With the market hitting the highs it has lately, any company that is selling for any kind of discount these days should probably be viewed with a certain bit of skepticism. After all, if there is so much confidence in the overall market, then something has to be deeply flawed with these companies.
As is always the case with Wall Street, many of the things that dictate share price have to do with very short timelines that may not necessarily apply to an individual looking to buy and hold a stock for several years, especially when it comes to dividend stocks.
Three stocks that look incredibly cheap today that may not necessarily merit such a deep discount are Alliance Resource Partners (ARLP +2.18%), Verizon Communications (VZ +0.02%), and 8point3 Energy Partners (CAFD +0.00%). Here's why these high-yield stocks may be worth a spot in your portfolio.
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The last gasps of coal have a lot of air in them
There's no denying that coal is on its way out as an economically viable energy source. According to Lazard's levelized cost of energy study, coal is now behind natural gas, solar, and wind on a cost-per-megawatt-hour basis -- and that doesn't include the impacts of subsidies or carbon taxes. Any company looking to invest in new power-producing facilities probably isn't going to look at coal as a viable option. Just look at the scheduled capacity additions in the U.S. for 2016-2020: Though net capacity additions will total 76 gigawatts, coal's net capacity will decline by 16 gigawatts, while other power sources offset these declines.
This doesn't paint a pretty picture for any coal investments, but Alliance Resource Partners is probably the one exception. The company's mines in the Illinois Basin are the lowest cost-coal source out there when you consider all the factors, such as transportation. What this means is that Alliance's coal production has an opportunity to grow, while other mine regions, such as Appalachia and the Powder River Basin, suffer even larger declines. Also, when you consider that coal is still the largest source of electric power in the U.S., there is still some time left to make money in coal.
And what better way to make money in this dying industry than with a company that has an 8.5% distribution yield and a balance sheet that won't blow up in a couple of years? Alliance's low-cost coal production, its low leverage, and a management team that isn't investing a lot in new mines is the strategy you want for an investment in coal today. Even with these desirable traits, Alliance's stock has an enterprise value to earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio of just 2.4. That's the kind of valuation you give to a company that is on the brink of collapse.
Alliance probably won't be around forever, but its stock doesn't merit a valuation that low. If you want a stock that will throw off gobs of cash over the next several years, Alliance is the company for you.
A strong subscriber base not getting much love
We've seen this before in the telecommunications business. Wireless providers start to reach network parity as a certain technology matures, and it sparks a bit of a price war as the non-price factors diminish. This is where we are at right now when it comes to Verizon Communications. Its competitors have had time to invest in 4G network infrastructure such that the difference between networks is much smaller than when 4G first came out. So to keep customers, wireless providers have turned to offering lower-cost contracts and bringing back unlimited data plans. As a result, competitors like T-Mobile are taking market share.
Here's the thing, though: We're on the cusp of wireless providers' starting to roll out 5G networks. Verizon said that it plans to roll out 5G service in 11 markets by the middle of this year. That may be just a baby step, but the $3.1 billion for Straight Path back in May gives the company loads of across-the-country spectrum that covers the 40 largest markets.
Now that Verizon has the technology and the spectrum, the next thing it will need in order to deploy 5G is loads of cash flow for investing. That is one place where Verizon excels. The company's subscriber base is the largest in the nation and should provide it with the most cash to throw at deploying 5G. If it can beat all its competitors to market with a 5G network, don't be surprised if all that pricing competition falls to the wayside.
When you consider this dynamic, Verizon's stock looks awfully cheap. It currently carries a dividend yield of 5.3%, and its enterprise value to EBITDA ratio of 6.8 times is more than reasonable.
Just because the thesis has changed doesn't necessarily mean it's broken
When 8point3 Energy Partners IPOed a couple years ago, it looked like a solar yield company that made much more sense than others in the market. Having two parent organizations -- solar panel manufacturers Sunpower and First Solar -- gave some reassurance that it wouldn't get projects rammed down its throat by a single parent org just looking to grow the payout at the expense of everything else.
Recently, though, both Sunpower and First Solar have announced that they are looking to sell their stakes in 8point3. Both companies seem to think that there are enough buyers out there for projects that they don't need to be involved in the development phase anymore and can focus on the manufacturing end.
That may sound like a death sentence for 8point3. If it doesn't have a parent organization, then how will it be able to buy development projects? If that is the concern on Wall Street (and it appears so, as shares have a price-to-tangible-book ratio of just 1.6 times and a dividend yield of 7.2%), then it seems a bit shortsighted. One thing to consider is that it still has right of first offer on 301 megawatts of power-generating assets held by the two parent companies. If 8point3 buys all of these facilities, that's a 31% increase to the portfolio today. Also, if both parent orgs decide to cut ties, then there is nothing stopping 8point3 from buying a stake in other solar power facilities as a third-party financier.
I'll admit that 8point3's accounting looks fuzzy. A lot of cash comes from minority and unconsolidated interests in projects that don't show up in revenue or earnings. However, if the reason so many people are shying away from the stock is that Sunpower and First Solar want out, then this is a steal.
