If you were lucky enough to have a cash pile to pour into stocks after the Great Recession ended, you're sitting pretty. It's been a phenomenal run, as the current bull market turned eight years old this spring. We boasted about Dow 20,000 in January only to blow past 21,000 a month later and briefly top 22,000 in early August.
As profitable as the current bull market has been for many investors, the S&P 500's price-to-earnings ratio of nearly 25 makes it difficult to find intriguing stocks at enticing prices. Luckily for investors, there are still some diamonds in the rough out there. Among them: Ross Stores (ROST -1.72%), General Motors (GM -0.91%), and Disney (DIS -0.93%)
Amazon-proof?
A lot of industries are shaking in their boots at the thought that Amazon.com (AMZN -1.35%) will eventually slide into their territory and steal business. That list of industries includes the grocery industry, now that the e-commerce giant has acquired Whole Foods Market. It also includes retailers of any kind, and industries such as automotive parts or pharmaceuticals could be next. But Ross Stores has somehow managed to successfully fight off the e-commerce company, but despite its solid results, it has traded lower with the rest of its retailing peers, offering investors a golden opportunity.
Off-price retailers such as Ross Stores thrived and increased their consumer base during the Great Recession and have continued to gain momentum in the years since:
ROST Revenue (TTM) data by YCharts
The core driving force is simply that a large group of consumers is more than willing to trade customer service and fancy store design for brand-name products at lower prices.
Image source: Getty Images.
Many retailers, especially those linked to malls, are posting drastic comparable-store sales declines and are shuttering stores. Meanwhile, Ross recently reported second-quarter sales growth of 8% compared with the prior year, driven by comparable-store sales gains of 4%. It outperformed its projections and topped Wall Street estimates, and investors sent shares more than 11% higher after hours. It's nearly impossible to find a retailer brushing off Amazon and bucking the retail downtrend, but Ross Stores is exactly that -- and it trades at a modest 18 times its trailing-12-month earnings.
Income over growth
Light-vehicle sales in the U.S. market are plateauing, and future growth will be much more difficult and probably more expensive. That's because as incremental sales dry up, automakers will be forced to compete by increasing deals and incentives that threaten profits. It's simply life in the cyclical automotive industry.
US Light Vehicle Sales data by YCharts
With the market peaking, albeit at still near record levels, General Motors isn't a stock for everyone. But GM is certainly a solid income stock and is crazy cheap. In the near term, GM stands to benefit from improved performance in North America, which is thriving despite peak sales because consumers have shifted from lower-margin passenger cars to SUVs and trucks. That's sent GM's North America EBIT-adjusted margin from 7.8% and 8.9% in 2013 and 2014, respectively, to 10.6% and 10.4% in 2015 and 2016, a strong level.
Image source: General Motors.
In addition to a more profitable sales mix of SUVs and trucks, GM is on pace to generate $6.5 billion in cost savings and plans to pour roughly half of that capital back into engineering and technology. Management plans to keep roughly $18 billion in cash on hand to make sure it survives a potential downturn and can still pay its dividend, which currently sits at an enticing 4.25% yield.
Lastly, GM is making smart near-term moves to generate more returns for shareholders. In fact, GM's return on invested capital (ROIC) has jumped from 16% in 2012 and 20.2% in 2013 to 30.1% in 2016 on a continuing-operations basis. GM has to capitalize on the changing landscape that includes more smart-mobility projects to combat companies such as Uber and Lyft, along with a future of driverless cars and electrified vehicles. But at a trailing-12-month price-to-earnings ratio of 6, improving margin in North America, higher ROIC, a solid dividend yield, and a massive cash pile, this is a strong income play for investors.
Have some faith
The last stock on this list is definitely facing a bit of adversity, which is historically unusual for what's been an absolute life-changing investment for long-term investors.
Disney is on pace to record its third consecutive fiscal year of revenue declines, driven in part by its media-networks segment, which is struggling because of weakness at ESPN. As subscribers continue to cut the cord, ESPN's advertising has dipped because of lower viewership rates and increasing programming costs, and broadcasting and media networks posted double-digit percentage declines in operating profit during the third quarter. To top it all off, Disney's move toward an online service and its decision to pull most of its content from Netflix will generate opinions, headlines, and uncertainty of all kinds.
Image source: Getty Images.
But investors need to have a little faith here. This is a company boasting one of the most recognizable brand images in the world, with theme parks that have stood the test of time and movies that continue to reach blockbuster status. In short, Disney is more than capable of adapting and evolving. Sure, a lot of ESPN's troubles stem from overpaying for sports content contracts, but that won't last forever. Movies can be hit or miss, and earnings comparisons can be volatile from quarter to quarter, but few can boast the library of franchises and characters to draw from, not least of which is the addition of the Star Wars franchise. Furthermore, its parks-and-resorts segment has rebounded strongly since the past recession and will gain future momentum from Disneyland Shanghai.
Disney has faced its share of adversity recently, and it trades at a fairly cheap trailing-12-month price-to-earnings ratio of 17. But the media juggernaut isn't going anywhere anytime soon, and if long-term investors have a little faith, that the company can emerge from this speed bump as healthy as ever, this could be a great time to scoop up shares -- and it offers patient investors a 1.5% dividend yield while you wait.
