Believe It: There Are Still Stock Bargains Available

As of Friday's close, the S&P 500 was up a whopping 11.7% since the end of last year. I'm sure many investors are really happy about that.

But I'm not.

If that sounds crazy, allow me to point to what Warren Buffett wrote in his annual letter to Berkshire Hathaway shareholders:

If you are going to be a net buyer of stocks in the future, either directly with your own money or indirectly (through your ownership of a company that is repurchasing shares), you are hurt when stocks rise. You benefit when stocks swoon. Emotions, however, too often complicate the matter: Most people, including those who will be net buyers in the future, take comfort in seeing stock prices advance. These shareholders resemble a commuter who rejoices after the price of gas increases, simply because his tank contains a day's supply.

In other words, what Buffett is saying is that as long as you're doing more buying than selling, you're better off if prices stay low and there are more bargains available.

And that brings us back to the nearly 12% surge in the S&P 500 so far this year. Some readers may know that I'm a fan of digging down to the bottom of the bargain bin to look for the best (and often, the dirtiest) deals out there. So when I watch the market surging, what I can't help noticing is that the bargains I love so much are rapidly disappearing.

That said, there are still a fair number of stocks that are at or near my definition of a "bargain bin" stock. Let's look at a few of them.

Company

Market Cap

Price-to-Book Value

Teekay Tankers (NYSE: TNK  ) $363 million 0.66
Popular (Nasdaq: BPOP  ) $2.3 billion 0.59
Bank of America (NYSE: BAC  ) $99 billion 0.49
First Solar (Nasdaq: FSLR  ) $2.5 billion 0.69
Boyd Gaming (NYSE: BYD  ) $733 million 0.59

Source: S&P Capital IQ.

Tankers by Teekay
Teekay Tankers is a great example of the kind of companies found in the bargain bin. At first glance, you can't help noticing that this appears to be a very cheap stock. Closer examination, however, reveals some significant warts. For instance, Teekay gives shareholders all of its "cash available for distribution" every quarter -- and this is reflected in the stock's nearly 10% dividend yield. But at the same time, the company makes it a practice of continually issuing new shares to raise money. Those two together -- a big dividend and hefty share sales -- make for a combination I never like to see, because it's like having somebody put money in one of your pockets only to take it back out of another. In addition, Teekay has a dual-share class structure that gives some shareholders voting rights out of line with their economic interests -- also something I typically shun.

For those reasons, I have little interest in being a long-term Teekay shareholder. But I do like Teekay's business -- owning and chartering oil tankers -- and there's reason to believe that its industry is about to see brighter days. And lest we forget, the stock currently carries a bargain valuation. I've put my money where my mouth is on Teekay, as it's part of my personal portfolio. I'm also putting my public scorecard on the line by making a positive CAPScall on Teekay in my Motley Fool CAPS portfolio.

A pair of banks
But enough about Teekay. What about Puerto Rico-based banking group Popular? This is an apparent bargain that I'd rather take a pass on. While the book value multiple fits the bill, the numbers make me want to keep my distance. Popular has been profitable for the past four quarters, and that's a big plus, but its nonperforming loans are still troublingly high, and its reserves against future losses look low to me.

On the other hand, Bank of America still has significant challenges ahead, but it may be a bargain stock worth taking a flier on. Why? Near the top of the list is that the stock's current valuation leaves the possibility for a lot to go wrong and still be attractive. In addition, the bank's numbers -- nonperforming loans, capital base, etc. -- look a lot better than the bargain valuation suggests. Also in its favor is a recent vote of confidence from the Federal Reserve. And, of course, even though our legislators have voiced concerns about "too big to fail," for better or worse, B of A still very much falls into that category. Like Teekay, I've given B of A thumbs-up in my CAPS portfolio and own it in my personal portfolio.

Ready for prime time?
In a very different kind of business, First Solar is proving why it can be tough to invest in an emerging technology. Though I love the promise that solar energy offers, I've long held that trying to pick the eventual winners in the industry will be extraordinarily difficult. Not all that long ago, First Solar appeared to be a solid leader in the industry, but it's increasingly looking like a bit of a flunky. Cash flow from operations fell into the red for 2011, and operating income was basically halved. On the plus side, the company still has no net debt and is, as my fellow Fool Travis Hoium put it, "trying to make some moves that will help it stay competitive." I'm torn on this one -- I'm keeping it on my radar, but I haven't seen enough to convince me to pull the trigger.

Gambling on a bargain
I'll finish off with casino operator Boyd Gaming, and the reason not to buy here is easy: Boyd's ugly balance sheet. This is a debt-heavy company that could face big trouble if it hits a rut. On the other hand, Boyd owns a collection of worthwhile gaming properties that includes the Fremont Hotel in downtown Las Vegas and Borgata in Atlantic City. This stock certainly isn't for the faint of heart, but it joins Teekay and B of A among my positive CAPScalls and ownership positions.

Of course it's quite possible that none of these is an appealing investment for you. I believe that Teekay, B of A, and Boyd have the potential to deliver good results, but they're still long on bargain and shorter on investment meat. If you're looking for more of the latter, you can find plenty of it in The Motley Fool's special report, "Secure Your Future With 9 Rock-Solid Dividend Stocks." You can grab a free copy of that report.

The Motley Fool owns shares of Berkshire Hathaway and Bank of America. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway and First Solar. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Matt Koppenheffer owns shares of Berkshire Hathaway, Boyd Gaming, Teekay Tankers, and Bank of America, but he has no financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter, @KoppTheFool, or on Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


Read/Post Comments (7) | Recommend This Article (30)

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 March 22, 2012, at 12:59 PM, cp757 wrote:

    Matt you have some great points but I find the bargain bin to be a bad approach to investing. The fact that I can buy a stock in the future for the same price as I did in the past is not a plus. From your chart it looks like you want me to look at Price to Book ratio to buy a stock. The Price to Book ratio is used to compare a stock's market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share. Another way to figure it is Stock price divided by total assets minus intangible assets and liabilities. The problem with looking at this figure is who is telling me how much the assets are worth and why. If I have an asset that will bring me one million dollars a year in revenue is it worth the same amount if it will bring me 10 million a year. I think you always follow the money, its the only measure that will give you an increase in share price. We know BAC has a great asset with Merrill Lynch because that asset will give them all the money. What we don't know is what the home loans they have on the books will lose and you pointed that out. You take the good with the bad. A good example of the principle I am looking at to follow the money is BYD does 2.34 billion in revenue so the question is will they do 3 billion. I don't see anyone pounding on the table about that. With 15 analysts giving it a hold I think I am in the same spot and you are on the same page also. Since we are looking at the gaming sector for one of our stocks lets look at Las Vegas Sands. Morgan Stanley came out today and said that LVS would take 40% of the market share in Macau in an area that will do 40 billion dollars in revenue. That's 16 billion dollars in revenue for LVS plus they will do 60% of the revenue in Singapore and that market is bigger than all the casinos in Vegas. I cant tell you how many investors buy a stock that a friend told them was good that stayed the same for years or went down. I want to get your crystal ball to tell me how to buy the stocks that are going to drive the sector they are in. It would be nice if you could tell me when the stock has a low price but that is deceiving to. If AAPL had the same number of shares as MSFT or a 10 for 1 split they would sell for 60 dollars a share and everyone would say what a good buy they are.They would say the stock is going to 100 and all those things investors get excited about. Its the Money I want to know about.

  • Report this Comment On March 22, 2012, at 7:23 PM, NJ7 wrote:

    Interesting topic, the issue that keeps coming up for me as I try to buy in this market is whether the value plays will go down even further if the market drops off. I try to address this by investing at intervals and picking long term winners. One way I'm doing this is by heading into industries that the market is down on, and I think will eventually recover (not going to invest in photographic film!). On shipping, I've looked at Teekay, but chose Diana Shipping and Diana Containerships over Teekay because of their solid balance sheets and good metrics. Natural gas has some good valuations, what about RPC or C&J Energy Services? Corning and the haunted house that is HP are also good value plays. All are in my portfolio. I think that a sector based approach has allowed me to pick up great companies at unreasonably low values without assuming inordinate risk. Hopefully this will lead to outperformance without excessive dependence on the market.

  • Report this Comment On March 22, 2012, at 7:29 PM, Millsteen wrote:

    But Buffett also makes the point that even at rock bottom prices it's still not a bargain if the company is not good. I'm not impressed with the companies mentioned in this article.

  • Report this Comment On March 22, 2012, at 7:35 PM, 3chains wrote:

    Anyone considering Teekay Tankers should know that it is a Master Limited Partnership or MLP. MLPs don't pay dividends, they pay distributions. The majority of the distribution is tax-deferred. This is a good thing for investors, but it makes tax time much more complicated. Also, MLPs generally should not be held in an IRA, as you can get hit by UBTI.

    The Fool rarely if ever mentions this in any of these free articles when MLPs are discussed.

  • Report this Comment On March 23, 2012, at 10:52 AM, kgrahamprinter wrote:

    PKI has a 7.69% dividend and P/E of 19.24, price hasn't changed much over 4 years but the dividend keeps coming in. If Canadian has a 5% DRIP to take advantage of.

    FTE French Telecom has a 12% dividend P/E of 7.94 and appears to be down due to Europe problems, but when US turned around stocks gained greatly. Has a Strong buy rating at $15.00 by Ford Equity, I've sold T (at&t) and bought FTE averaged in at $14.75

  • Report this Comment On March 26, 2012, at 12:55 PM, cp757 wrote:

    When you invest you should look at a stock based on a sector. You should know which stock in the sector is the best performer. That's not hard to find the best performer and invest in the best. If you go to a race track everyone tells you bet on the long shot if it comes in you will make so much money so how often does the long shot come in. The best horses come in first or second almost 100% of the time. We all want to bet on the underdog to try and get the big money but that's not the way life works. If any investor picked five sectors and picked the number one stocks in that sector you would have a great portfolio over the next five years. If you had a higher risk tolerance you could pick five sectors that had future applications that are only beginning to take effect. The ones you got right would outperform your other portfolio but the ones that missed would take your performance down. Keep everything simple its not hard to make money its hard to spend a few hours a month to build your future financial security. Don't listen to one person listen to them all and do what you feel makes sense for you, but just five stocks. Why five. You cant know about them all and the reason to add another stock is if one of your picks was wrong and you think another stock will work better. If you cant see how a company will make money in the future and you don't understand the business model don't buy the stock. You have thousands of stocks to pick from it does not matter what someone else think's , it maters what you know. If you don't know, why are investing your hard earned money in it.

  • Report this Comment On March 28, 2012, at 1:29 PM, Quaker08 wrote:

    3chains,

    TNK is not an MLP. It is a corporation and issues dividends and a 1099.

    There is a different Teekay affiliate that is an MLP. I think it is related to their nat gas operation. That might be the cause of the confusion.

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