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3 Top Value Stocks to Buy in May

By Reuben Gregg Brewer, Travis Hoium, and Chuck Saletta - Updated May 15, 2018 at 11:27AM

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Here are three distinct opportunities to buy good companies at bargain prices. Don't miss out.

Value isn't a term that relates to any one area of the market; good buys can be found all over if you look closely. And we asked three Motley Fool investors to take a look for us. They said that right now, temporary staffing expert Kelly Services Inc. (KELYA 5.03%) looks like a bargain in a tight labor market, high-yielding Verizon Communications Inc. (VZ -2.17%) seems poised to benefit no matter what happens to the wireless landscape, and energy giant ExxonMobil Corporation (XOM 1.98%) is being shunned for what are likely temporary issues. Those are three vastly different businesses, all on sale. Here's what you need to know to start your research. 

As employment tightens, staffing becomes crucial

Chuck Saletta (Kelly Services, Inc.): The recent low unemployment numbers indicate that it's getting tougher to fill jobs with qualified candidates. That's music to the ears of companies that specialize in matching the supply of labor with the demand for it, such as Kelly Services. When qualified employees start becoming harder to find, companies become willing to pay more for help filling jobs on either a temporary or a permanent basis.

A hand drawing a scale balancing price and value

Image source: Getty Images.

As the innovator that founded the temporary staffing industry, Kelly Services has a better than 70-year history of matching people to roles. It not only handles those temporary placements it's famous for, but it also handles companies' more-permanent staffing needs. That full suite of employment-related offerings makes Kelly Services an in-demand business in today's economy. What makes it a value stock today is its price relative to its potential.

Right now, Kelly Services trades at a mere 11 times its anticipated earnings, and those earnings are expected to grow by around 15% annualized over the next five years or so. That combination alone would make it a reasonable value to consider buying today.

What makes the story potentially even better is the fact that staffing companies often are paid based on the salary of the people they place with employers. As a result, if the tight labor market starts pushing up salaries even faster, there's a chance that Kelly Services could grow even faster than expected. That would make its stock an even larger bargain.

Granted, what goes around comes around, and if the economy weakens, Kelly Services would likely be hurt by any lowered demand for employees. Still, chances are that a large part of that risk is already priced into its shares, which is what allows them to be available at a bargain price now.

The leader in wireless

Travis Hoium (Verizon Communications Inc.): There's been a lot of discussion in the telecommunications business about whether or not Sprint and T-Mobile will be able to combine to make a third wireless giant in the U.S. -- to go with Verizon and AT&T.  But there's been very little focus on the fact that no matter what happens, Verizon will be a winner.

Today, Verizon is in a duopoly with AT&T on the premium side of the wireless market, with Sprint and T-Mobile fighting over low-margin budget customers and struggling to invest in next-generation wireless networks. The result has been a highly profitable business that has a lock-in with consumers who demand the best network. 

If the Sprint-T-Mobile merger is approved, the market will be a three-company oligopoly, which typically means the remaining players will have very little incentive to compete fiercely for customers. Either way, Verizon is in a valuable position in the wireless market. 

You can see below that Verizon's premium position allows it to generate better operating margins than the competition. This high margin drives over $10 billion of cash flow generation that funds both a 4.9% dividend yield and investment in the next-generation 5G network that entrenches the company's differentiation long term. 

VZ Operating Margin (TTM) Chart

VZ operating margin data by YCharts. TTM = trailing 12 months.

As Verizon's 5G network is rolled out later this year, early adopters will be looking for the best network, and according to Verizon CEO Lowell McAdam, "we're way ahead of everybody." Consider that 5G is going to be the technology that enables self-driving cars, wireless home internet, and advanced virtual reality devices, and will ultimately drive Verizon's growth long term. 

I think Verizon's stock is a great value for investors, given the duopoly or oligopoly in wireless (depending on how you look at it), Verizon's leading position in the market, and its investment in rolling out 5G across the U.S. Shares trade at 13.7 times trailing earnings, and the dividend yield of 4.9% is a strong payout backed by loyal customers. Use of wireless technology is only going to grow over the next decade, and that positions Verizon well to be a winner for investors long term. 

A 25-year low for this energy giant

Reuben Gregg Brewer (ExxonMobil Corporation): Integrated oil and natural gas giant ExxonMobil has been struggling lately. Two notable issues are the company's falling production and a moderating return-on-capital-employed metric. Investors have pushed the stock down around 8% over the past year, while peers like Total, Royal Dutch Shell, and BP have seen stock advances of 20% or more.

That lack of love has lifted ExxonMobil's yield to 4.4%, its highest level since the 1990s. And the company's price to tangible book value is down to levels not seen since the 1980s. Historically speaking, ExxonMobil looks very cheap today. To be fair, the concerns pushing the stock price lower are real issues. But ExxonMobil is aware of the problems, and the conservatively run company has plenty of time to deal with them.

XOM Dividend Yield (TTM) Chart

XOM Dividend Yield (TTM) data by YCharts.

Investors are, effectively, thinking short term with a massive company where it takes time to shift gears. ExxonMobil, for example, has major projects in the U.S. onshore market and offshore in Guyana and Brazil, and is investing in natural gas in Mozambique. In time, these projects should alleviate production concerns. As for return on capital employed, ExxonMobil is taking the lead role in more of its investments so it can make good use of its expertise in running big projects. That should help lift returns back into the teens.   

If you can deal with collecting a nice 4.4% yield while you wait for ExxonMobil to turn the ship, now is a good time to consider buying.

Time for some deep dives

Kelly Services, Verizon, and ExxonMobil all have the makings of solid value plays. Indeed, the outlook for each seems brighter than investors are currently pricing into their stocks, which is an opportunity for value investors to jump on board before the rest of the market wakes up to the opportunity. You have the basics for this trio; now take a closer look at each of them. I think you'll find that one, or more, may be appropriate for your portfolio.


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Stocks Mentioned

Verizon Communications Inc. Stock Quote
Verizon Communications Inc.
$50.96 (-2.17%) $-1.13
Exxon Mobil Corporation Stock Quote
Exxon Mobil Corporation
$86.90 (1.98%) $1.69
Kelly Services, Inc. Stock Quote
Kelly Services, Inc.
$19.43 (5.03%) $0.93

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

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