The Dow Jones Industrial Average keeps hitting new highs, and it recently broke through the 25,000-point level. That suggests we're in a market where it's difficult to find stocks still offering good value. But it isn't.
Scouring the universe of stocks, I identified Cars.com (CARS 0.65%), DSW (DBI -0.94%), and Harley-Davidson (HOG 1.86%) as stocks that look as if they offer not only attractive valuations, but also the promise of appreciating in value over the next few years.
There are good reasons the activist investors at Starboard Value staked out a 9.9% position in digital automotive marketplace operator Cars.com. The market is betting heavily against the stock, with more than a quarter of its shares outstanding shorted, and its days to cover have reached 10 -- anything over seven days is a lot. The hedge fund also thinks it's a candidate for a buyout by private equity.
Although Cars.com hasn't had an impressive run since being spun off by Tegna last year, reasons remain for being bullish. Some 80% of Cars.com revenue comes from car dealerships that have annual subscription-based contracts, and though there are no long-term agreements with the dealers, the contracts are automatically renewed unless the dealers cancel them.
Moreover, digital advertising is where car dealerships are spending the majority of their money. According to ad market researcher Borrell Associates, online and digital ads account for 54%, or $16 billion, of the $30 billion dealers will have spent in 2017. With over 20,000 dealers advertising on its site, Cars.com can expect to receive its share of ad spend, particularly if car sales are expected to decline.
Trading at 18 times trailing earnings and only 12 times free cash flow, Cars.com's stock looks like a cheap choice that could see its engines rev in the future.
Footwear retailer DSW has had one of those cliched roller-coaster years, rising and falling as its fortunes changed each quarter. The company has made more than a few missteps, such as its acquisition of online retailer Ebuys that it ended up having to write down virtually the entire purchase price for, but it's also been able to clear out inventory and reposition itself for growth. At least that's the game plan, and it's not unreasonable to think it can work.
While comparable-store sales were down 0.4% in the latest quarter, and down 1% for the first nine months of 2017, that's actually improved from the same time in the prior-year period, when comps were down 1.8% and 1.5%, respectively.
DSW is also in the process of acquiring the 51% of Canada's Town Shoes that it doesn't already own, which should help it raise its profile north of the border. That deal is expected to happen sometime this year, but they're starting to share services, and DSW has identified digital and supply chain synergies they can potentially unlock when the deal finally does happen.
The footwear chain trades at less than 20 times earnings and 14 times next year's estimates, while also being valued at 13 times free cash flow. 2018 could be the year DSW finally kicks it into high gear.
It's not like motorcycle king Harley-Davidson doesn't deserve its low valuation. It trades at 16 times earnings and 13 times estimates, and its price-to-free cash flow ratio of only 11 theoretically puts it in bargain-basement territory. However, it is in the middle of a four-year sales slide that is giving no indication of resolving itself anytime soon.
So, why would it be a buy? Harley essentially owns the motorcycle market, with a better than 50% share for bikes with engines of 601 cubic centimeters and above. Its next closest competitor, Polaris Industries, has a double-digit slice of the motorcycle pie, though it classifies the market slightly differently, looking at bikes with engines 900 cc and above. Even so, Harley commands the lion's share of the market.
Because of its leadership position, it doesn't have to engage in the frenetic discounting the rest of the industry is employing. Harley-Davidson is protecting its premium image and, in doing so, has kept its profit margins elevated. While that has cost it a lot of sales over the past few years, the company remains committed to bringing in 2 million new riders to the brand while producing 100 new motorcycles over the next 10 years.
It's an ambitious plan, and there are more than a few pitfalls facing the bike maker, but Harley has time and the financial wherewithal to wait out the slump, and its low-priced stock is still attractive.