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You might have to do a little digging nowadays to find stocks that are trading on the cheap, but they are certainly out there. Three stocks that stick out are General Motors (GM 0.13%), Valero Energy (VLO +1.93%), and Alliance Resource Partners (ARLP +0.57%). Here's a quick breakdown of why shares are cheap and why you might want to consider it for your portfolio.
Cheap even at the top of the cycle
When you look at traditional valuation metrics like price to earnings, shares of General Motors look like a bargain. Today, General Motors' stock trades for just 3.9 times earnings. Whenever shares trade for that low, red flags go up because it signals tougher times ahead. Yet if you look at the company's most recent earnings, it would appear that it is humming along like a well tuned V-6.
If you wanted to throw some shade on General Motors right now, it's that there are some favorable market conditions in the North American market. Cheap gasoline means customers are more willing to pay up for SUVs and light-duty trucks in the market, where GM and its big American rival Ford Motor Company (F 3.16%) generate a vast majority of their pre-tax profits. With higher-priced vehicles come higher margins. If gasoline prices were to rise significantly and customers go back to buying smaller vehicles with better gas mileage, a decent portion of those profits could go away quickly.
Even taking this scenario into account, shares still look cheap. On a price-to-tangible book value basis -- a valuation metric that isn't as impacted by the cyclical nature of earnings -- GM trades for just 1.34 times. That's not a huge premium over the liquidation value of the company.
Earnings may wax and wane with the cyclical nature of building and selling cars, but today's share price and the 4.9% dividend yield make this stock worth considering.
A bargain at the bottom
On the opposite side of the industry cycle spectrum, it's easy to argue that oil refiners are in the trough. Refining margins -- the price difference between crude oil and refined products -- have been on a steady decline as a glut of gasoline has been building up in the U.S. and crude prices have increased since their lows back in January. To add insult to injury, oil refiners have also had to deal with the higher costs of complying with the U.S. Environmental Protection Agency's renewable fuels standards. All of these things have weighed on Valero Energy's stock so much that shares today trade at a modest 8.4 times earnings and 1.2 times tangible book value.
Thing is, like auto manufacturing, oil refining is a cyclical industry. As consumption increases -- likely from all those gas guzzlers GM is selling right now -- it will use up inventories and probably lead to higher refined prices and higher refining margins. It may take a while to get there, but Valero's balance sheet is in great shape and the company continues to generate gobs of free cash flow to support its dividend and buy back shares. So while investors wait for the market to rebound, they can sit on a 4.6% dividend yield.
Taking the last few puffs from coal
One market that has gone from cyclical to structural decline is the coal industry. Cheap natural gas has surpassed coal as the primary energy source for power generation in the U.S. Also, lower costs for gas and renewable energy such as solar and wind have put immense pressure on coal demand and prices. This has led to three of the four largest coal producers in the U.S. to file for Chapter 11 bankruptcy.
This doesn't sound like the most appealing market to invest in by any means, but Alliance Resource Partners has remained solidly profitable for the five years that coal has been on the decline. Now that so many other producers have gone bankrupt, though, there is room for Alliance to step in and gain market share. Even if the market were to decline precipitously over the next few years, the absence of other major producers could mean Alliance has some room to grow and continue to pay investors.
Clearly, this investment is akin to taking the last few puffs from a cigar butt. Eventually, there will be nothing left to get out of it. For the time being, though, shares trade at a very modest 1.3 times tangible book and have a distribution yield of 9.1%. Alliance has been the best-run coal company for several years. If there is any money left in coal, it's with Alliance.
