"Sell in May and go away" is an adage that we Fools refuse to follow. If you feel the same way, then you're probably on the hunt for a few great stocks to buy. Here's why you should consider FactSet Research Systems (FDS 0.94%), Chipotle Mexican Grill (CMG 3.87%), Omeros Corporation (OMER 4.36%), IBM (IBM 0.57%), and Skechers (SKX +0.00%).
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A fair price for a wonderful business
Brian Feroldi (FactSet Research Systems): Since the S&P 500 continues to flirt with all-time highs, I think it's as important as ever for investors to buy the highest-quality companies that they can find. FactSet Research Systems may be a good place to start.
FactSet is a leading data aggregator that collects information from hundreds of sources and then sells tools that make it easy to access and interpret the data. The company's product is so useful that thousands of financial institutions -- think hedge funds, insurers, banks, mutual funds, and more -- happily pay a recurring subscription fee to have access to the platform. With a customer retention rate of 95% for more than 15 years in a row, FactSet has a system that some customers simply couldn't operate without.
That strong customer dependency provides FactSet with pricing power. When combined with the company's recurring revenue business model, you get long-term financial results that are nothing short of spectacular:
FDS Revenue (TTM) data by YCharts
FactSet's remarkable consistency hasn't gone unnoticed on Wall Street. The company's stock usually commands a premium valuation, which makes sense given its resilience. However, FactSet's fiscal second-quarter results were not well received, which has caused its share price to lag the market's returns by a wide margin year to date. While it's hard to call shares "cheap," I think FactSet is a wonderful business -- one that can be purchased for an attractive price today.
Chipotle might be a steal at these prices
Jason Hall (Chipotle Mexican Grill): At first blush, shares of the well-known burrito bistro may look pricey, trading for more than 145 times the past 12 months' earnings. Factor in the company's struggles from the food-borne illness issues in 2015, and it may seem Chipotle is an ideal stock to avoid right now. I couldn't disagree further.
To start, Chipotle is showing every sign that it's moving forward, and customers are coming back in a big way. In the first quarter, same-store sales were up almost 18%, a trend that management said started at the end of 2016, and it looks to be continuing into the second quarter. This situation led to a near tripling of profits year over year, even with sales still down from their mid-2015 peak.
That brings us to the big opportunity for investors right now. At its peak, Chipotle earned over $16 per share with 1,900 locations; that's 21% fewer than the 2,300-plus it operates today. And that means investors who buy shares of the company now will be in an excellent position when sales have fully recovered.
At recent prices, Chipotle shares sell for about 30 times the 2015 earnings peak. If the company -- as I expect -- is able to return to its prior per-restaurant sales and profit levels within a couple of years, its stock is an absolute buy today. Don't let the last year's earnings make you look past the recovery, and what it should mean for profit growth in the quarters ahead.
Hiding in plain sight
Cory Renauer (Omeros Corporation): Small-cap biotech stocks can produce huge overnight gains, but cautious investors tend to avoid them for a reason that doesn't quite apply to my pick this month. With a recent market cap of about $683 million, this stock is priced like a recent start-up that needs to sell its own shares to fund risky development of new drugs. Although Omeros is pouring money into a new drug candidate with $1 billion-plus annual sales potential, it also has a growing revenue stream that could make another value-diluting share offering unnecessary.
Omeros Corporation's first drug, Omidria, got off to a slow start following its launch a couple of years ago. More recently, though, sales of the pupil-dilating eye-surgery assistant have been growing by double-digit percentages from one quarter to the next.
Recent Omidria sales growth has been outstanding, but investors will want to focus on the development of OMS721. This new drug candidate could become a new standard for treatment of rare, blood-based autoimmune disorders you've probably never heard of, such as atypical hemolytic uremic syndrome (aHUS).
At the moment, patients with aHUS have just one treatment option: Soliris. This drug is expected to generate about $3 billion in sales for Alexion Pharmaceuticals this year, which could be a high-water mark. The company has already started a clinical trial designed to support applications for OMS721 as an aHUS treatment.
Omeros Corporation stock may be flying under the radar now, but further hints of success for its lead candidate could send the stock soaring.
A tech titan no longer on Buffett's favorite list
Chuck Saletta (IBM): Last month, billionaire investor Warren Buffett announced that he had shed a significant portion of his stake in technology behemoth International Business Machines. On that news, IBM's shares dropped, and they've sat in the low $150s ever since. Losing Buffett's confidence is a tough blow for any company's stock, but the benefit for new investors is a lower entry price on a stock that may be an incredible bargain.
At its recent price of $152.63 per share, IBM trades at just over 12 times its trailing earnings and just under 11 times its anticipated forward-looking earnings. Sure, IBM has had struggles in recent years, but its current valuation reflects those struggles and anticipates very little future growth. Investors buying today also get a yield of nearly 4%, provided by a dividend with a 17-year history of growth.
Perhaps even better for investors, that dividend represents a payout ratio of only around 46% of the company's earnings, providing ample coverage for that dividend. Its most recent dividend increase was from $1.40 to $1.50 per share per quarter -- a decent 7% raise, and one that reflects optimism for a potential return to growth.
Despite its challenges, IBM remains a global titan with solid, though not necessarily spectacular, prospects. With the share-price decline on the news that Buffett lightened his holdings, its price reflects a reasonable value for those modest growth expectations. In a generally pricey market, that relative value is what makes IBM a top stock to consider for June.
An undervalued shoe company
Tim Green (Skechers): As recently as early 2016, footwear company Skechers was growing at a rip-roaring pace. Year-over-year revenue growth in excess of 25% had become the norm, propelling the stock to impressive gains in previous years. Skechers stock peaked in mid-2015, up 750% since the start of 2013.
Growth has since slowed, and investors responded by cutting the stock price in half. But that reaction may be overdone. Skechers is still growing, driven by its international business, and the stock trades at a valuation that looks enticing. Analysts expect earnings per share of $1.77 in 2017, putting the P/E ratio at about 14.5. Analysts also expect revenue growth of nearly 11%.
While the stock is in the doldrums, the business itself is doing just fine. During the first quarter, comparable sales at the company's retail stores grew 2.9%, with total retail sales surging 12.8% because of new store openings. The international wholesale business expanded by 16.8%, while the domestic wholesale business, the source of much of the pessimism surrounding the stock, produced roughly flat revenue.
Skechers is no longer an explosive growth stock. But the combination of solid growth prospects in international markets, an attractive valuation, a cash-rich balance sheet, and a retail business that's performing well in a difficult retail environment makes the stock one to seriously consider buying this month.
