Warren Buffett may be the most successful value investor of our time, but even he had mentors. At age 20, a young Buffett stumbled upon Benjamin Graham’s book The Intelligent Investor. It was a pivotal moment in Buffett’s life, and to this day he credits Graham as one of his greatest teachers.
Graham’s value-investing philosophy was simple: Pay $0.50 to $0.70 to buy $1 of assets. With that in mind, we asked three Motley Fool specialists to cut through the clutter and find three stocks selling below their true value. Read on why…
Apache Corporation (NYSE:APA), Kroger (NYSE:KR), and XPO Logistics (NYSE:XPO) are on their lists.
Still undervalued but rising
John Bromels (Apache Corporation): If you don’t think a stock that’s risen more than 34% so far this year could possibly still be undervalued, you don’t know Apache Corporation. The well-managed oil and gas driller was one of the few independent U.S. drillers that didn’t cut its dividend during the oil price slump of 2014-2017. But the market showed Apache no love, pummeling the company’s shares worse than the vast majority of its peers’.
Apache’s share price dropped 71.3% between the beginning of 2014 and the end of 2018. That’s despite the company’s announcement of a massive oil and gas find in the Permian Basin of western Texas in 2016. It’s also despite the company’s production starting to show consistent growth since bottoming out in Q2 2018.
But the market may have finally caught on to Apache’s status as a deep value play. So far this year, shares have handily outpaced the overall industry, as measured by the SPDR S&P Oil and Gas Exploration & Production ETF, which has only risen 18.9%. However, it roughly tracks the increasing prices of crude oil. Brent crude prices have once again topped $70 per barrel, with WTI crude not far behind at about $64 per barrel.
With the big summer driving season just around the corner and crude-oil prices continuing to climb, industry trends look favorable to Apache. That makes April a fantastic time to consider buying this beaten-down driller.
Kroger is priced for Armageddon
Jamal Carnette, CFA (Kroger): Continuing the Buffett theme, the Oracle of Omaha famously stated that “you have to buy when there is blood on the streets.” That sums up the opportunity Kroger presents rather succinctly. The stock is trading at an enterprise-value-to-EBITDA ratio of 6.5, versus 13 for the S&P 500; the forward price-to-earnings ratio is 10, compared to the S&P 500’s 17.5.
Shares have been under pressure since Amazon announced it was buying Whole Foods. This risk appeared overstated, but that narrative changed with Kroger’s fourth-quarter earnings report, showing top-line contraction of 9.5% and margin erosion. However, this was an overreaction, on account of a convenience-store divestiture, an extra week in the year-ago period, and lower fuel prices for gas sales. Excluding transient or extraordinary items, Kroger increased total sales 1.6%. The company has been taking advantage of this bearishness by strategically buying up shares at low valuations.
One thing I’m watching is…
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