The U.S. stock market has had its fair share of hiccups over the trailing 12 months, but at the end of the day, the scoreboard still reads green, with the broad-based S&P 500 up better than 19% over the trailing year.
Unfortunately, some stocks have been left in the dust. There's usually a reason that a company underperforms the market, but it's up to investors like you and I to determine whether these reasons are business-altering events or temporary obstacles.
Three value stocks to consider buying
The term "value stock" has no universally agreed upon definition, but I define it as a stock with a valuation that is substantially lower than the average of the broader market and its industry peers. Traditionally, either the price-to-earnings (P/E) ratio or PEG ratio is used to determine relative "cheapness," with a single-digit P/E or a PEG ratio around or below 1 signaling a "value stock."
If you're on the lookout for deeply discounted value stocks this winter, then I'd suggest looking no further than the following three companies.
Bristol-Myers Squibb Co.
Among large-cap stocks, drug giant Bristol-Myers Squibb (NYSE:BMY) is a deeply discounted value stock that could be worth your consideration.
While the S&P 500 has galloped higher by 19%, Bristol-Myers' stock has plunged by 31%. The irony is that the same drug that's been responsible for Bristol-Myers' multiyear surge in its share price -- cancer immunotherapy Opdivo -- has also been responsible for its recent struggles. In August, Bristol-Myers Squibb announced that Opdivo failed to meet its primary endpoint in the phase 3 CheckMate-026 trial for patients with advanced, treatment-naïve, non-small cell lung cancer (NSCLC) and whose tumors had 5% or greater PD-L1 expression. In September, the full data release showed just how badly Opdivo missed the mark: the chemotherapy arm actually performed better in terms of progression-free survival than the Opdivo arm.
There's little denying that CheckMate-026 was a surprise and a disappointment for investors and NSCLC patients. However, the drop in Bristol-Myers' valuation ignores the fact that Opdivo has become a foundational therapy for advanced melanoma, second-line renal cell carcinoma, and second-line NSCLC. It also ignores the seemingly dozens of ongoing studies examining Opdivo as a monotherapy and combination therapy in multiple different cancer types and staging. There are a number of ways that Opdivo's label can expand in the years to come, and with Bristol still hanging firmly onto its pricing power, Opdivo's future remains bright.
Don't overlook the impact of blood-thinning oral drug Eliquis, either. Developed in partnership with Pfizer, Eliquis is currently on track for more than $3.5 billion in sales in 2016. With label expansion opportunities possible here as well, Bristol-Myers' growth can't be discounted.
With a PEG ratio of 1 as the icing on the cake, investors would be wise to get Bristol-Myers on their radar.
AMC Networks Inc.
When you think of deeply discounted value stocks this winter, AMC Networks (NASDAQ:AMCX) may also come to mind. The network behind the hit show The Walking Dead has witnessed its stock act somewhat zombie-like, underperforming the S&P 500 by 43 percentage points over the trailing-12-month period.
What's to blame? As can be seen in the company's third-quarter earnings results, AMC Networks' operating income dropped on a year-over-year basis as advertising revenue for its national networks fell nearly 10% and restructuring expenses increased. With the stock market rising rapidly in recent months, investors have been anxious to dive into growth stocks, and AMC's recent slowdown in revenue and profit growth has chased some of the skittish investors away.
However, assuming that AMC's recent woes are a cause for long-term concern would probably be a mistake. AMC Networks' management team continues to executive its strategic growth plan with precision, and we're starting to see the results. For example, AMC's licensing and distribution revenue as a percentage of its total annual revenue is on the climb. Licensing and distribution revenue is considerably steadier than advertising revenue, which should help alleviate some of the wild peaks and troughs in cash flow that investors had been used to in previous years.
Also, AMC Networks has a healthy blend of successful programming and new content. Go-to programs like The Walking Dead, Mad Men, and Breaking Bad bring in the viewers, while its pipeline of new content, including shows such as Preacher, offers plenty of hope that AMC's content isn't just a flash in the pan.
AMC's PEG ratio just below 1, along with its forward P/E of 9, should certainly appeal to value investors this winter.
American Eagle Outfitters, Inc.
Another deeply discounted value stock that should have your attention is teen-targeting retailer American Eagle Outfitters (NYSE:AEO), which is essentially unchanged over the trailing-12-month period, and thus underperforming the broader market by 19 percentage points.
American Eagle Outfitters has struggled in a very difficult retail environment that's coerced big names in the industry, such as Macy's and Kohl's, to announce job cuts and store closures. Until the third quarter, U.S. GDP had been growing on relatively subpar basis, and consumer confidence wasn't where it needed to be to encourage discretionary spending. On a more company-specific basis, American Eagle was working through inventory issues that reared their head back in 2013 and early 2014.
Now for the good news: American Eagle Outfitters may have the best management in the retail sphere, and I don't say that lightly. Consumer buying habits change frequently, and even American Eagle Outfitters isn't immune to having the wrong inventory on its shelves from time to time. However, few if any retailers work through inventory issues quicker than American Eagle Outfitters. The company really clamped down its selling, general, and administrative spending, and in recent months has reined in its discounting. Furthermore, it's placed more emphasis on its direct-to-consumer segment in an effort to reach its digitally focused target audience of Gen Z and millennials.
How are American Eagle's efforts paying off? In the third quarter, the company wound up increasing its comparable-store sales by 2% on a year-over-year basis, and it generated record Q3 revenue of $941 million. Adjusted profit per share also rose by 17% to $0.41 per share from the prior-year quarter, marking the ninth consecutive quarter of profit increases.
Simply put, American Eagle Outfitters' management team is on point, and so is the company's 3.3% dividend yield. With a PEG ratio that's a hair below 1 and a forward P/E of only 11, this stock looks to be waiting on the clearance rack for patient long-term investors.