Folgers, it still makes 62% more operating profits than its pet food business from 16% fewer sales. 

Say what you will about the acquisition, but it’s certainly delivering for shareholders.

With a TTM FCF of $1.3 billion, an enterprise value of $13.2 billion, and a P/FCF of 10.2, I believe SJM could be the best of the 10 value plays on my list.          

Orix (IX)

a person holding an iphone in one hand and a credit card in the othr
Source: apichon_tee/ShutterStock.com

It’s hard to believe that given a chance to write about Visa (NYSE:V) and Mastercard (NYSE:MA) in May 2020, I chose to go with a totally unknown Japanese financial services company called Orix. 

Surprise, surprise, Orix stock is up 47% since my article was published on May 14, 2020.

“Despite the fact I think Visa is an excellent stock, I still think you’ll be able to get a better buy point at some point in 2020. In the meantime, I came across a Japanese company that value investors ought to consider,” I wrote last May. 

As part of my argument at the time, I suggested that Orix was trading at less than half its five-year average price-to-cash-flow. Despite the appreciation over the past seven months, it is still trading below its five-year average. 

More importantly, at a multiple of 2.12 times cash flow — compared to Visa’s P/CF of 43.02 — it is still cheap compared to its five-year average. 

Take a closer look at this one of all the stocks to buy. It’s a diamond in the rough. 

CVS Health (CVS)

the exterior of a CVS pharmacystore
Source: Jonathan Weiss / Shutterstock.com

After several years of disappointing returns, CVS Health stock is off to a quick start in 2021. Up 6.6% year-to-date, investors are probably wondering if this is the beginning of a nice move higher or nothing more than a dead cat bounce. 

It’s hard not to notice that the health & wellness company has become far more female-orientated in recent months. First, the company’s board appointed Karen Lynch in November to become its new CEO on Feb. 1 to succeed Larry Merlo. 

On Jan. 6, 2021, CVS named Michelle Peluso its first-ever Chief Customer Officer. On Jan. 11, it hired Laurie Havanec as Executive Vice President and Chief People Officer. 

If you’re a CVS shareholder and care about ESG investing, the moves demonstrate its commitment to diversity in its management team. That can only mean more opportunities for women to climb the ranks. Statistics show that’s good for business.

With a TTM FCF of $12.6 billion, an enterprise value of $173.7 billion, and a P/FCF of 13.8, investors who take a shot on CVS stock can take solace in the fact that you’ll be paid a reasonable dividend (2.7% yield) to wait for the company’s health and wellness strategy to take hold. 

Patient investors only.  

Acuity Brands (AYI)

aculty signage (AYI) stocks to buy
Source: JHVEPhoto / Shutterstock.com

Talk about a stock that has taken it on the chin. You have to go all the way back to Acuity Brands’ 10-year performance to get a positive annualized total return. It’s 8.4%, almost 50% less than the entire U.S. markets over the past decade.

Unfortunately for the manufacturer of lighting solutions and building management systems, Acuity was leaking oil long before Covid-19 took hold in March 2020.

In January 2019, I wrote a story about seven S&P 500 stocks that needed a new CEO. Acuity CEO Vernon Nagel was one of them. 

If there’s a stock that has really disappointed in recent years, it would have to be Atlanta-based commercial lighting specialist Acuity Brands (NYSE:AYI), whose shareholders have seen three consecutive years of calendar-year losses,” I wrote on Jan. 30, 2019. 

“Up a little more than 4% on a total return basis year to date, CEO Vernon Nagel has got to deliver a lot more if he wants to remain in the job he’s held since 2004.”

Well, it turns out that Nagel and the board were already leaning in that direction. 

A year later, Nagel moved into the Executive Chairman position and the board hired one-time Walmart (NYSE:WMT) senior executive Neil Ashe as CEO. 

The reality is that Acuity’s sales peaked in fiscal 2018 (August 31, 2018 year-end) at $3.68 billion and $349.6 million in net income.  

The good news is that it’s got consistent free cash flow — TTM FCF of $440 million — and a P/CF of 10.1 based on an enterprise value of $4.3 billion

It’s cheaper than it’s been in the past five years. 

CGI Group (GIB)

white keyboard with "buy" written on a green enter key (stocks to buy)
Source: Shutterstock

It’s only appropriate as a Canadian that I leave Montreal-based IT-services provider CGI Group for last on this list of stocks to buy. 

CGI is one of those companies that seems to fly under the radar even though it has 76,000 employees at 400 locations worldwide, more than 50,000 clients, and generated more than CAD$12.2 billion (US$9.7 billion) in fiscal 2020 sales. 

The company’s dream is a simple one:

“‘To create an environment in which we enjoy working together and, as owners, contribute to building a company we can be proud of,’” states page 9 of its fiscal 2020 annual report. 

“This dream has motivated us since our founding in 1976 and drives our vision: ‘To be a global, world-class end-to-end IT and business consulting services leader helping our clients succeed.’”

While 2020’s results are nothing to write home about — a 0.4% increase in revenues and earnings per share growth of 4.0% — it had bookings of 11.9 billion CAD (US$9.4 billion) and a 22.7 billion CAD (US$18 billion) backlog as of Sep. 30, 2020. 

At the end of the day, it has a TTM FCF of 1.6 billion CAD (US$1.3 billion), an enterprise value of $21.9 billion, and a P/FCF of 16.8.  

You won’t get rich owning CGI Group, but you ought to do better than the markets as a whole. 

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2021/01/10-stocks-to-buy-currently-selling-at-a-discount-to-free-cash-flow/.

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