The data doesn't lie: High-quality stocks tend to rise in value over the long term. However, that doesn't mean they go up in a straight line. We're investors, and that inherently means we want to buy stocks that we perceive to be on sale. Sometimes that means exercising patience and waiting for great stocks to go on sale and come to us.
What great stocks can't we wait to buy? That was a question posed to three Foolish investors. Topping the list of potential "on-sale" buy candidates are gold miner Yamana Gold (AUY 1.22%), defense giant Raytheon (RTN), and financial holding company Markel (MKL -0.42%).
Digging deep for value
Sean Williams (Yamana Gold): You could rightly argue that gold miner Yamana Gold is already on sale. After all, its stock has fallen by 54% over the trailing one-year period as a result of weaker year-over-year gold prices and a first-quarter earnings miss. But this Fool is being patient and waiting for Yamana to really hit the clearance rack before diving in.
Why the long-term bullishness on Yamana Gold? It has to do with two factors. First, I have a favorable view of gold over the long run. Even though a rising interest-rate environment isn't good news, since it increases the opportunity cost of owning gold, other factors are working in gold's favor. For instance, uncertainty surrounding the Trump presidency and Britain's imminent exit from the European Union could cause a safe-haven influx to the yellow metal. Increasing demand for gold and inflation figures could also influence gold higher. Needless to say, a higher spot gold price should help Yamana's margins.
But more important, Yamana is on the cusp of a major production expansion. The miner has three new sources of production set to come online very soon, which should lead to a substantial boost in cash flow and a reduction in all-in sustaining costs. It's scheduled to recommission its C1 Santa Luz mine by next year, with a 10-year mine life capable of 114,000 ounces of gold annually. Meanwhile, Cerro Moro, which is also slated to come online in 2018, is capable of 150,000 ounces of gold and 7.2 million ounces of silver, on average, over its first three years. Finally, the Suruca development within the Chapada mine should yield 45,000 to 60,000 ounces of gold annually for up to five years, beginning in 2019. This new production, coupled with organic mine growth, could lift cash flow per share by 50% by 2020.
Normally, mining companies are valued around 10 times their cash flow per share. Yamana is currently valued at just over three times next year's cash flow per share, making it one heck of a value. Assuming its 2017 quarterly reports are challenged by gold price volatility and development expenses, I should be able to nab this stock for a sizable discount later this year.
This rocket stock rocketed too high, too fast for me to catch it
Rich Smith (Raytheon): The S&P 500 is trading at 26 times earnings today -- a level it's only hit three times before -- first in the mid-1890s, and then only briefly; then again in 1999, in a great, snorting bull market that lasted four years; and then most recently in 2009, when all the banks were reporting losses, greatly depressing earnings.
While this has been great news for folks who already own the stocks they want, it does pose a problem for investors with new money they want to put to work: Everything we want to buy looks too darned expensive to buy.
So what's an investor to do? Well, you could throw caution to the wind and buy anyway. Or you could do what I do: Window shop, and wait for stocks to go on sale. When they do, one stock I'll be buying first of all is Raytheon.
Why buy Raytheon? Well, because it's one of the best defense stocks out there. Raytheon earns a huge 13.9% operating profit margin on its revenue, which is better than most of its rivals make. And it rakes in more than $31.3 billion in revenue a year. Raytheon's also located in the defense niche I like best -- missiles and rockets. In contrast to big-ticket defense hardware -- fighter jets, aircraft carriers, and the like -- which, once bought, tend to remain in service for decades, missiles and rockets are consumable products. Their purpose is to be bought, used, and disposed of -- at which point the customer must buy more.
And why not buy Raytheon now? Simply put, because I've spent a lot of time researching defense stocks and, in my experience, the fair value for such stocks tends to circle a valuation of one-times annual sales. The problem with Raytheon stock is that, after more than a decade of wartime operations, the stock's now so popular that it sells for two times sales -- 100% more than what I want to pay.
And so, for now, I'll wait. Make no mistake: I can't wait to buy Raytheon -- but not until it's on sale.
Investing for the long term
Steve Symington (Markel): I argued recently that Markel was a stock I would prefer to never sell, and one that is still worth buying at all-time highs. So it stands to reason that I would love to buy more shares of the so-called "mini-Berkshire Hathaway" if they go on sale.
Markel is run with a long-term mindset. Management's bonus compensation structure is tied directly to the company's growth in book value per share over rolling five-year periods, for example, helping to ensure that their interests are aligned with those of investors.
And when now co-CEO Tom Gayner was previously Markel's chief investment officer, he insisted that he hopes to "buy and stock and never sell it," elaborating, "I think that if you limit your buying to things you will be able to own for a long time, you will put more thought in to whether to buy or not, and that leads to better long-term decisions."
Markel shareholders can rest assured that Gayner will continue to run the overall business -- whether that means its investing operations, the insurance segment, or its non-insurance operations included under Markel Ventures -- with the same long-term focus.
However, with Markel shares currently trading around 1.65 times book value, compared with its historical average of closer to 1.4, the stock isn't as mouthwateringly cheap as I would like it to be. So with the caveat that Markel could certainly grow its book value and reduce its valuation without forcing investors to endure a pullback in the share price, I would jump at the chance to pick up shares at a discount.