Value stocks have become scarce thanks to the nine-year bull market, which has only recently started to show its age. Even a few months ago, it was tough to find anything that could legitimately be called a value stock.
The market is no longer moving in only one direction, and that means value investors should be on the lookout for opportunities. Where to start? How about Alphabet (GOOG 2.70%) (GOOGL 2.62%), Best Buy (BBY 3.10%), and Cypress Semiconductor (CY)? Here's what you need to know.
A surprisingly inexpensive tech giant
Steve Symington (Alphabet): Alphabet stock is trading at around $1,035 per share as of this writing, but don't let its four-figure price fool you into thinking it's expensive. The parent company of Google is expected to increase revenue nearly 21% this year (to around $134 billion), while 2018 earnings should climb by an even more impressive 38% to roughly $42 per share. Assuming Alphabet lives up to those expectations -- and it typically does, despite not offering quarterly financial guidance to Wall Street -- that would mean the stock trades at below 25 times forward earnings, an attractive premium given its growth. And that's not to mention the fact that Alphabet has nearly $101.9 billion in cash and marketable securities -- or roughly $147 per share -- on its balance sheet.
Of course, the vast majority of Alphabet's sales and profits come from advertising and digital product sales from its incredible core Google business, which boasts seven products with at least one billion monthly users each: Search, Gmail, Chrome, Maps, YouTube, Google Play, and Android.
But Alphabet also enjoys the promise of substantial incremental growth from its "other bets" segment, which houses a group of mostly early-stage businesses with massive long-term promise. Even still, these other bets are seeing their collective top lines grow quickly; sales from the segment soared 49% last year to $1.2 billion -- mostly from Nest connected home products, Fiber high-speed internet, and Verily life-sciences innovations. And while they simultaneously generated an operating loss of $3.4 billion last year (narrowed from $36 billion in 2016), if even one or two of these businesses can eventually grow to rival Google's existing core operations, they will prove money well spent.
This retailer is killing it
Tim Green (Best Buy): There are a lot of retail stocks trading at severely beaten-down valuations. Consumer electronics retailer Best Buy isn't one of them. The stock has soared since the company embarked on its turnaround in late 2012. Over the past five years, shares of Best Buy have more than tripled:
Best Buy has slashed unnecessary costs, removed layers of management, lowered prices, invested in its stores, and expanded its e-commerce operation. The company's fourth-quarter results show the fruits of those labors: Comparable sales jumped 9% higher, online sales surged 17.9%, and adjusted earnings per share exploded 25%. On top of solid execution, the company's results were aided by the decline of competitors like Sears Holdings and the bankruptcy of regional chain H.H. Gregg.
Best Buy produced adjusted earnings of $4.42 per share in 2017. Back out the $1.78 billion of net cash on the balance sheet, and the stock's price-to-earnings ratio sits at 14. Use the $5.50 to $5.75 per share Best Buy expects to earn in fiscal 2021, and the ratio drops to 11 at the midpoint of that range.
Best Buy's future growth will depend on its success expanding its services, e-commerce, and international businesses. The company doesn't expect the blockbuster growth numbers it put up in the fourth quarter to repeat. But with a relatively low valuation, Best Buy doesn't need to hit a home run every quarter for the stock to be a solid investment.
An overlooked niche chipmaker
Leo Sun (Cypress Semiconductor): Cypress Semiconductor is often overshadowed by larger chipmakers, but it's the market leader in five high-growth niche categories -- Wi-Fi/Bluetooth combo chips for Internet of Things (IoT) devices, automotive instrument cluster microcontrollers, automotive NOR flash memory chips, SRAM memory chips, and USB-C controllers.
The chipmaker's core growth strategy, dubbed "Cypress 3.0," aims to turn it into a "one-stop embedded solutions provider" for the IoT market. That strategy got a big boost from its acquisition of Broadcom's wireless IoT business in 2016.
Cypress has a lot of irons in the fire. Its core growth comes from the automotive and industrial markets, where smarter machines now require more semiconductors, but it also has a major foothold in the consumer electronics market, where the USB-C standard is gaining traction.
Bears think its growth could be hurt by soft auto sales or an economic slowdown which hits industrial chips, but Cypress consistently gains content share in both the auto and industrial markets -- which means that a large number of chips installed per machine could easily offset any cyclical declines. That's why 80% of its revenues came from customers who bought "two or more" product families last quarter.
Analysts expect the company's revenue and earnings to rise 7% and 37%, respectively, this year. Yet the stock trades at 14 times forward earnings and pays a forward dividend yield of 2.4%. Cypress already rallied 11% this year, versus the 6% gain of the PHLX Semiconductor Index, but I think that it's still a great value play in a lofty sector.