With the S&P 500 trading at an all-time high, expert investors know it's probably a smart idea to put money to work in value stocks instead of simply chasing after momentum stocks. But which value stocks are a good bet right now? We asked that question to a team of Fools, and they picked Cameco Corp (NYSE:CCJ), The Container Store Group (NYSE:TCS), and Medtronic (NYSE:MDT).
The nuclear option
Reuben Gregg Brewer (Cameco Corp): Cameco Corp is suffering through a period of historically low uranium prices. There's too much supply and too little demand leading prices to hit 12-year lows in 2016. That pushed the miner's bottom line into the red last year, something it had managed to avoid through the downturn up until that point. And the first quarter was seasonally weak, as management expected, which didn't help the story.
But here's the thing, Cameco has recently been trading for less than book value. In other words, you are buying it for less than its assets are worth. It's five-year average price to book value ratio, for reference, is around 1.5. The stock also yields 3.1% (or so), well above the five-year average yield of 2.3%. The board appears committed to maintaining the payout. In sum, Cameco looks relatively cheap today.
Of course, that assumes that Cameco can muddle through the downturn to benefit from an eventual upturn. There's good news on this front. For example, Cameco is conservatively financed with long-term debt making up around 22% of the capital structure. And its business is built off of long-term contracts, allowing it to charge customers $34.43 per pound versus a spot price of $23.88. That gives it an important buffer against low uranium prices. Part of the recent red ink, meanwhile, was related to Cameco adjusting its business to lower prices (shutting higher cost mines down and shifting production to lower-cost assets, for example).
Basically, Cameco is doing the right things and has a solid foundation. It should be around to benefit when supply and demand come back into balance. And with over 50 new nuclear reactors being built around the world, now could be the right time to take the risk and buy Cameco while it's cheap.
An increasingly efficient niche retailer
Keith Noonan (The Container Store Group): Shares of The Container Store are up more than 30% following its better-than-anticipated fourth-quarter earnings report in May, but the stock is still down 11% year to date and roughly 80% over the last three years, and looks to have continued comeback potential now that it's taking a more cost-conscious approach to conscious capitalism.
The company specializes in storage and organization products and has built a reputation for being one of the best places to work in retail with its average worker making nearly $50,000 annually, but its lauded employee compensation program has weighed on earnings and been an ongoing concern for investors. The recent earnings beat (which saw fourth-quarter earnings double year over year) coupled with the announcement that the company would be paring down its workforce suggests it could see profit momentum down the line. Cost savings helped the company more than triple annual earnings in its last fiscal year, and management has indicated that it's moving forward with ongoing efficiency efforts as a key focus.
The Container Store operates in a somewhat unexciting retail industry niche, suggesting that, while threats from Amazon.com and other online outlets are still present, it probably won't have to worry about an influx of brick and mortar competitors. Its forward P/E of roughly 17 isn't dramatically below the specialized retail industry's forward multiple of 20.5, but the company trades at roughly a third of trailing sales and revenue momentum stemming from new store openings and cost-cutting measures suggest avenues to earnings beats that could recast its current valuation.
Medical devices are always in demand
Brian Feroldi (Medtronic): Owning a diversified medical device maker might sound like a boring way to make a buck, but if you glance at Medtronic's long-term stock performance you might be willing to change your tune. Medtronic's stock has beat the return of the S&P 500 over the past three, five, and 10 years. My hunch is that the company will do more of the same from here.
Why do I believe that Medtronic's future is bright? First, Medtronic pumps billions of dollars into research and development each year. This money helps the company to create new products in the many disease states in which it competes and makes it tough for competitors to catch up. In addition, the company has a long history of making tuck-in acquisitions as a way to enter new disease states or fend itself off from would-be competitors. These moves help keep the company at the top of its game.
Second, it can take a healthcare provider a long time to get comfortable with using a certain type of medical device. Once the company has spent a lot of time on training, it typically likes to stick with what it knows. These high switching costs are yet another way in which Medtronic fends off the competition.
Third, the world's population is aging and becoming more wealthy. Both of these factors should lead to steady growth in the demand for medical devices. Given Medtronic's size and global scale, the company looks well positioned to take advantage of these demographic tailwinds.
Given all of the above, Medtronic's financial statements look poised to continue flourishing in the decades ahead. If true, then the company's 39-year long history of consecutive dividend increases should be able to continue. That's an attractive total package for a company that is trading around 16 times forward earnings, which is why I think value investors should put this stock on their radar.
Brian Feroldi owns shares of Amazon. Keith Noonan has no position in any stocks mentioned. Reuben Brewer has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool owns shares of Medtronic and The Container Store Group. The Motley Fool has a disclosure policy.