Cue the pumpkin-spiced everything, because fall is officially here! Along with the coming of fall we've also witnessed a pretty steady stream of new highs for the stock market, with all three indexes recently notching all-time record closes.
Nonetheless, we head into fall with a number of questions still to be answered. Namely, will President Trump and the GOP pass healthcare and/or tax reforms? Wall Street has been counting on corporate tax reform (i.e., lower income-tax rates) to drive growth in the years to come, and anything less than a passage of a cut in corporate tax rates could be viewed as a failure.
There's also the question of what's to come with interest rates. The Federal Reserve chose to stand pat on its federal funds target at its September meeting, but the door is still open for a possible rate increase for the third consecutive December. How future rate hikes could impact stocks and the economy remains a highly debatable topic.
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Three top stocks on sale this fall
Right now, the answers to these questions are unknown, but that doesn't mean investors have to sit idly by awaiting the outcomes. Instead, investors with a long-term mindset have the opportunity to seize the day by picking out attractively priced high-quality stocks this fall that could power their portfolio to gains for years to come.
Here are three top stocks trading at discounts that investors may want to consider buying this fall.
Alliance Resource Partners
Ready for a curveball? How about we begin by taking a look at coal producer (yes, I said "coal producer") -- Alliance Resource Partners (ARLP 0.59%).
Some pundits would suggest that buying into coal would be investment suicide, given how it's been pushed to the wayside by natural gas and alternative energies such as wind and solar in recent years. According to the Energy Information Administration (EIA), coal wound up generating 30% of all electricity in 2016, which is down almost 10% in just two years. This reduction and subsequent oversupply has weighed on coal prices, which also pushed Alliance Resource Partners' sales and net income down in its most recent quarter.
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However, the EIA also calls for coal's usage to rise in 2017 to 31% of all electricity generation, suggesting that coal isn't going anywhere anytime soon. Instead, it just means that investors in the coal space need to be especially picky when looking for companies to benefit from coal's usage. I believe Alliance Resource Partners is that top-tier producer in the coal industry.
To begin with, the company does an excellent job of minimizing its exposure to wholesale coal prices, which in turn makes its cash flow very predictable from one quarter to the next. It does this by contracting out its production years in advance. Through the midway point of 2017, it had 38 million tons of coal committed this year, along with 20.1 million tons, 11 million tons, and 6.9 million tons, respectively committed for 2018, 2019, and 2020. Few other coal producers have commitments of this size pushed out as far as Alliance Resource Partners.
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The company has also done a remarkably good job managing its debt and expenditures effectively. Whereas many of Alliance Resource Partners' competitors are mired in debt, its debt-to-equity was a reasonable 48% as of the latest quarter, and it's been generating more in annual operating cash flow than it has in total debt at the moment. In other words, there are no debt or financing concerns here.
As the icing on the cake, Alliance Resource Partners is a limited partnership, meaning its dishes out a delectable 10.6% yield in return for hefty tax breaks. It's possible this dividend could be cut a bit in the future depending on coal prices and demand, but it's likely that you'll continue to receive a dividend that's light years higher than the S&P 500's average yield.
Teva Pharmaceutical industries
How about another curveball? Even with every big-name money manager and Wall Street pundit under the sun running in the opposite direction, I'd suggest that pharmaceutical castaway Teva Pharmaceutical Industries (TEVA 0.69%) could make for an intriguing buy this fall.
Let's get the elephant in the room out of the way: Teva is nothing short of a mess in the very near term. Here's the laundry list of everything that's gone wrong recently (and forgive me if I miss a point or two):
- The company cut its sales and profits guidance for fiscal 2017 and slashed its top-notch dividend by 75% to $0.085 a quarter.
- Weaker generic-drug pricing is weighing on the company, which is a problem given that Teva is the largest generic-drug maker in the world.
- It's buried under $35.1 billion in debt, mostly from its recent acquisition of generic-drug maker Actavis, and it's being forced to sell non-core assets to improve its financial flexibility.
- Its CEO and CFO both left following a bribery settlement in three foreign countries.
- Copaxone, the company's leading brand-name product that accounts for close to 20% of total sales, is expected to face generic competition next year.
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As I said, it's not pretty -- but it could very well get better.
Recently, Teva announced that it had found its next CEO, Kare Schultz, a longtime veteran at Novo Nordisk , and it sold its women's health operating segment. It divested Paragard to Cooper Companies for $1.1 billion, and then announced the sale of the remainder of its women's health assets for $1.38 billion in two separate transactions just a few days later. That's a pretty good start for a company aiming to reduce its debt load by $5 billion by year's end. Remember, cutting its dividend by 75% will allow it to keep $1 billion in annual cash flow that it can then funnel toward debt reduction. It's also generating around $1 billion in free cash flow each quarter from existing operations. If Teva can make good on its expected sale of European oncology and pain franchises, it's not out of the question that it can reduce its total debt by between $7 billion and $10 billion by the end of 2018.
Teva's also done a nice job with trying to shield Copaxone from generic competition. It developed a new formulation that can be administered three times weekly, as opposed to daily. While it's unclear if this new formulation will be protected from generics, Teva continues to utilize the legal system to the best of its ability to keep its cash cow untouched by generic competitors.
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Finally, just keep in mind that as the top generic-drug maker in the world, the long haul numbers are on its side. Within the U.S. alone, the elderly population is expected to nearly double from 48 million in 2015 to 88 million by 2050, according to the U.S. Census Bureau. Since the elderly are more likely to take prescription medicines, Teva is uniquely set up to see its demand for generic products rise. Even if margins remain challenged, volume can prove to be a moneymaking tool for Teva.
At just five times forward earnings and boasting a 2% yield even after the dividend cut, Teva looks worthy of value- and income-seekers' consideration.
Spirit Airlines
Why not one more curveball? The last discounted top stock worth a look this fall is Spirit Airlines (SAVE). Yes, an airline!
Fuel costs are generally the largest expenditure for the airline industry, so when crude prices fell from north of $100 a barrel in 2014 to under $30 at one point in 2016, most everyone rejoiced, including consumers. But that cheering only lasted so long for bare-bones airlines like Spirit, which rely on exceptionally low fares to attract consumers. Low fuel prices have opened the door for major airlines to wage ticket-price wars with Spirit, hurting its near-term margins.
Image source: Spirit Airlines.
More recently, Spirit has also had labor disagreements with its pilots who want a new contract. Despite the offer for bonus pay, many of Spirit's pilots have been turning down overtime work, pushing the airline to cancel 850 flights during the second quarter. Worries about when a new agreement will be reached have hung over the stock in the interim.
Now, here's the good news: Spirit Airlines' business model is unique, and that alone could help differentiate it in a crowded and debt-laden industry.
Spirit's focus is on passing along the lowest ticket price as possible. That's its lure to hook passengers and get them on its planes. After their ticket is purchased is where the high-margin business model comes into play. Spirit charges for pretty much everything thereafter, including printing out your boarding pass, checking luggage, taking a carry-on bag onto the plane, food, drinks, pillows, a blanket -- you name it, they charge for it. The best part about these ancillary fees is they're very high margin, since they don't typically require the assistance of an airline agent. These ancillary costs are geared in such a way as to persuade cost-conscious travelers to handle things on their end, rather than to rely on Spirit Airlines' agents. That means fewer employee costs for Spirit.
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Furthermore, Spirit Airlines is operating one of the youngest fleets in the skies. According to AirFleets.net, the average age of its 103 aircraft is just 5.3 years, which means its plane spend most of their time in the air rather than in the garage receiving repairs. What's more, if jet fuel prices do creep higher, Spirit's newer fleet will get far better fuel efficiency than the older planes than many majors are currently operating. Yet in spite of this new fleet and capacity expansion, Spirit has only $211 million in net debt, which is very reasonable for a profitable airline of its size.
Currently valued at less than 10 times forward earnings, Spirit and its low-cost model could prove to be a bargain for consumers and investors.
