Even in a bull market, investors often cast aside good companies because of one-off or short-term problems that can fix themselves in due time. That creates an opportunity for bargain-basement stock shoppers to scoop up these companies at great values.
We asked three Motley Fool investors to identify a stock they felt was absurdly cheap compared to its prospects, and they picked Johnson & Johnson (NYSE:JNJ), Tanger Factory Outlet Centers (NYSE:SKT), and US Foods Holdings (NYSE:USFD). Let's find out why these companies represent unusual opportunities that we might not see again.
A rare opportunity
George Budwell (Johnson & Johnson): President Trump's promise to lower prescription drug prices has weighed heavily on the shares of top pharmaceutical companies like Johnson & Johnson this year. Specifically, the pharma giant's shares have lost 11.4% of their value so far this year, making them absurdly cheap in my view.
J&J's shares are now trading at an attractive 14.4 times forward-looking earnings. And while that particular valuation metric alone suggests that J&J's stock is a bargain compared to the broader field of big pharmas, I think there's so much more here that makes this stock too cheap to ignore right now.
First off, J&J is quickly catching up to the leaders in the high-growth field of immuno-oncology. Although the company initially lagged behind the pioneers in this space, J&J jumped in with both feet via a licensing deal with a Chinese company called Legend Biotech late last year.
The two companies are currently developing a potentially best-in-class chimeric antigen receptor T-cell candidate, LCAR-B38M, for advanced multiple myeloma. In an early stage study last year, LCAR-B38M generated a stunning 100% response rate in patients whose multiple myeloma returned after previous treatments.
This experimental therapy therefore has a real shot at becoming the standard of care for advanced multiple myeloma, which should translate into some truly astounding sales figures down the road. In addition, J&J also sports several other potential blockbuster candidates within its broader portfolio, giving it one of the most valuable clinical pipelines in the industry.
Apart from J&J's stellar pipeline, the company also offers one of the best dividend programs in all of healthcare, an AAA-rated balance sheet, and a mountain of cash that can be used for business development going forward. So there's a lot to like about J&J in both the short and long term, and that's why I think investors would be wise to take advantage of this exceedingly rare dip in J&J's stock price.
A retail stock with a bright future
Matthew Frankel (Tanger Outlets): Outlet mall real estate investment trust Tanger Factory Outlet Centers trades for a rock-bottom valuation of just 9.4 times this year's projected funds from operations (the REIT version of earnings). With headwinds facing the retail industry and rising interest rates putting pressure on REITs, Tanger has become a serious bargain.
And to be fair, there have been a few troubling signs. For example, Tanger has been affected by a few retail bankruptcies and has had to make some rent concessions to keep its occupancy up.
However, this company should be just fine in the long term. For starters, discount-oriented and experiential retail properties are doing quite well. This is why TJX Companies and Five Below have soaring stock prices, just to name a couple examples. Tanger's business model is inherently recession-resistant (discount shopping), and with an experiential component of hunting for unique bargains, it is also somewhat e-commerce-resistant. And while there have been some retailer bankruptcy issues, the vast majority of Tanger's tenants are high-quality vendors that are in great shape.
Finally, the outlet industry is still quite small, so there's lots of room for growth. Tanger is in just 22 states so far, and there are many underserved markets that could accommodate outlet shopping. Once the retail headwinds begin to clear, Tanger could have lots of expansion potential. And in the meantime, you'll get a 6.2% dividend yield as you wait for the retail environment to normalize.
A seat at the table
Rich Duprey (US Foods Holdings): With shares of US Food Holdings up 18% in 2018 and 25% over the past year, the food service supplier would not appear to be a stock that was absurdly cheap. But because its growth prospects don't seem to have been fully incorporated into its valuation, there looks to be plenty of room for margin expansion and price appreciation.
When it comes to food, whether grocery stores or the food service industry that US Foods services, profit margins are always thin. Furthermore, the restaurant industry is going through a prolonged slump due to changing consumer eating habits.
Yet US Foods is expected to grow its earnings faster than much larger rival Sysco or even smaller peers such as United Natural Foods. US Foods' earnings growth is forecast to expand 27% annually for the next five years versus 16% at Sysco and almost 10% at United Natural. Only Chefs' Warehouse is expected to exceed it, boasting anticipated 32% annual growth.
First-quarter earnings last month showed US Foods enjoyed "solid growth with independent restaurants," according to Chairman and CEO Pietro Satriano, and it was also able to achieve its highest quarterly per-case growth rate in recent history.
Analysts view its technology initiatives as giving it a substantial edge over the competition, which will pay off with winning high-margin restaurant accounts that are increasingly concerned with mobile and delivery options.
At least one analyst expects its free cash flow to grow to $650 million over the next few years as a result, a development that might make its deeply discounted price-to-free-cash-flow ratio of just under 12 even more of a bargain. Snacking on shares now ought to let investors feast later as expansion occurs.
George Budwell has no position in any of the stocks mentioned. Matthew Frankel owns shares of Tanger Factory Outlet Centers. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of Johnson & Johnson. The Motley Fool recommends Five Below. The Motley Fool has a disclosure policy.