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3 Value Stocks for Wise Investors

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Wise investors understand how some margin for error -- often by buying undervalued stocks -- can help reduce your risk of losses.

With the stock market still pushing all-time highs, value investors might feel like there are no opportunities to be found. But the reality is that's not the case. Furthermore, the economy has remained steady and strong, which is why it would behoove investors to stay invested. There's nothing worse for your portfolio than sitting on the sidelines while the market inexorably marches higher and higher. 

And while it's folly just to buy stocks willy-nilly and hope for the best, there's wisdom in finding good businesses you can buy with a margin of safety -- in other words, stocks that trade at a nice discount to what investors might normally pay for them, or are trading for a discount to their typical valuations. Three stocks that our investing contributors like right now are fast-growing LGI Homes Inc (LGIH 7.13%), steady and profitable Magna International Inc. (USA) (MGA 1.62%), and slowly improving International Business Machines Corp. (IBM -0.05%)

Drawing of two light bulbs separated by a dotted line with an ink pen. "Risk" is written under one bulb while "reward" is written beneath the other, which is lit up.

Image source: Getty Images.

All three are solidly profitable, and their stocks are cheap. Keep reading to learn why they're worth buying. 

A stock that's up 75% and is still cheap

Jason Hall (LGI Homes Inc): It might sound crazy to call a stock that's up 70% since the beginning of the year a value. But there's definitely a case to be made that small homebuilder LGI Homes is still a value stock. 

As a starting point, its stock was at fire-sale prices the first half of the year, trading for less than 9 times trailing earnings until midsummer. But even after the big jump in its stock price over the past few months, LGI Homes has steadily grown its earnings as home sales have surged. Second-quarter earnings were up 56% on 46% growth in home sales revenue. The company closed on 34% more homes in the second quarter than it did the year before. 

And those results are accelerating. The company announced August home closings recently, reporting a 56% increase in homes closed in the month. Through the first eight months of the year, LGI Homes has closed 30% more homes than last year. There's the possibility that it could feel some slowdown from Hurricane Harvey for this Texas-based builder, but that's likely to be short-term in nature. The company might actually experience increased demand in communities affected by the storm. 

LGIH PE Ratio (TTM) Chart

LGIH PE Ratio (TTM) data by YCharts.

Finally, it is still cheap, trading for 13.4 times trailing-12-month earnings per share. That's about half the S&P 500 average and cheaper than most high-quality homebuilders. With millennials finally starting to enter the homebuying market, this looks like an excellent time to buy this inexpensive builder that's in full-on growth mode. 

Strong tailwinds should power up this stock

Neha Chamaria (Magna International): At first blush, Magna International may not entice value investors after its solid run-up so far this year, but wise ones will know there's still a lot of steam left in the Canadian automotive supplier. Magna is, after all, still trading at multi-year low price-to-earnings multiple (under 10) and price-to-free cash flow (around 12), despite profits and cash flow rising rapidly in the past year or so.

MGA Net Income (TTM) Chart

MGA Net Income (TTM) data by YCharts.

Last quarter, Magna reported record quarterly sales backed by strong demand from the Asia-Pacific region and other international markets like Brazil. Encouraged, management bumped up its full-year forecast, now projecting 6% growth in sales at the midpoint. That paves the way for a record year for the company, which doesn't just serve some of the top automakers in the world, but has even developed its own self-driving platform called MAX4 that can be integrated into any car's existing systems.

Magna's financials are equally impressive. The company has consistently earned double-digit returns on equity and invested capital in each of the past five years and has generated nearly $1.7 billion in free cash flow over the past 12 months. It currently sports a very comfortable debt-to-equity ratio of 0.23. In short, Magna meets or exceeds most of the parameters I'd look for in a sound value stock.

When you combine that with its dividend yield of 2% and a forward P/E of just 8, Magna offers value investors a compelling entry point today.

The (painfully) slow turn

Reuben Gregg Brewer (International Business Machines Corp.): IBM's top line has been in decline for over five years. The reason is the technology giant's shift from older businesses, like making computers, to newer ones, such as artificial intelligence, cloud computing, and security. You don't turn a $135 billion-plus company on a dime, so it isn't surprising that IBM's makeover is taking a long time to gain traction.

The big question is how long should investors wait? With the price down roughly 30% over the past five years, it seems like investors are worried that IBM isn't going to succeed. But it has successfully remade itself many times over in its history, shifting from clocks and scales to mainframes and to services while remaining an industry leader throughout. And with ample free cash flow to pay its dividend and cover its spending on the business makeover, there's no particular rush to get things done.

IBM Dividend Yield (TTM) Chart

IBM Dividend Yield (TTM) data by YCharts.

The most exciting thing about IBM today, however, might be its price. The yield is currently around 4%, compared to a five-year average of 2.7% and toward the high end of its historical range. Moreover, the company's P/E, price-to-book, price-to-sales, and price-to-cash flow ratios are all below their five-year averages. Those ratios also compare favorably to technology peers like Microsoft (NASDAQ: MSFT) and Intel (NASDAQ: INTC), among others. If you can see a positive outcome in IBM's future, this might be a good time to add the tech giant to your portfolio on the cheap and with a fat yield.

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Stocks Mentioned

International Business Machines Corporation Stock Quote
International Business Machines Corporation
$141.12 (-0.05%) $0.07
Magna International Inc. Stock Quote
Magna International Inc.
$55.79 (1.62%) $0.89
LGI Homes, Inc. Stock Quote
LGI Homes, Inc.
$93.10 (7.13%) $6.20

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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