Many analysts believe current stock valuations resemble the dot-com era. The market’s day-to-day movements are certainly turbulent. But in the long run, returns tend to follow somewhat predictable upward trends. Regardless, picking stocks to buy in this environment becomes a tricky proposition. You do not want to be overpaying for a company with little to no upside.
For that very reason, I curated a list of the seven best stocks that have the greatest margin of safety based on their computed fair value relative to their price. Before we go a bit further, it’s important to understand what fair value is.
When you boil everything down, every investment, whether it’s buying a home or purchasing a stock, the logic remains the same. You pay a certain amount of money for a stream of future income. The trick is to decide what price to pay for the stock or asset.
Let’s say a stock is trading at $10 a pop at the moment. You do your calculations and assess the stock’s fair price per share to be $30. You pay $10 for the stock, and in return, you receive a stream of income valued at $30. That’s a great deal.
This list is concerned with finding stocks that have a wide margin of safety. The fair value is estimated by forecasting a company’s future financial performance using a discounted cash-flow model that factors projections for the company’s income statement, balance sheet and cash-flow statement.
Without further ado, here are seven names with the greatest margin of safety:
- Maersk (OTCMKTS:AMKBF)
- Clearway Energy (NYSE:CWEN-A)
- Thai Beverage (OTCMKTS:TBVPF)
- CaixaBank (OTCMKTS:CAIXY)
- M&G (OTCMKTS:MGPUF)
- Nippon Paint (OTCMKTS:NPCPF)
- Lincoln Educational Services (NASDAQ:LINC)
Stocks to Buy: Maersk (AMKBF)
Margin of Safety: 35%
Since 1996, Maersk has been the largest container shipping line and vessel operator in the world. The Danish integrated shipping company has had a rough time as of late. And can you blame it? The company has had to deal with an incredibly stressed container shipping market due to Covid-19.
But container companies are set to have a blockbuster year as vaccines continue to roll out. Maersk has published its own guidance, showing container rates returning to normal by the end of 2021. So, when you invest in this one, you are essentially purchasing a position in a recovery play.
On a trailing-12-month (TTM) basis, earnings per share (EPS) are up 426.9%, and the top line has increased by 11.2%. As a result of these outstanding returns, AMKBF has outperformed the S&P 500 by 116% and its sector by 102.4% in the past year.
Nonetheless, this price momentum has thrown a spanner in the works since the upside has shrunk considerably. But after its massive fiscal year 2021 upward adjusted guidance, I believe Maersk still has upside potential. That much is exemplified from its high margin of safety.
Clearway Energy (CWEN.A)
Margin of Safety: 38%
Among renewable energy stocks to buy, Clearway Energy is a very attractive investment. Clearway holds a portfolio of eight gigawatts in contracted renewable and conventional energy generation and thermal infrastructure assets. In addition, the company has a 10-GW pipeline of projects. Of this, 5.8 GW are late-stage projects.
In the last three years, the company reported an increase in the bottom line and the top line of 19.8% and 4.5%. Considering its development pipeline, one can expect positive growth for several more quarters. What is most impressive about Clearway Energy is the company’s cash position, which stands at $831 million as of the first quarter-end. With that kind of cash, the company can continue to build out its pipeline and engage in aggressive M&A activity.
On a separate note, Clearway has guided for annual dividend growth of between 5% and 8% through 2023. Therefore, the dividend yield of 5% is attractive on its own, without the bells and whistles of the development pipeline.
Stocks to Buy: Thai Beverage (TBVPF)
Margin of Safety: 50%
Thai Beverage is Thailand’s largest — and one of Southeast Asia’s largest — beverage companies. The company is owned by Thai Chinese billionaire business magnate Charoen Sirivadhanabhakdi and has distilleries in Thailand, the UK and China.
On account of its headquarters in Thailand, the company does not garner many headlines in the States. But Thai Beverage’s products, which include alcoholic and non-alcoholic beverages and food, usually enjoy stable demand regardless of the state of the broader economy.
Over the last three years, revenue is up 3.8%, and EPS has jumped 5.9%. But the last year has seen sales drop 5.4%. Considering consumer discretionary companies tend to be more sensitive to the overall business cycle, the lack of sales performance is not surprising.
HSBC (NYSE:HSBC) has given a price target of $0.95 on the stock, representing more than 40% upside for shares. Over the last 52 weeks, Thai Beverage has traded on the pink sheets between $0.56 and $0.85.
Margin of Safety: 50%
Spanish banks are not considered the strongest in the Eurozone. Notwithstanding, CaixaBank has performed very well during the last few quarters, despite a very stressed atmosphere. With a pre-provision and pre-tax income of approximately 3.8 billion EUR in 2020, CaixaBank stands head and shoulders above larger peers like Banco Santander (NYSE:SAN) and Banco Bilbao Vizcaya Argentaria (NYSE:BBVA), which have been expanding into territories outside of the Iberian peninsula. CAIXY, meanwhile, is focusing solely on the Spanish market.
CaixaBank was able to navigate through the crisis without too many hiccups. Net interest income was 4.9 billion EUR resulting in a pre-impairment income of 3.83 billion EUR in 2020. Net interest income did fall by almost 3%. Considering the ultra-low yield environment, these numbers are very impressive.
Due to ECB regulations, the company has had to put a lid on dividend payments. The bank intends to propose a dividend of 2.68 cents per share, the maximum under ECB regulations. Overall, CaixaBank is a profitable enterprise and is moving along smoothly. The low dividend is not because of low net income but rather due to a dividend ceiling imposed by the ECB on all banks in the Eurozone.
In September last year, Caixabank agreed to buy Bankia for 4.3 billion EUR to create Spain’s biggest domestic bank. The acquisition will likely result in some exceptional (restructuring) expenses in 2021 and 2022. But the merger will help Caixabank emerge as a more powerful bank in the longer run.
Stocks to Buy: M&G (MGPUF)
Margin of Safety: 29%
M&G is a global investment manager incorporated and with its principal place of business in England. It is an attractive pick among UK dividend stocks. But again, much like Spanish bank CaixaBank, it doesn’t attract as much attention as some of the major players in the U.S. financial services sector.
The asset manager yields 7%, making it one of the highest prospective yields amongst FTSE 100 companies. Last year, the post-tax profit was £1.142 billion, so the company has plenty of cash to cover the dividend twice over.
On a TTM basis, M&G has grown its top line by 18.1%, and the net income grew by 4.5%. Considering total fee-based revenues of £1.22 billion and post-tax profit was £1.142 billion, the profit margin is astonishingly high. But this is an asset-light global investment manager we are talking about, so it makes sense.
With its limited history as an independently listed company since it was spun out of Prudential (NYSE:PUK) in 2019, M&G does not have a long history of strong dividend payments. Its most recent annual report reemphasized its “current policy” of a stable or increasing dividend. Still, among its peers, it stands out because of its yield and profitability.
Nippon Paint (NPCPF)
Margin of Safety: 41%
Nippon Paint is a Japanese paint and paint products manufacturing company, the fourth largest globally based on revenue in 2020.
The company is divided into four operating groups — the automotive paints division supplies temperature-control coatings for the body of cars. The industrial division sells paints for trains and ships. The trade-use paints division sells paints and coatings for buildings, bridges and roads. The surface treatments division sells anti-corrosive and anti-rust coatings for metal products and electronics.
Geographically, the company organizes itself into three divisions: Japan, Asia and the Americas, with revenues mostly coming from Japan.
In 2020, Nippon saw sales increase by 12.9%, and profit soared by 21.2%. The performance in the decorative paints business remained strong due to robust demand brought by enhanced home improvement activity brought on by the pandemic. Again, this is a very stable performer with several years of success under its belt. It’s about as safe as you can get.
Stocks to Buy: Lincoln Educational Services (LINC)
Margin of Safety: 39%
Lincoln Educational is one of the best for-profit educational stocks to buy. It offers diversified career-oriented post-secondary education, with its main target market being recent high school graduates and working adults.
The company is arranged into three business segments: Transportation and Skilled Trades, Healthcare and Other Professions (HOPS), and Transitional. The biggest revenue contributor is the Transportation and Skilled Trades segment, which offers academic programs for those who want to learn skilled trades such as welding and manufacturing.
The education services company is all set to have a bumper year. The United States economy added a robust 850,000 jobs in June, far exceeding what economists had expected and a signal that American job growth is accelerating. Against this backdrop, people need fresh skills as they enter new roles. That is where LINC will come in handy.
The company’s first-quarter 2021 results reaffirm this narrative. Net income came in at $225 million, or $1.16 per diluted share, compared to $52 million, or $0.15 per share, last year. Lincoln returned $186 million to shareholders during the quarter, including $105 million in share buybacks.
“First quarter results were strong as strategic actions taken to drive top and bottom line growth led to increased operating revenues and expense efficiency in all our businesses,” remarked Dennis R. Glass, president and CEO of Lincoln Financial Group.
As the U.S. economy continues to add jobs at a decent clip, keep your eyes on this one.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio. Faizan does not directly own the securities mentioned above.