It takes a little extra rooting around to find good value stocks in an overheated market, but savvy investors know that companies with good businesses that have been dealt temporary setbacks are always one place to start. We asked three top Motley Fool contributors to identify just such a company that a smart value investor could sink his or her teeth into. Read on to find out why Nike (NYSE:NKE), Garmin (NASDAQ:GRMN), and Dollar General (NYSE:DG) could be those stocks.
The Swoosh is on the clearance rack
Brian Feroldi (Nike): The slowdown in North American retail sales has knocked down the price of all kinds of stocks that have exposure to the U.S. consumer, including apparel-giant Nike. That fear seems justified given the recent wave of retail store closures, but a closer look at Nike's actual results paint a brighter picture.
Last quarter, the company posted a 5% gain on the top line and 24% growth in profits. While the outsized net income gains are attributable to cost-cutting measures and favorable tax benefits, those results hardly justify a sell-off. What's more, I think that the company's results were quite impressive given the retail operating environment.
Looking ahead, Nike has a number of initiatives in place that promise to keep its financial statements heading in the right direction. The company is investing heavily in its own direct-to-consumer capabilities. Over the long term, this move promises to bypass retailers altogether and could lead to margin expansion. In addition, the company is spending to expand its presence in international markets such as China and Europe, both of which hold lots of growth potential.
Finally, the company is also trimming its workforce in an effort to rightsize the business, which should also help generate incremental profit growth, in time. That should make it easy for the company to continue its habit of buying back lots of stock and making annual bumps to the dividend.
In total, I think there's ample reason to believe that Nike will continue to deliver for its shareholders from here. With shares currently trading for less than 22 times trailing earnings, I think that right now is a great time to consider buying into this long-term winner.
Tracking surprising gains
Demitri Kalogeropoulos (Garmin): Garmin shares are up over 20% in the last year, but the GPS-device specialist is still valued at an attractive 15 times profits. Sure, its core automotive product segment is in sharp retreat today. That division slumped by 19% last quarter as people continued to choose their phones or built-in navigating hardware to get around in their cars.
Garmin's business is about far more than just its fading auto segment, though. Its marine, outdoor, and aviation units are seeing healthy growth, and together, they kept the overall operations expanding in the first quarter. Garmin has a significant portfolio in the fast-growing wearable fitness arena, too. And unlike rival FitBit (NYSE:FIT), it enjoys strong profitability on these devices, as gross margin was 56% of sales last quarter. Overall, operating margin jumped higher by almost 2 percentage points, to 18.2% of sales.
CEO Cliff Pemble and his executive team are targeting roughly flat sales this year of just over $3 billion, which would mark a significant slowdown from last year's 7% increase. Cash flow and profitability figures are improving, though, and that's ensuring that Garmin has plenty of resources available to direct toward research and development.
Those innovation investments helped it gain significant market share in the fitness industry last year, and if they continue driving steady growth, I believe investors will be pleasantly surprised with how this stock performs over the next few years, given its relatively conservative valuation today.
An Amazon-resistant retailer
Rich Duprey (Dollar General): No retailer is completely immune to the effects of Amazon.com (NASDAQ:AMZN), but if there's one that comes close, it's leading deep-discounter Dollar General. With over 13,000 stores, it has dotted the country with locations filled with low-cost goods that are typically unavailable, or not cost-effective to buy, online.
More than 80% of its stock-keeping units are priced at $5 or less, while 77% of its sales are consumables -- items that need to be replaced on a regular basis. You could buy them online, but it's easier and quicker to stop in at a Dollar General store.
Net sales were up last quarter 6.5% on a 0.7% rise in comparable sales. This was weaker than in past quarters but weighed down by reductions in SNAP (Government Assistance) benefits and average unit retail price deflation. Both, however, are seen as relatively "transitory" in nature. As the impact of those effects start to subside, Dollar General's comparative performance will improve.
Some analysts suggest the deep discounter should even be acquired by Amazon. Considering Amazon's foray into produce to bolster its own grocery ambitions, snapping up a deep discounter might not be a bad idea.
Brian Feroldi owns shares of Amazon and Nike. Demitrios Kalogeropoulos owns shares of Nike. Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon, Fitbit, and Nike. The Motley Fool has a disclosure policy.