Value investors aren't unwilling to take risk, but they like to have the odds stacked in their favor. That's why they often look at stocks that have more attractive valuations, because those lower share prices build in a margin of safety in case something goes wrong. With that in mind, three Motley Fool contributors chose to write about Toronto-Dominion Bank (NYSE:TD), IBM (NYSE:IBM), and Chipotle Mexican Grill (NYSE:CMG). Read on to see what they said and whether these stocks seem like good values to you.
A bank with northern exposure
Dan Caplinger (Toronto-Dominion Bank): The financial industry has been a good place for value investors to look for inexpensive stocks lately, because the broader market seems not to believe that banks have truly recovered from the financial crisis nearly a decade ago. Even banks that weren't as directly affected by the market meltdown in 2008 offer good value, and Canada's Toronto-Dominion Bank is a great example of this phenomenon.
Toronto-Dominion not only has a huge presence in the Canadian market but has also looked southward with its U.S. subsidiary, TD Bank. Yet despite its border-straddling approach to bolster profits, Toronto-Dominion shares carry a trailing earnings multiple of just over 13, and incorporating near-term profit growth, its forward P/E ratio is just 11.5. Shareholders also benefit from a healthy dividend, which currently works out to a roughly 3.3% yield at current levels.
One concern that some investors have about Toronto-Dominion involves its exposure to the Canadian housing market. Despite having avoided the meltdown that its U.S. counterpart suffered, some see hot areas like Vancouver in danger of overheating. Yet TD has done a good job of diversifying, with credit card partnerships in Canada and the U.S. and a top credit rating. With a history of superior investment decisions, Toronto-Dominion is a worthwhile option to consider for any value investor's portfolio.
Value, income, and growth: What's not to love?
Tim Brugger (IBM): Big Blue has all the attributes investors in search of value stocks could possibly hope for. It's shunned by the Street, trades at ridiculously low levels, is in the midst of a business transition, and even pays one of the tech industry's best dividend yields, at nearly 4%. So, what's the problem?
According to many pundits, IBM's year-over-year revenue declines -- last quarter's $18.2 billion was a 3% drop and the 20th consecutive quarter of total sales "misses" -- is a sign that all is lost. That's short-term thinking at its worst.
Lost in the negativity is that IBM's transformation to its "strategic imperatives" is what really matters over the long run. Last quarter, IBM's strategic-imperatives sales, which includes the cloud, cognitive computing, mobile, and data security, increased a combined 12% to $7.8 billion, equal to 43% of total revenue. Of the $7.8 billion, an impressive $3.5 billion came from IBM's cloud business, a 33% year-over-year improvement.
At an annual run rate of $14.6 billion and counting, IBM is one of the largest cloud providers on the planet, and considering the astronomical growth most predict in the cloud market, that's an awfully good position to be in.
As for value, IBM stock is trading at a paltry 11 times future earnings, and its price-to-sales ratio is a minuscule 1.8. Both measures are significantly below those of IBM's peers and completely ignore the strides it's making in burgeoning markets. IBM offers value, income, and growth for investors with some patience.
There may be hidden value in Chipotle's recovery
But to stop there and dismiss Chipotle as being too expensive ignores the potential for earnings to grow sharply as the company continues to recover from 2015's food-borne-illness incidents.
When Chipotle's earnings peaked in 2015, the company earned more than $16 per share on $4.44 billion in sales from about 1,900 locations. Earnings have fallen to $3.28 per share over the past 12 months on $4.14 billion in sales. But revenue and profits have started to recover in the past two quarters.
Chipotle has also opened hundreds of new locations over the past couple of years, and its total count is up more than 20% since its revenue peak. Chipotle should be able to generate far more than $16 per share in profits from a store base that's one-fifth bigger than it was at its profit peak in 2015.
How does that make Chipotle a value? At $16 earnings per share, the recent share price is worth about 30 times earnings. My money -- literally, as a Chipotle shareholder -- is on seeing Chipotle's earnings recover quickly going forward, and I think its much bigger store base could result in more than $16 in earnings per share within a few years.
And with a history of trading for far more than 30 times earnings, investors willing to take a chance that it takes longer for earnings to recover could do very well to buy Chipotle at this "expensive" valuation.