Finding bargains in the stock market can be tricky, particularly with the market hitting all-time highs in 2014. However, with a new year comes new opportunities. Below, three Motley Fool contributors explain why AT&T (T 1.29%), IBM (IBM 1.30%) and GameStop (GME 1.50%), are three bargain stocks that are worth buying today.
Bob Ciura (AT&T): AT&T is a bargain stock because, on a valuation basis, it's much cheaper than the broader market while still offering value. AT&T trades for 10 times its earnings today -- a notable discount to the S&P 500 Index, which is valued at approximately 17 times trailing earnings. To be sure, AT&T isn't exactly a high-growth business. In 2009, AT&T generated $123 billion in revenue, and in 2013, revenue clocked in at $128 billion. That's less than 1% growth per year over that five-year time frame, which explains why investors aren't willing to award AT&T with a market multiple.
Still, AT&T's low valuation presents opportunity. Its share price is cheap, and as long as AT&T keeps registering modest earnings growth, downside risk is mitigated. Plus, AT&T's juicy 5.5% dividend yield towers above the S&P's yield, which is slightly less than 2%, and AT&T has increased its dividend for 31 years in a row. And AT&T is much less volatile than the average stock; it's beta value, which measures its correlation to the overall stock market, is 0.18, meaning that AT&T's share price moves just 0.18% for every 1% move in the S&P 500. The bottom line is that AT&T is a low-volatility, cheap stock, with a very high dividend yield. This makes it a good candidate for a bargain stock investors can buy right now.
Tim Brugger (IBM): It's no secret IBM was glad to see 2014 in its rearview mirror. Despite several stellar performances in the tech sector last year, IBM lagged. But 2015 could be the year IBM finally breaks out of its funk and investors recognize its bargain price.
The problems, and opportunities, that IBM faces manifested themselves in last quarterly financial results. Earnings on a non-GAAP (excluding one-time items) basis dropped 10% compared to the year-ago quarter, net income was down 18%, and non-GAAP gross operating margins declined from just over 50% to 49.2% despite CEO Ginni Rometty's cost-cutting efforts.
But IBM's current stock performance doesn't account for its transformation efforts from a PC-reliant, hardware provider to one of the leading cloud, big data, and business analytics suppliers on the planet. Making the transition from the blue blazer, red tie image of the old Big Blue to a provider of cutting-edge tech solutions isn't done overnight, but significant strides are being made.
Even as many IBM investors focused on the negative, there were signs of life in what it refers to as its, "strategic imperatives." Cloud service revenues were up 80% and are now tracking at $3.1 billion in revenues annually, putting IBM near the top of the cloud providers list. Business analytic sales grew 8%, and combined with IBM's $1 billion investment in its new-ish Watson super-computer unit, you can expect continued analytics growth, along with driving big data sales.
Shedding money-losing units and streamlining operations will begin paying off this year, and continued growth in its strategic imperative units will make it clear what a bargain IBM is. Toss in IBM's 2.8% dividend yield, and the deal gets even better.
Tamara Walsh (GameStop Corp): Video game retailer, GameStop can't seem to catch a break lately. GameStop is now the most heavily shorted stock in the S&P index, according to Bloomberg. In fact, more than 45% of its outstanding shares are currently sold short. With 6,700 video game stores worldwide, many investors worry that GameStop will go the way of the dodo bird now that mobile and social games are gaining traction. As a result, shares of GameStop are now trading near the stock's 52-week low at $32 per share.
Nevertheless, I believe the current pessimism surrounding GameStop is over done. The company is trading at just 10 times earnings, which is markedly better than the S&P 500's price-to-earnings ratio of 17 today. Despite the cheap stock price, GameStop is still one of the more profitable companies operating in the specialty retail industry. In fact, its operating margins and net margins are both above the industry averages, according to data from Ameritrade. The company is also adept at managing its current debt load. GameStop should have no problem repaying debt because its operating profits are 30 times greater than its interest payments.
In addition to benefiting from sales of new gaming consoles, GameStop has also positioned itself to better capitalize on digital content. The video game chain is set to generate $830 million in revenue from its digital business alone in fiscal 2014, according to Bloomberg. Strength in GameStop's trade-in business should also fuel revenue growth in the year ahead. Thanks to the attractive margins on trade-ins, used games now account for 44% of GameStop's profits.
GameStop is in the process of diversifying into new revenue streams like digital content, while also making it easier for guests to trade in older titles. Together, this spells opportunity for patient investors. Moreover, given the high short interest in the stock, any upbeat news from GameStop could spark a short-squeeze in the name and send shares higher in the quarters ahead. For these reasons, GameStop is a bargain stock that investors can buy today.
