The stock market has been firing on all cylinders over the last few years, major indices are trading near historical highs, and the S&P 500 has gained nearly 240% on a total return basis from its March 2009 low during the financial crisis. In this context, valuations are becoming stretched, and many investors are finding it hard to find attractively priced stocks to buy.
However, none of this means that every single stock in the market is overpriced. At The Motley Fool, we believe in the power of hard work, and we know it pays to look beyond the surface in the search for undervalued investment opportunities.
Our contributors have done their homework, and they've identified three companies they believe are undervalued and offer an attractive entry point for bargain-hunting investors. Read on to see why Wal-Mart (WMT 0.06%), Michael Kors (CPRI 1.18%), and Las Vegas Sands (LVS -0.38%) might be smart picks for you, too.
Dan Caplinger (Wal-Mart): Huge companies often end up as value plays, as their lack of clear catalysts for growth causes them to trade for lower earnings multiples than their faster-growing counterparts. Nowhere is this clearer than with retail giant Wal-Mart, which is trading at about 16 times earnings despite having an attractive 2.4% dividend yield.
Source: Wal-Mart.
The main problem facing Wal-Mart is that investors aren't certain where future growth can come from. Those following the stock expect earnings to contract this year, and even next year's growth will drive less than a 3% bump to earnings per share from last year's figure. Heavy competition from online retailers, as well as other brick-and-mortar competitors both above and below Wal-Mart's traditional price points, threaten its former dominance.
Yet Wal-Mart is far from surrendering. New leadership has put some fire into the retailer's strategic efforts, with initiatives like its smaller-store formats representing a major response to deep discounters. At the same time, leveraging its popularity by entering lucrative areas such as financial services also offers some growth opportunities. Wal-Mart is not certain to succeed, but with many blue-chip stocks trading at much higher valuations, the retailer is worth a look from value investors.
Bob Ciura (Michael Kors): Trading for just 15 times earnings, Michael Kors stock is a bargain, especially considering that the broader S&P 500 market trades for roughly 20 times earnings. At $65 apiece, shares of Michael Kors are down 27% over the past year despite the company reporting strong earnings in this period. Over the first three quarters of its current fiscal year, Kors grew revenue and earnings per share by 38%, year over year.
Source: Motley Fool.
It seems Michael Kors' valuation is contracting because investors fear the company's discounting practices will erode profitability and cause growth to taper off in the future. Indeed, its gross profit margin fell to 60.8% last quarter from 61.2% in the same period of the previous year. Declining margins are dangerous for a luxury-apparel company, and perhaps a sign the brand is fading.
However, Michael Kors management remains confident that significant growth remains attainable. Management forecasts the company will earn $4.27-$4.30 per share this year, which would represent at least 32% year-over-year earnings growth. This kind of growth would hardly be cause for concern, and such a low valuation sets the stage for an attractive buying opportunity. Moreover, the company has a rock-solid balance sheet, with $950 million in cash and only $117 million in long-term debt.
Despite its robust fundamentals, Michael Kors' poor stock performance might frustrate its shareholders, but investors on the sidelines now have a better buying opportunity for a bargain stock.
Andres Cardenal (Las Vegas Sands): When a high-quality company goes through temporary weakness due to external factors, this can create a buying opportunity for investors. This seems to be precisely the case with Las Vegas Sands stock.
The company is the leading casino operator in Macau, the only region in China where gaming is legal and a major growth driver for Las Vegas Sands over the years. Sales have grown by more than 26% annually through the last five years, and the business is remarkably profitable, with an EBITDA margin above 37% of sales in 2014.
Source: Las Vegas Sands.
However, Chinese government authorities are imposing a series of restrictions and regulations on VIP players in Macau to fight money laundering and other illegal activities, and this is hurting traffic and gaming demand in the region. Because of these concerns, Las Vegas Sands stock is down by 25% from its high of the last year.
At current pricing, Las Vegas Sands is trading at a P/E ratio below 17 times earnings, a discount versus the S&P 500's average valuation. Management doesn't seem particularly concerned about the company's future, as it recently announced a 30% dividend increase. This puts the dividend yield at a compelling 4.4% on a forward basis.
It's hard to tell how long might take for conditions in Macau to improve, so Las Vegas Sands could remain volatile in the coming months. On a long-term basis, however, this profitable casino operator looks like a smart bet.
