Value stocks are generally defined as those whose underlying businesses have consistent revenue and profitability and that trade at low valuation relative to their earnings or other metrics. The general idea of value investing is to find the companies that are trading at a substantial discount to the intrinsic value of their businesses. Obviously, this is easier said than done.
However, there are some value stocks that look like exceptionally good bargains that could be worth a closer look. With that in mind, here are five stocks in different industries and with various levels of risk that look extremely cheap right now considering their future potential…
Of course, if you want to learn how to invest in value stocks the right way, be sure to first check out our guide on How to Invest in Value Stocks before you get started.
5 top value stocks to buy now
|Company (Symbol)||Sector||Business Description|
|General Motors(NYSE:GM)||Consumer discretionary||Automobile manufacturer|
|Simon Property Group(NYSE:SPG)||Real estate||Owns and operates shopping malls|
|Wells Fargo(NYSE:WFC)||Financials||Commercial banking|
|AT&T (NYSE:T)||Communications||Telecommunications services|
As I mentioned, these five stocks look like tremendous bargains, so let’s take a closer look at each company’s business, its valuation, and why it could be such a great buy for patient long-term investors.
General Motors: Absurdly cheap with promising growth prospects
General Motors is one of the lowest-priced stocks in the market on a price-to-earnings basis. As of July 29, 2019, the company trades for about 6.6 times its earnings over the previous 12 months, and this is actually on the high end of the company’s recent valuation history.
To be clear, there are some significant risk factors of which investors should be aware. For starters, trade tensions could ultimately cost GM money. A good amount of the company’s manufacturing is based in Mexico, and its largest market is China.
Furthermore, the auto manufacturing business is a highly cyclical one; General Motors, along with most other major auto manufacturers, is facing a significant slowdown. Auto sales plateaued in 2017 and continue to fall, with GM’s sales down 1.5% year over year in the first quarter of 2019. Plus, it’s important to keep in mind that a worse-than-expected economic slowdown in the U.S. could cause sales to drop even more.
General Motors is a great play on the auto industry both in the current state of the industry (it earned net income of more than $8 billion in 2018) and in the future, because GM has major investments in autonomous vehicle technology as well as being one of the leaders in all-electric transportation. In fact, through its Cruise autonomous vehicles unit, GM has a goal of introducing its first self-driving vehicles to the market by the end of 2021, and it’s rolling out a ride-sharing service based on this self-driving technology. Its Cruise autonomous vehicles business is now valued at $19 billion all by itself.
In addition to automation and electric vehicles, there are other reasons to have a positive outlook on General Motors’ future. The company is investing heavily in its Cadillac brand with a new lineup of crossovers and refreshed sedans. It’s too early to judge how successful this will be, but luxury brands generally run at high margins, so a boost in sales could translate to major profits.
The company is also doing a great job of capitalizing on the industry trend toward more full-size trucks and SUVs. Crossover SUV sales are up 17% year over year, and larger truck-based SUV sales grew 20% — both highly profitable categories compared to smaller cars.
The bottom line on General Motors is that this is a solid company on the forefront of the automotive industry. Its current valuation suggests that the potential negativity in the industry over the next few years is already priced in and more.
Simon Property Group: Major competitive advantages over other mall owners
Simon Property Group is a real estate investment trust, or REIT, that owns and operates a portfolio of higher-end malls and outlet shopping centers. While many investors are understandably hesitant to get involved with any type of retail investments given all of the headwinds affecting the sector over the past several years, it’s important to realize that Simon is different than most other mall and shopping center operators.
For one thing, Simon is a massive company. Excluding telecommunications companies, Simon Property Group is the largest real estate investment trust in the United States. The company’s Premium Outlets shopping centers have a dominant leading market share in the outlet shopping industry, and its “Mills” brand of malls are some of the most valuable shopping properties in the entire world. This not only gives it the efficiency advantages that come with scale but also means that Simon has tremendous financial flexibility to keep up with changing consumer trends and to create the best shopping destinations in the market.
One way Simon has been repositioning its portfolio is by creating mixed-use shopping destinations that incorporate nonretail elements like hotels, office spaces, and apartments. Simon calls these “live, work, play, stay, and shop communities,” and there were more than 30 redevelopment and expansion projects taking place as of March 2019 in Simon’s portfolio with this vision in mind. Many of these are taking place in space formerly occupied by department stores like Sears, whose bankruptcy is seen by Simon as one of its best opportunities to innovate. Others are additions being built from the ground up, like a 430-unit apartment property and two hotels that are under construction at three of Simon’s properties.
The benefit here is twofold. For one thing, these types of additions help diversify Simon’s revenue stream away from just retail. Additionally, this provides a built-in source of foot traffic for Simon’s retail tenants.
Furthermore, Simon treats the retailers who occupy the company’s space more like partners than tenants. The company actively invests in omnichannel retail, such as with its recently launched Shop Premium Outlets online outlet-shopping platform. And Simon invests in things like e-sports and augmented-reality gaming in order to help increase traffic to its properties.
The proof of the company’s business model is in the numbers. Simon’s malls have not been hit by the retail slowdown nearly as much as most peers. In fact, in the 12-month period ending March 31, 2019, retailer sales per square foot in Simon’s properties actually grew by 3.1%. This has allowed Simon to increase its rent steadily over the past few years. In short, the company’s retail space is some of the most desirable in the industry, so as other retail properties continue to decline, retailers will gravitate toward space where there’s been a proven track record of sales growth, even in the new retail environment.
The bottom line is that as the retail landscape evolves, Simon Property Group is likely to gain market share and get even stronger. And thanks to the uncertainty surrounding the retail industry, the company has been trading at a very low price-to-FFO valuation (the REIT version of price-to-earnings) for several years.
Teva Pharmaceutical: The best value in healthcare?
Teva Pharmaceutical is one of the worst-performing stocks in the market, down by about 82% over the five-year period ending June 30, 2019, despite a 50% rise in the S&P 500 over the same period.
The company is the largest generic-drug producer in the world, and as such, the sales of generics account for roughly half of its revenue. Teva also has several major brand-name drugs in its portfolio, including Copaxone and several respiratory drugs.
Despite its prominence, there are a few good reasons for Teva’s poor stock performance:
Debt. Teva Pharmaceutical carried $28.9 billion on its balance sheet at the end of 2018 — more than three times the company’s market capitalization. That’s down from 2016, when its debt totaled $36.9 billion following its leveraged buyout of Actavis for $39 billion. Clearly its debt has fallen considerably, but Teva has a long way to go to get back to what anyone would consider a reasonable debt load.
Litigation risk. Teva has been sued by 44 states over opioid sales; potential fines are estimated to be as high as $4 billion. Furthermore, Teva eliminated its dividend in 2017 — a smart move when it comes to freeing up cash to reduce debt but not likely to make income-seeking investors particularly happy.
Increased competition. The FDA has ramped up approval of generic drugs in recent years, which has resulted in pricing pressure on its generics and rapidly falling sales for some of Teva’s brand-name drugs. That is particularly true of Copaxone, which accounted for about 20% of Teva’s sales in 2016 before generic competitors started to win approval. In fact, between increasing generic competition to Copaxone and pricing pressure on the rest of its products, Teva’s sales fell by an alarming 16% in 2018.
The good news is that Teva is an extremely cheap value stock. As of July 29, 2019, Teva trades for just 3.3 times 2019’s expected earnings — a remarkably low multiple, especially considering that earnings are expected to rise in 2020. If Teva is able to overcome its significant issues and its litigation costs end up lower than feared, this could end up being one of the best long-term bargains in the market.
Wells Fargo: Ready to turn the corner?
For the better part of the past few decades, Wells Fargo was considered to be…
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