With the market bumping up against its all-time highs, it's becoming increasingly difficult to unearth stocks with compelling valuations. That said, good bargain-hunters can always seem to find hidden gems -- even in a pricey market such as this one.
Keeping this theme in mind, we asked three of our contributors which stocks they think offer attractive valuations right now. They suggested Opko Health (OPK 5.30%), Wesco Aircraft Holdings (WAIR), and Boeing (BA 2.19%). Read on to find out why.
This healthcare stock is poised to bounce back after an awful start to 2017
George Budwell (Opko Health): Opko's shares have been on a downward spiral this year because of the late-stage failure of its long-acting human growth hormone product hGH-CTP, which was indicated as a possible treatment for growth hormone deficiency. The key issue to understand is that this experimental drug was already licensed out to pharma titan Pfizer, meaning that Opko was in line to gain millions in milestone payments following a successful late-stage readout.
However, the market appears to have seriously overreacted to this clinical setback -- potentially transforming Opko into an attractive value play for investors with a long-term outlook.
Although this late-stage failure was certainly unwelcome news, Opko still has two major value drivers in play that could send its shares higher in the years ahead. Opko is working diligently at improving the reimbursement landscape for its 4Kscore prostate cancer test, and the company has arguably set up its relatively new chronic kidney disease drug Rayaldee for a strong commercial launch by forming key partnerships with leaders in the field.
The bottom line is that Opko is on track to grow its top line by an impressive 16.6% next year because of these two growth drivers, and its shares are also trading at an absolutely dirt cheap price to sales ratio of 3 at the moment. So, Opko definitely qualifies as an underappreciated value stock that's worthy of a deeper dive.
Looking for value in the friendly skies
Dan Caplinger (Wesco Aircraft Holdings): The aerospace industry has done extremely well in recent years, and many stocks that have links to aviation have seen their shares rise. Yet for Wesco Aircraft Holdings, the recent boom hasn't shown up in its stock price, and shares now look attractive to some value investors.
Wesco provides supply chain management services and distributes products related to the aerospace industry both in the U.S. and internationally. The company ensures that its customers have a wide range of supplies, ranging from hardware items to chemicals, electronic components, tools, and specially crafted parts. With new aircraft in strong demand and with companies across the commercial and military airplane manufacturing industry using Wesco's services, the aerospace supply specialist has plenty of opportunities.
What has some investors concerned is the fact that Wesco's earnings have been on the decline in recent years. From a high of $1.12 per share in fiscal 2013, Wesco saw its bottom-line figures fall to $0.94 per share in fiscal 2016, and the past three quarters have shown more signs of a slowdown. Yet the stock trades at just nine times its trailing earnings, giving Wesco a margin of safety against any further declines. Whether the company succeeds in boosting its sales performance or starts pursuing strategic alternatives, Wesco has a good chance of bouncing back from its recent challenges and delivering value for shareholders.
Want to find value? Look up -- in the sky
Rich Smith (Boeing): At $109.4 billion in market capitalization and a share price of nearly $180, I'm willing to bet that airplane maker Boeing is a company few investors think of as being a "value stock."
But it is.
The way I look at value breaks down into two main parts: How much does a stock cost relative to its profits, and how fast is the company growing those profits? In the case of Boeing, it works like this:
Valued on GAAP earnings, Boeing stock costs about 21.6 times its $5.1 billion in trailing net income. But that's just the start of the story. Boeing, you see, generates cash from its business at levels far higher than what it's permitted (by GAAP rules) to call "net income." In fact, over the past 12 months, Boeing generated positive free cash flow (that's operating cash flow minus capital expenditures) of nearly $9 billion. That's roughly $1.76 in cash profits for every $1 than Boeing was able to report as "accounting profit."
As a result, while some may look at Boeing stock and say that it sells for 21.6 times "earnings," it's just as accurate to say that Boeing costs less than 12.3 times free cash flow, which seems to me a very reasonable price to pay for the world's leading aircraft manufacturer.
All the more so given how fast Boeing is growing. According to estimates tallied by S&P Global Market Intelligence, analysts on average expect Boeing to grow its profits at 16% annually over the next five years as it works its way through its backlog of more than 5,700 aircraft ordered but not yet built.
Marrying these two metrics, I calculate Boeing stock as selling for a price-to-free cash flow-to-growth ratio of just 0.8 -- at least 20% below fair value. In my book, this makes Boeing a value stock, hiding in plain sight.