Are Hewlett-Packard and Valero Energy Bargains Right Now?

These stocks sport great growth potential, too.

Jul 23, 2014 at 10:54AM

Credit: Stuart, Flickr.

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some large-cap value stocks to your portfolio but don't have the time or expertise to hand-pick a few, the Guggenheim S&P 500 Pure Value ETF (NYSEMKT:RPV) could save you a lot of trouble. Instead of trying to figure out which stocks will perform best, you can use this exchange-traded fund to invest in lots of large-cap value stocks simultaneously.

Why this ETF and large-cap value stocks?
One way to up your chances of getting great investing results is to focus not only on great companies but also on ones that are undervalued and therefore offer a margin of safety. This ETF targets undervalued stocks based on price-to-book-value, price-to-earnings, and price-to-sales ratios that suggest strong value. It's also focused on large-cap stocks, which, in general, are more reliable than smaller, younger, upstarts -- after all, they've done a lot of things right in order to grow to their size.

This ETF sports an expense ratio, or annual fee, of 0.35%, which is well below the typical mutual fund's fees, and it recently yielded 1.3%. It has outperformed the S&P 500 over the past three and five years.

A closer look at some components
On your own you might not have selected Hewlett-Packard (NYSE:HPQ) or Valero Energy (NYSE:VLO) as large-cap value stocks for your portfolio, but this ETF recently counted them among its 50 holdings. 

Hewlett-Packard has struggled lately, with its stock averaging an annual 1.3% loss over the past five years, but that stock is up about 40% over the past 12 months. The printing giant has been hurt by the weak PC market, but it recently posted a 7% year-over-year gain in PC sales, while its printing and hardware businesses didn't do as well. One explanation is that Microsoft's ending support for Windows XP led to many companies replacing their PCs instead of just upgrading to newer software. Thus, it's likely more of a temporary sales boost.

The company, led by CEO Meg Whitman, has been working on turning itself around, in part via aggressive cost-cutting that featured enormous layoffs, to the tune of about 45,000 to 50,000 jobs. The company has elevated Whitman to the chairman role, which runs counter to sound corporate governance practices, especially from this company with a poor track record in that area. Corporate governance expert Nell Minow has said, "To unthinkingly give the same person the CEO and chairman role shows that they still don't get it." 

A bright spot is the company's hefty free cash flow of close to $8 billion annually. Hewlett-Packard bulls like its moves into areas such as cloud computing, 3-D printing, health care analytics, software, and mobile. They like its 1.9% dividend yield, too. The company's forward price-to-earnings (P/E) ratio of 8.9 is appealing, but that's roughly its five-year average and Hewlett-Packard's future remains rather uncertain at this point. Whether you buy depends on whether you think Whitman will pull off an ultimately successful turnaround. I'd like to at least see revenue start growing again before considering buying.

Valero Energy Corporation
Major U.S. refiner Valero Energy has been treating shareholders well, with its price up 38% over the past year and an average annual gain of 15% over the past 30 years. It has been profiting from the boom in shale oil and has been enjoying fat profit margins from Gulf Coast diesel. Its ethanol business has been booming, too. Its strong presence on the Gulf Coast gives it the advantage of access to imported crude oil as well as the ability to export refined products. New pipelines are now delivering cheaper U.S. oil to refine, boosting Valero's margins as it imports less.

Valero is poised to benefit from the proposed (and controversial) Keystone XL Pipeline, and has been investing in railcars to help bring in crude from inland fields. It has been making strategic investments that can lower its refining and transportation costs.

Valero Energy yields 1.7% and it has tripled its dividend payout since 2011. With single-digit P/E and forward P/E ratios, rising profit margins, and free cash flow topping $2 billion annually, its stock is appealingly priced, given its substantial growth drivers.

The big picture
It makes sense to consider adding some large-cap value stocks to your portfolio. You can do so easily via an ETF. Alternatively, you might simply investigate its holdings and then cherry-pick from among them after doing some research on your own.

Another compelling energy stock with great potential
Imagine a company that rents a very specific and valuable piece of machinery for $41,000 per hour (That's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable landslide of profits!

Longtime Fool specialist Selena Maranjian, whom you can follow on Twitter, owns shares of Microsoft. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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