Just because a stock is cheap doesn't mean the company is a good one to own. Often cheap stocks are cheap for a reason. Warren Buffett put it this way: "Price is what you pay, value is what you get." In stock investing or otherwise, you can pay a low price for something that will end up costing you more in the long run.
With the stock market indices consistently trading at or near all-time highs, it's become even more important for investors to weigh the price they're paying to make sure they're getting the best value out of their investments. Below, find out why bargain stocks Dollar Tree (NASDAQ:DLTR), Ford (NYSE:F), and Tyson Foods (NYSE:TSN) are a good value.
While not the pure play on the dollar-store theme it once was, Dollar Tree is still a good bet on the deep-discount space, which has been hurt by proposed cuts to the Supplemental Nutrition Assistance Program (SNAP). Dollar Tree has felt has felt some impact because of its acquisition of the Family Dollar chain, which receives a bigger influx of food stamps revenue than its namesake stores. But even though Dollar Tree now accepts food stamps at more than 6,000 stores, overall SNAP revenue remains just a small part of the business. In fact, the delay in sending out tax refund checks this year had a larger impact, but that's a one-off, uncontrollable event, as is the shift in the Easter holiday.
Still, there remains concern about the integration of Family Dollar into the Dollar Tree family, a move I was never keen on, thinking its dollar-and-above pricing strategy fit better with Dollar General, which has a similar pricing policy, as opposed to the everything-for-a-dollar at Dollar Tree. Comparable-store sales fell 1.2% at Family Dollar in the first quarter, but were up 2.5% at Dollar Tree. The year-ago comp was the most difficult one the company will face, and on a two-year basis comps are positive at both chains.
Dollar Tree is also planning to expand into Canada, which some analysts are leery of, considering the dominance of Dollarama up north, but with the chance to serve customers at a variety of price points, Dollar Tree represents a good value. The stock trades at 19 times earnings and 14 times next year's estimates, and goes for a discounted 13 times the free cash flow it produces. It's a cheap stock that still offers opportunity.
If you were to make a judgment about Ford based solely on its stock price, you would think it was on the verge of bankruptcy. The stock trades at single-digit multiples on next year's earnings estimates and a minuscule fraction of its sales. The share price is less than five times the company's free cash flow, a ridiculously cheap price considering Ford's otherwise financially stable operations.
The company has gone from hero to zero as analysts wonder whether it has the innovative technology to challenge its rivals for the future of cars and driving. While the doubts may have had traction with Alan Mulally's successor, Ford has more recently installed a new CEO who vows to focus on both profitability and innovativeness.
It's not just Ford investors are worried about, though; GM, Fiat Chrysler -- and all automakers really -- give investors pause because of the concern that auto sales may have peaked. While that may well be true, it's important to consider that Ford sports a $0.60 per-share dividend currently yielding 5.4% that is in no danger of being cut or suspended, meaning investors will reap the rewards of being paid to invest in Ford's stock while waiting for the rebound to come. And at such deeply discounted values across all metrics, this automaker's shares might be too cheap to pass up.
Beef, chicken, and pork processor Tyson Foods has become even more focused on protein and less on non-related businesses, having shed such non-core operations as Sara Lee and Van's Food while acquiring others that can extend the protein category. Case in point: last month's purchase of AdvancePierre Foods, which is the leading producer of ready-to-eat lunch and dinner sandwiches and snacks. Tyson is also dabbling in alternative proteins such as meat substitutes with its ownership stake in Beyond Meat.
While Tyson's stock soared over the past few years as protein prices skyrocketed, shares have been hit lately as questions arose over whether the company and other producers, such as Pilgrim's Pride, engaged in price fixing to keep prices artificially elevated. And its first-quarter results were dented by lower sales at restaurants, which themselves are undergoing a sea change as consumers react to grocery store price deflation.
Yet that's why the acquisition of AdvancePierre is strategic: It can help Tyson capture more of those sales as people eat in. With its stock trading at only 12 times earnings and next year's estimates, as well as at a fraction of its sales and at a discounted value compared to its free cash flow, Tyson Foods is a bargain stock investors could be tempted to gorge on.