5 Companies You Can Buy Today

The hardest part of investing is that the best time to buy is when you look and feel the dumbest doing it. Even investors who understand this, and most of us do, fail to implement it when the time comes. Most minds are not wired for contrarian thinking (which is pretty obvious). That's why Warren Buffett is rich, and most of us are not.

But give it a try. Read the headlines today. Read the commentary. Listen to the talking heads. The fear factor is back in the market, and it's mad as hell. Europe is slowly dying. The U.S. is on a path to a double dip. Housing is an unequivocal wreck. Analysts from nearly all industries are losing hope. Find me one positive headline from the past month, and I'll show you six foretelling doom.

If any of this gets your contrarian juices flowing, keep reading. I've got five cheap stocks you can buy today.

By the numbers
To find these stocks, I'm using my favorite valuation method: enterprise value over unlevered free cash flow. To elaborate:  

  • Enterprise value: Market capitalization plus total debt and minority interests, minus cash.
  • Unlevered cash flow: Free cash flow plus interest paid on outstanding debt.

The ratio of these two metrics shows what the most popular valuation techniques, namely the P/E ratio, do not. It shows what a company truly earns -- free cash flow with interest payments added back in -- in relation to enterprise value, or the value of capital owned by everyone with a stake in the company, both stock and bondholders.

This way, you, the shareholder, are forced to think about the interests and ramifications of bondholders. Why should you care? Because bondholders have to be taken care of before shareholders. In this sense, they're more important than you. Ignoring this simple truth -- basically, the concept of leverage -- has led to misery aplenty. GM shareholders will tell you all about it. If you owned a private business, this is the metric you'd naturally use to size things up. Think of it as a more comprehensive, more meaningful, P/E ratio.

Without further ado, here are five companies that look cheap:

Company

Enterprise Value to
LTM Unlevered Cash Flow

5-Year Average

CAPS Rating
(out of 5)

Gannett (NYSE: GCI  )

8.7

10.3

**

Reynolds American (NYSE: RAI  )

7.9

12.2

***

UnitedHealth (NYSE: UNH  )

6.0

12.0

****

Procter & Gamble (NYSE: PG  )

14.9

25.1

*****

VF Corp. (NYSE: VFC  )

8.3

19.5

***

Source: Capital IQ, a division of Standard & Poor's.
LTM = last 12 months.

Let's say a few words about these companies.

Gannett is the best company in an absolutely terrible industry (newspapers). While its competitors die a slow, painful death, Gannett is actually quite profitable, thank you very much. Its flagship service, USA TODAY, has held up better than most papers because it's a staple in places like airports, hotels, and gyms, where people who typically would never touch a physical paper often do so. Its one major drawback, a heavy debt load, is being handled quite efficiently by a managmenent team that's on a mission to get rid of it.

Reynolds American, the cigarette giant overshadowed by Altria (NYSE: MO  ) , has a 6.8% dividend yield, which is about as high as you'll find these days. Yes, the cigarette industry is up against new taxes, marketing laws, and the ever-present threat of litigation battles. But dominant players like Reynolds and Altria might actually benefit from the first two, as it's now nearly impossible for new competition to enter the marketplace. As for litigation threats, this has been a worry for decades, and the dividend yield you're being paid is ample compensation.

Last summer, I could see why investors were scared of insurance stocks like UnitedHealth. With the health-care bill pending and all sorts of noxious rhetoric spewing around -- death panels! nationalization! -- there was reason to be rationally scared. But substantially all of that risk is now off the table, and yet most health-care stocks haven't materially budged. On the whole, they're some of the cheapest stocks around. It's like there's a market moratorium on guts. Exploit that.

It's hard to exaggerate the power of Procter & Gamble. I'd call it the best consumer brand in the world, mostly because it's a collection of spectacular brands with the power of diversity -- a trait that others, like Coca-Cola (NYSE: KO  ) , lack. By almost any valuation metric, P&G shares are cheap on a historical basis. China's decision to unshackle its currency could also be a boon for multinationals like P&G.

VF Corp. -- a diversified apparel manufacturer -- has a brilliant business model. It uses the stable and generous cash flow from assets like Wrangler Jeans and JanSport to capitalize high-growth prospects like 7 For All Mankind jeans and The North Face. The result is basically a cash-cow stalwart with a call option attached. It's a rare, and lucrative, arrangement.

Have at it
Any other cheap stocks on your radar? Share 'em in the comments section below.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Fool contributor Morgan Housel owns shares of Altria and Procter & Gamble. Coca-Cola and UnitedHealth Group are Motley Fool Inside Value recommendations. UnitedHealth Group is a Motley Fool Stock Advisor selection. Coca-Cola and Procter & Gamble are Motley Fool Income Investor choices. The Fool owns shares of Coca-Cola, Procter & Gamble, and UnitedHealth Group, and has a disclosure policy.


Read/Post Comments (27) | Recommend This Article (147)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 26, 2010, at 12:46 AM, grant224 wrote:

    BP?

    Definitely cheap..

    Obviously there is a little baggage, but I think it is unlikely BP will simply go under. I wouldn't go so far as to predict a time horizon (If I had to guess I would say this will blow over like every other news story fad (healthcare- Goldman Sachs/financial reform-now oil spill) but eventually it will rebound appropriately and it is very cheap at the moment.

    I do worry that the potential for punitive damages could be huge; if BP were to be forced to pay for the true economic harm caused by the spill then maybe could go under? But I guess that is what the escrow fund is for?

  • Report this Comment On June 26, 2010, at 4:28 AM, ximike1007 wrote:

    Very good article!

  • Report this Comment On June 26, 2010, at 9:37 AM, wax wrote:

    I am an individual investor and I have worked very hard to save the few dollars I have to invest. Explain to me why I want to pay anything for debt as required by the Enterprise Value calculation, which to me is for use by folks that invest in mutual funds?

    As to PG being cheap, on a historical basis, perhaps you should look again. For FY09 the company had an earnings yield of about 8%, debt exceeded available cash by almost 8 times, the company had a tangible book value of ($8.25) and a net current asset value of ($16.25), and on top of all of that, the stock is trading at almost $60, with an estimated value of $65-$70.

    All I can say is if that's cheap to you, I am very glad you not my investment manager.

    Wax

  • Report this Comment On June 26, 2010, at 1:51 PM, crca99 wrote:

    Interesting perspective and educational challenge. Regret the title. I'll have to save to my own computer because how will I ever find it again on Fool as "5 stocks to buy."

  • Report this Comment On June 26, 2010, at 3:32 PM, sagitarius84 wrote:

    I think Johnson & Johnson (JNJ) looks cheap:

    http://www.dividendgrowthinvestor.com/2010/06/johnson-johnso...

    I am long JNJ

  • Report this Comment On June 26, 2010, at 4:39 PM, soycapital wrote:

    Well done sagitarius! I am long and accumulating JNJ.

  • Report this Comment On June 26, 2010, at 6:23 PM, marco55 wrote:

    Preferred stock is not a part of Enterprise value?

  • Report this Comment On June 26, 2010, at 8:11 PM, dividendgrowth wrote:

    If you think Brand X diapers are just as good as Pampers, then stay away from P&G.

    On the other hand, people will not change their favorite food, drinks, or dopes for a nickel or two.

  • Report this Comment On June 27, 2010, at 8:29 AM, STEVEZ81 wrote:

    People will change their favorite food and they are. When people loose jobs, they get state aid for groceries, which mandates them to buy store brand items. As long as people are out of work or taking cut backs they will change brands.

    I think the growth of any newspaper company is their ability to sell stories electronically rather than sell a newspaper with stories in them. In the coming years from now we will all be using similar products. The news is free on yahoo and google every day, why pay for a newspaper?

  • Report this Comment On June 27, 2010, at 11:41 AM, kekap697 wrote:

    I'd like Morgan House to explain "with a call feature attached" when writing about VF.

  • Report this Comment On June 27, 2010, at 6:45 PM, 11x wrote:

    It means you're buying a company that has a stable main business that also puts money into various new brands that may one day take off... ie, you are buying "Wrangler Jeans" when buying VF.With little or no premium, you are also getting North Face or one of these other brands that could be the next Wrangler Jeans. The North Face seems like a pretty popular brand with the young preppy/yuppie crowd.

  • Report this Comment On June 28, 2010, at 8:06 AM, menachem18 wrote:

    I have to disagree about United Health. Ever since I worked briefly for one of their Competitors Coventry Health Care I've learned to stay away completely from Health Care. Main reason is something that my VP told us back in 2006. The big health insurers had already gobbled up all of the market. There weren't any large groups left out there that weren't already insured. It was a zero sum game when it came to gaining new large group plans.

    Essentially if you want to grow your customer base you had to sell to the smaller groups and then wait for them to grow organically. United and Coventry and the other companies do offer more than just group health care coverage but that segment of their portfolio isn't going to generate the kinds of returns that get me excited about investing in them.

  • Report this Comment On June 28, 2010, at 10:38 PM, jennifergmd wrote:

    No offense- but Gannett (GCI) will go bankrupt. You must not have realized the enormous amount of debt it has and the difficulty it will have servicing that debt (not to mention ever paying it off). It is strapped with debt in a dying industry. Not a good combination. I certainly would not buy and would strongly consider shorting the bejesus out of it. The Ipad can't save it. The only way it does not go bankrupt is through subsidies from the international subsidizer of last resort- Mr Obama. Don't laugh- it probably will happen.

  • Report this Comment On June 28, 2010, at 10:51 PM, jennifergmd wrote:

    Addendum:

    GCI has over $3 billion in debt and about $500,000,000 in unfunded pension liabilities. It generates just over 10% of revenue from digital media. USA Today's subscription rates are getting hammered. People under 30 do not buy newspapers. Online competition will destroy it. Impact of online advertising is much easier to track than newspapers- leading to more cut-throat pricing and accountability of content providers. Morgan- you are going to wipe out your readers if they follow you on this one.

    Brian

  • Report this Comment On June 28, 2010, at 10:53 PM, jennifergmd wrote:

    Yes- it has done a good job of cutting costs- but most of its infrastructure is geared towards production of physical newspapers. Thus- most of its assets are goodwill that will be wiped out in the near future. It has spent years overpaying for its newspapers. There will only be one way to make money off this- SHORT!!

  • Report this Comment On June 29, 2010, at 12:33 AM, ayaghsizian wrote:

    CVS and walmart are being overlooked, both have growing earnings and cash flow, and I plan to buy both with real money this week.

  • Report this Comment On June 29, 2010, at 12:43 AM, itconsultant wrote:

    "The nine major U.S. and European drug companies -- Pfizer (PFE), Merck (MRK), Eli Lilly (LLY), Bristol-Myers Squibb (BMY), Novartis (NVS), Roche (RHHBY), AstraZeneca (AZN), Sanofi Aventis (SNY) and GlaxoSmithKline (GSK) -- now trade for an average of just nine times projected 2010 profits, far below the Standard & Poor's 500's multiple of 18." - Barrons June 26, 2010

  • Report this Comment On June 29, 2010, at 6:34 AM, jcordwell wrote:

    I wish you had expanded on the enterprise value/free cash flow metric a bit more. I was left wondering why the companies you picked wrere such good examples. United health on 6 and P&G on over twice that. Is that good? Why? What do other companies have. Is 1 bad and 20 good? etc. From now on I will calculate this metric as I do price/book value, cash /debt etc. but I am still a little unsure what a screaming "buy" for any company would be based on your metric. I loved "The Fool" of ten years ago because you always assumed the reader knew nothing about investing, (which of course I didn't). Please go back to stating the obvious as some of us are quite dimwitted when it comes to investing. Thanks for a great service.

  • Report this Comment On June 29, 2010, at 10:44 AM, Cookucletus wrote:

    The ratio in this article doesn't make sense to me. I would prefer EV/levered FCF which accounts for servicing debt. In this economy I'd be wary of high debt loads.

  • Report this Comment On July 02, 2010, at 11:46 AM, slof1955 wrote:

    These stocks are a lot cheaper than the first time you mentioned 2 weeks ago!

  • Report this Comment On July 02, 2010, at 2:13 PM, mtracy9 wrote:

    Warren Buffett: "The most common cause of low prices is pessimism -- sometimes pervasive, sometimes specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It's optimism that is the enemy of the rational buyer." Hence, Warren Buffet's maxim: "Be fearful when others are greedy, and be greedy when others are fearful." The best time to find bargains in stocks is during an economic recession or market correction. "I made by far the best buys I've ever made in my lifetime in 1974. And that was a time of great pessimism and the oil shock and stagflation and all those sorts of things. But stocks were cheap."

    http://shouldersofgiantsinvestor.com/

  • Report this Comment On July 02, 2010, at 6:22 PM, philkek wrote:

    Thanks to ALL fools who wrote on this article. I believe that MF teaches us to do our own homework before investing any real money in ANY companies mentioned. Good article with lots of food for thought. Only symbol here I own mentioned by fools is MRK. I will investigate the fundamentals of other companies listed here then decide my next move. Fools rule on.

  • Report this Comment On July 03, 2010, at 8:09 AM, PeterVanKan wrote:

    But....wasn't there this other little thing with tobacco manufacturers ? You, know, that the stuff kills people by the scores ?

  • Report this Comment On July 03, 2010, at 10:58 AM, mudman90039 wrote:

    I don't do math on my stocks, I should hang my head in shame. One thing I know is not to invest in companies doing harm like Reynolds and Altria. They keep coming up as high dividend payers on my searches but I won't buy them. I'm sure they're in several of my mutual funds but not in their top ten.

    I did Find NextEra Energy which is well invested in green energy technology. That I'm game to take a dividend from, even tho it'll never go sky high.

  • Report this Comment On July 05, 2010, at 11:41 AM, 1000isl wrote:

    The concept of enterprise value is based on the ability to borrow ie leverage your cash flow (thus commanding a higher value on sale). I'm cautious as to historical comparisons of this metric given the change in allowed leverage in future debt deals. Debt to EBITDA levels for cash flow lenders has gone from 5.5 times to 2.5-3 times EBITDA and with the amount of refinancings to occur in 2011 and 2012 may be further challenged. I would recommend this be considered for extremely long positions at best.

  • Report this Comment On July 08, 2010, at 11:17 PM, pkluck wrote:

    Newsflash to TMF "With the health-care bill pending and all sorts of noxious rhetoric spewing around -- death panels! nationalization! -- there was reason to be rationally scared. But substantially all of that risk is now off the table," These risks are NOT off the table and will become in effect once nobamas health care is fully in place. Health insurance stocks are risky. TMF was recommending BP when it was around $46 and paying it's hefty dividend. Oops.

  • Report this Comment On July 14, 2010, at 8:00 PM, Gezzer80 wrote:

    A stock for your consideration would be csv..people are dying to participate in their business..low price..making money providing a needed service.. potential for the future on the capital side..

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