When the broader market is trading at a Shiller cyclically adjusted price to earnings ratio of 30, you know that stock prices are far from cheap. This is making the bargain-hunters' job that much harder by the day. That isn't to say the market is completely devoid of deals right now. There are some small pockets where value-seekers can find bargain-basement priced stocks.
Three stocks that stand out as businesses worth considering as an investment and stocks priced at decent valuations are oil services company Schlumberger (SLB 0.67%), wireless provider Verizon Communications (VZ -0.68%), and tire manufacturer Cooper Tire & Rubber (CTB).
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Not cheap by valuation standards, but cheap based on market cycles
By most conventional valuation metrics, it's hard to say that oil services giant Schlumberger's stock is selling for cheap. Then again, that is the trouble with valuing cyclical stocks like oil services. When looking at stocks like this one, you have to look at the valuation and how it relates to the market cycle. Today, the oil service business is suffering from a lack of investment from oil producers, and too much idle services equipment is putting pressure on prices. As a result, earnings are down, and valuations will look high. If you look at the future of the business, though, it appears as though now is the right time to start adding Schlumberger to your portfolio.
Unlike its largest rival Halliburton that is highly leveraged to North America and the shale industry, Schlumberger is very much a global oil services company that generates the bulk of its earnings in the international and offshore markets. When times are good, this is a great position to be because offshore oil drilling is a service-intense business. The problem today is that shale drilling has become so cheap that producers are electing to spend their capital in the shale patch instead of on international projects or new offshore developments.
This trend may last a little while longer, but it isn't a situation that can last forever. Natural decline rates at existing reservoirs continue to eat into existing production, and demand is growing at 1.4 million barrels per day globally. Eventually, shale won't be able to grow fast enough to offset these trends, oil prices will rise, and producers will develop offshore assets again. When that happens, Schlumberger will likely be the oil services company of choice, and its bottom line will get back on track.
Schlumberger is a best-in-class kind of stock that has a reputation of generating superior returns for investors over time. Today, it is in the midst of a market swoon that has made its stock price look rather compelling. It may take some time before the market for international and offshore development turns, but it will, and Schlumberger should be the largest beneficiary.
An awful lot of attention given to short-term issues
Wall Street hasn't been too pleased with some of Verizon's recent moves such as delving into the war for original content and unlimited data packages in reaction to smaller competitors such as T-Mobile. Over the shorter-term, these are certainly concerns that shouldn't be entirely overlooked. This thinking, however, ignores some of Verizon's largest strengths.
Whenever wireless providers compete on benefits and pricing, it always helps to be the biggest company on the block. Verizon's subscriber base is leagues ahead of all of its peers, which gives it the ability to outlast its competition when pricing wars come up. The push toward unlimited data plans is the most recent iteration of this. Verizon was a little slow to react to others offering unlimited data, and it has lost some subscribers as a result. These pricing competitions can lead to the occasional blip in subscriber base, but over the long term traits like download speed and availability win out. This is where Verizon's strength comes into play. According to the most recent OpenSignal report, Verizon earned the top ranking -- either outright or shared -- in 66 of the 72 regional tests for 4G download speed or availability.
These traits make the company's business an absolute cash cow that has more than supported reinvestment in the business and significant dividends to investors. Cash has been a little tight over the past 12 months because of a major build in working capital, but eventually that working capital will be drawn down.
I can't deny that Verizon has some short-term hurdles that are a slight cause for concern, but the company remains the biggest fish in the pond with the best network that should attract customers. With shares trading at an enterprise value to EBITDA ratio of 7.1 times and a dividend yield of 5%, Verizon's stock looks awfully tempting.
Always cheap, but that doesn't mean you should stay away
Let's face it; some stocks are persistently cheap for one reason or another. One great example is Cooper Tire & Rubber. Even though the company has managed to produce double-digit returns on equity throughout this decade, its shares have never traded above an EV/EBITDA ratio of six times. Today shares trade for just four times EBITDA.
CTB EV to EBITDA (TTM) data by YCharts.
Two negatives are likely impacting Cooper's valuation right now: North American tire sales aren't a growth market, and the company's growing international presence isn't impacting the bottom line. The first argument is a valid one. Cooper's North American sales are all exclusively aftermarket tire sales, and there isn't much growth in this market.
On the international side of the business, though, operations are improving, and operating losses are narrowing. Management believes that it can raise prices in some of its international markets that will enhance profitability and leave it on track for an 8% to 10% operating income margin for 2017. Sales are likely to grow for some time in Cooper's international segments, and if it can pass on higher prices in those markets, it could be the driver of higher net earnings that have been so elusive for some time.
Cooper's management has been adept at allocating capital -- its return on invested capital has been above 15% since 2010 -- and the opportunities in international markets give Cooper a growth driver to go along with its stable, cash generating North American business. Cooper's results will never blow you away, but it is the kind of slow-but-steady business that generates wealth over time. At four times EBITDA, that is an investment worth making.
