The market giveth, and the market taketh away. Over the past nine years and four months, there's been far more "giveth" going on than "taketh" thanks to a bull market that's delivered big gains for patient long-term investors of high-quality, brand-name stocks.
But as investors, we also know that nothing goes up in a straight line. Since 1950, the broad-based S&P 500, arguably the best measure of overall stock market and U.S. economic health, has undergone 36 corrections of at least 10%. That's about one correction every two years, with the latest occurring in late January and early February of this year. And while the broader market has somewhat recovered what it lost during that brief early year tumble, some well-known stocks have marched in the opposite direction.
Though bull markets -- and generally low-interest-rate environments -- are known for their focus on growth stocks, I have two value names that might be worth a closer look. These are time-tested businesses with significant brand-name appeal and notable market share within their respective industries. And, as the icing on the cake, neither has been this cheap on a forward earnings basis in at least eight years.
I get it. Really I do. Investing in wireless provider AT&T (NYSE:T) is about as exciting as watching paint dry. But sometimes the most boring business models are the ones that yield the safest and most consistent long-term returns.
AT&T finds itself in rarefied territory following the release of its second-quarter operating results. Its $30.25 closing value on Wednesday marked its lowest share price since February 2012. The culprit appears to be a top-line miss ($39 billion in revenue versus an estimated $39.4 billion), which the company partially blamed on new accounting practices adopted at the beginning of the year. Those new practices reduced revenue by $900 million in the second quarter. The remainder of the blame goes to underwhelming net customer additions in broadband and video.
Yet for as much flak as AT&T has taken recently, I'm optimistic that its acquisition of Time Warner will improve multiple facets of its business -- or, at least for the time being, I'm willing to give the company an opportunity to prove itself at a forward P/E of just over 9. The real lure of Time Warner and its prized assets -- CNN, TBS, and TNT -- is that they'll act as a bargaining chip when 5G wireless network rollouts are ramped up. These networks should be the perfect lure to attract wireless cable service subscribers and help stymie the cord-cutting stigma that's recently plagued traditional content providers. Not to mention it gives AT&T even more bargaining power with advertisers.
It also doesn't hurt that AT&T has increased its quarterly payout for 34 consecutive years. This dividend is costing the company less than $15 billion annually to pay out, yet its operating cash flow has tallied roughly $39 billion in 2016 and 2017. Translation: this dividend is in no way, shape, or form, in danger of being cut. That means shareholders can sit back, relax, and watch TV (on AT&T's network) while collecting a premium 6.6% yield.
It's been eight years since AT&T was this cheap on a forward earnings basis, which might mean it's time for investors to take a nibble.
Leading appliance maker Whirlpool (NYSE:WHR) has done its best impression to honor its namesake by going quickly down the drain following its most recent quarterly operating results. Shares of the company have plunged 18% over the course of two days, hitting levels not seen in five years.
For the second quarter, Whirlpool's net sales, sans currency movements, swirled lower by 4.5%. Its EMEA segment -- Europe, Middle East, and Africa -- took a big hit, with sales plunging 12.3% from the year-ago period, while the company also noted substantial softness in its U.S. appliances business. This softness was the result of tariffs that hit steel and aluminum prices, which in turn caused Whirlpool to raise prices on its appliances to compensate. These higher prices appear to have steered consumers away for at least one quarter. Ultimately, the company reduced its full-year EPS guidance to $14.20 to $14.80 on an adjusted basis from its prior-quarter full-year forecast of $14.50 to $15.50 in EPS on an adjusted basis.
So, how do I spin good news out of these figures? Well, I don't. Rising raw-material costs aren't something businesses simply flip a switch to adjust to. In Whirlpool's case, it will probably take a few quarters for U.S. consumers to become comfortable with its higher pricing. In the meantime, the company will be able to reduce expenditures in other areas to partially offset this sales weakness.
But what's so interesting about this cyclical appliance kingpin is that it always seems to dig itself out of holes. It's a trusted brand in the U.S., and it has a burgeoning appliance business in Asia, mostly through acquisitions in recent years. In fact, Asia was its lone highlight in the second quarter, with sales rising 14.5% to $428 million, sans currency fluctuations. I believe in management's ability to rein in expenses while still focusing on brand differentiation and innovation.
I also believe in Whirlpool because of its valuation. We'd have go back 10 years to find the last time Whirlpool had a forward P/E of as low as 8.6. And did I mention it's now yielding 3.7%? This trusted consumer brand is certainly worth a closer look at these levels.