Hunting for Bargains at Record Highs: Apple, Coca-Cola, and Gap

The market has recently achieved record highs, but companies such as Apple, Coca-Cola, and Gap still offer sound fundamentals and attractive valuations.

Apr 2, 2014 at 9:00AM

The S&P 500 index achieved a new record intraday high above the 1,880 level after a strong open yesterday. But that does not mean investors need to pay excessive valuations to put money to work in the current environment. On the contrary, companies such as Apple (NASDAQ:AAPL), Coca-Cola (NYSE:KO), and Gap (NYSE:GPS) offer strong fundamentals and attractive valuations for bargain hunters.

Apple Image

Source: Apple.

A deliciously cheap Apple
Apple is losing market share to lower-cost smartphones and tablets operating with Android as the mobile computing revolution expands to emerging markets, where the company's products are too expensive for many consumers and the carrier subsidy model is not as widespread as in the U.S.

However, the company is still the undisputed leader when it comes to the high end of the pricing spectrum, and this means rock-solid profitability and massive cash flow for investors. Apple has an operating margin in the neighborhood of 30% of sales, something most competitors in the industry can only envy, and the company produced an operating cash flow of more than $28.6 billion during the quarter ended in December.

Wall Street analysts are concerned about the company´s ability to innovate without Steve Jobs, but CEO Tim Cook has repeatedly promised Apple will roll out new product categories in 2014. This means we could be in a make or break year for Apple, as new product launches might provide improved visibility about the company´s innovative drive and growth potential.

The good news for investors is that Apple is not priced for much growth: the company trades at a P/E ratio of only 13 times earnings over the last year versus an average P/E ratio in the area of 18 for the companies that make the S&P 500 index.

If Apple can accelerate innovation and growth, the company offers substantial upside potential from current levels.

Image Coke

Source: Coca-Cola.

Always Coca-Cola´s dividends
Coca-Cola is facing slowing growth lately. Consumers in developed countries seem to prefer healthier alternatives to traditional sodas because of growing concerns over obesity and related health considerations. In emerging markets, where both sodas and drinks with lower calories offer considerable room for growth, currency fluctuations have been a drag on sales for Coca-Cola in recent quarters.

On the other hand, the company's leadership in the global soft drinks industry is unquestioned. Brand recognition is a huge strategic asset: Coca-Cola owns 17 brands making over $1 billion in global annual revenue, in addition to 20 other growing brands generating between $0.5 billion and $1 billion in sales.

This includes not only traditional sodas, but also categories such as waters, juice and juice drinks, sports drinks, and tea, all of which are positioned for growth among health-conscious consumers.

Whether consumers around the planet decide to go for typical sodas or drinks with better nutritional qualities, Coca-Cola has the brand power, geographical reach, and financial resources to adapt and thrive in a dynamic industry landscape.

Coca-Cola has raised its dividend for 52 uninterrupted years through all kinds of consumer environments and economic scenarios, so the company has proven its fundamental strength over time. The current dividend yield of 3.1% looks like a convenient entry point for such a sound dividend powerhouse.

Gps Image

Source: The Gap

The Gap is in the bargain bin
Fashion is usually considered a volatile and fickle business, especially when it comes to companies focused on young consumers. But Gap stands away from the competition due to its big presence in affordable basic fashion apparel targeting a wide and diverse clientele, which provides stability to the company´s performance over time.

Through its brands The Gap, Banana Republic, Old Navy, Athleta, Piperlime, and Intermix, the company owns or franchises 3,549 stores in 48 countries. This level of diversification across different brands and geographical markets allows Gap to pursue multiple growth venues at the same time, while reducing risks for investors.

Management seems quite confident about the company´s future, judging by recent dividend announcements. Gap in February raised its dividend by 10% to $0.22 per share, which puts the payout yield at nearly 2.2%.

The company is also cheaply valued in terms of earnings, with a P/E ratio of 15 times earnings over the last year and a forward P/E ratio of only 12 times earnings forecasts for 2015.

A harsh winter and an aggressive competitive environment have hurt companies in the sector lately, but Gap has what it takes to successfully weather the storm and continue generating reliable results over years to come.

Foolish takeaway
The market may be near historical highs, but that doesn´t mean all stocks are necessarily overvalued. Investors hunting for solid companies trading at convenient valuations can find interesting candidates in names such as Apple, Coca-Cola, and Gap. People call it the stock market, but it's actually a market of stocks, offering many different alternatives with their own individual characteristics.

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Andrés Cardenal owns shares of Apple. The Motley Fool recommends Apple and Coca-Cola. The Motley Fool owns shares of Apple and Coca-Cola and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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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