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With the major stock indexes trading at fairly lofty multiples of earnings, finding true bargains is easier said than done. Shares of many great companies have been pushed up to unattractive levels, and other companies that look cheap on the surface are dealing with serious problems. The good news is that there are still some great values out there. Best Buy (BBY 1.41%), General Motors (GM -0.47%), and Cisco Systems (CSCO -0.27%) are three good examples. I own all three, and I think that each stock is worth a look.
Best Buy
Consumer electronics retailer Best Buy is a polarizing stock. The company has made quite the comeback over the past few years, driven by a turnaround strategy centered around improving customer service, slashing unnecessary costs, and investing in e-commerce. But the future of brick-and-mortar retail in general is uncertain, with Amazon.com viewed by many as an unstoppable juggernaut that will destroy all competitors in its path.
There's a reason why Best Buy has focused so heavily on improving its customer service over the past few years. The main advantage that the company has, other than scale, is its ability to cater to consumers that aren't particularly tech savvy. Buying a laptop or tablet online is great if you know exactly what you want. If you don't, or if you want to try things out in person, Best Buy is often the best option. And since the company now price matches online retailers including Amazon in-store, the practice of showrooming doesn't make much sense.
Best Buy's revenue is dependent on the consumer electronics industry as a whole, which has been in a funk in the U.S. due to a lack of exciting new products. NPD reported a 1.9% year-over-year decline in industry sales during the first quarter, compared to roughly flat comparable-store sales for Best Buy. That means that Best Buy is likely winning market share.
Best Buy produced $2.78 in per-share earnings last year, adjusted for restructuring and other one-time charges, putting the P/E ratio at just about 11. The company's balance sheet is strong, with about $3 billion of cash compared to $1.4 billion of debt, and a 3.7% dividend yield makes Best Buy a solid dividend stock. The market remains overly pessimistic, giving investors the chance to scoop up shares of Best Buy at a great price.
General Motors
General Motors expects to generate between $5.25 and $5.75 in adjusted earnings per share this year, putting the current stock price of around $29.50 at just 5.4 times the midpoint of this range. The stock also comes with a dividend yield in excess of 5%.
Why is GM so cheap? Part of the reason is pessimism about the future. The annual rate of automobile sales in the U.S. has recovered to pre-recession levels, raising concerns that the peak has been reached. Combined with general economic uncertainty and the memory of the auto bailout of 2009, investors simply don't believe that the good times will last forever.
GM is a far leaner company today compared to the "old GM," and its breakeven point in the U.S. is well below the current pace of sales. According to CEO Mary Barra, annual U.S. auto sales would need to fall to 10 or 11 million before the company would post a loss. In 2015, 17.5 million vehicles were sold in the United States.
A severe downturn that plunges GM into the red certainly isn't impossible, but I think the market is being overly pessimistic. A decline in earnings at some point in the next few years may be unavoidable, but a mid-single-digit P/E ratio gives investors a sizable margin of safety.
Cisco Systems
Networking hardware giant Cisco doesn't get the credit it deserves. The company dominates the network switching and routing markets, and growth businesses like collaboration and security have been driving revenue growth. Cisco is a slow-growing company overall, but it trades at such a low valuation that not much growth is necessary to justify the stock price.
Cisco has generated $12.7 billion of free cash flow over the past 12 months, putting its market capitalization at just 11.5 times this number. If you back out the $34.9 billion of net cash on its balance sheet, that ratio falls to just 8.7. There's some nuance here: Much of Cisco's excess cash is overseas and can't be brought into the U.S. without paying taxes, and the free cash flow includes about $1.5 billion of stock-based compensation that should probably be backed out. But anywhere in the ballpark of 10 times free cash flow is a great deal.
There are some risks that come along with investing in Cisco. Technology changes fast, and with cloud computing currently upending the entire IT industry, there's no guarantee that Cisco will be able maintain its enviable position. For investors willing to accept that uncertainty, a low price and a solid 3.6% dividend yield make Cisco a great stock to buy.
