In general, a value stock is an investment that's trading at a discount to its intrinsic value. And while that's the core of traditional value-seeking, the term has grown to be more expansive, and it can also include stocks that may not offer the same margin of safety as a traditional value stock but still represents a great bargain, if not as much downside protection.
Three top Motley Fool contributors have identified three that may not meet the traditional definition of a value stock, but certainly represent a bargain-basement opportunity for savvy investors: CenturyLink Inc. (LUMN -2.24%), General Motors Company (GM -0.33%), and Celgene Corporation (CELG). Keep reading to learn why these three stocks look like bargains today, and whether you have a spot in your portfolio for one or more of them.
Image source: Getty Images.
From dividend trap to value play?
Jason Hall (CenturyLink Inc.): This once-struggling hardline telecom has received plenty of bearish coverage over the past few years, mainly because of its sky-high dividend yield and concerns that it would be forced to cut the payout. In short, many of my fellow Fools have called CenturyLink a potential dividend trap.
And my colleagues weren't wrong to warn investors of the risks. CenturyLink's dividend has been bigger than its earnings for years:
CTL Payout Ratio (TTM) data by YCharts
Furthermore, the company's plans to reverse that trend have been heavily weighted to pulling off something that rarely works out as well as investors hope: a major corporate merger. But in this case, CenturyLink's acquisition of Level 3 Communications is actually paying off. Last quarter, the company generated more cash than it needed to pay its dividend:
CTL Cash Dividend Payout Ratio (TTM) data by YCharts
I expect as further integration actions drive expenses down even more and its Level 3 offerings return it to revenue growth, we should see even stronger cash flows in the coming years.
CenturyLink trades for 3.5 times cash from operations and 8.2 times free cash flow, cheaper than most of its telecom peers, and a reasonable 9.5 times earnings. Combined with the positive cash flow trend that should keep its dividend sustainable -- a priority for management -- and solid prospects to generate modest growth, CenturyLink is surprisingly cheap, and its 10.3% dividend yield may be more secure than many investors think.
The long road ahead
Daniel Miller (General Motors): It's understandable that investors hunting for value stocks would be very cautious sifting through the automotive industry because of near-term headwinds. The highly profitable U.S. new vehicle market is plateauing, trade war continues to be a possibility, and many automakers are facing other challenges. Ford is struggling with its second CEO since Alan Mulally magnificently turned around the company, and it's lost the momentum since the last recession. But General Motors, which is trading at a dirt cheap 6 time forward price-to-earnings ratio, has made excellent moves and could be a great value for long-term investors.
GM has made huge progress in autonomous vehicle technology. Image source: Getty Images.
The first thing value investors should know about GM is that despite near-term headwinds that could hinder its business, such as possible tariff issues and plateauing U.S. sales, it's positioning itself as a leader in driverless vehicles. In fact, RBC Capital Markets' auto analyst, Joseph Spak, wrote to clients that GM Cruise, General Motors' self-driving subsidiary, could be worth $43 billion and could be a lucrative business as soon as 2030. All eyes will be on GM Cruise's 2019 roll-out of a self-driving taxi fleet. If it's successful, expect GM to win even more credibility in driverless vehicles.
Yes, GM's driverless ambitions may not bear fruit for years, or longer, but in the meantime it's making good moves for investors. It's exiting unprofitable markets such as Europe, restructuring markets such as south Korea, and designing its next generation of pickup trucks to be more profitable. It's also returning value to shareholders with a large buyback program while its shares are cheap and offers investors a 4% dividend yield. Yes, GM and automakers face challenges, but over the long term it's well positioned to profit from driverless cars, and in the near term it's making smart moves for investors. It looks like a top value stock for patient investors.
An undervalued big biotech
George Budwell (Celgene Corporation): Buying stocks with depressed valuations is a proven strategy at producing market-beating returns. The trick to this time-tested investing approach, though, is picking stocks that the market is discounting for irrational reasons. The blue-chip biotech Celgene Corporation, in my view, is one such stock.
Celgene's shares are trading at their lowest price-to-sales ratio in the past 10 years. While it's true that the valuations of most big biotechs have been steadily cooling off lately, Celgene's stock has been particularly hard hit this year for a variety of reasons.
The core problem is that the biotech has so far failed to diversify its revenue stream ahead of the patent expiration of its flagship multiple myeloma drug, Revlimid, in the next decade. I know that sounds like a serious problem in light of the fact that Revlimid makes up 64% of the biotech's revenue, but the market has arguably gone overboard at this point.
Now, the refusal-to-file letter for the relapsing multiple sclerosis drug candidate ozanimod was disconcerting, and Celgene's other various setbacks didn't help matters. But that doesn't mean Celgene can't right the ship. After all, the biotech's broader pipeline is chock-full of potential star products, and this impressive line-up is starting to bear fruit.
As proof, Celgene has an outstanding chance at bringing a whopping four new blood cancer products -- luspatercept, fedratinib, and the CAR-T therapies liso-cel and bb2121 -- to market within the next three years. Each one of these products has blockbuster-level sales potential over time. Celgene should thus have little trouble offsetting Revlimid's declining revenue stream when that day finally comes.
That's why I'm confident that the market's palpable fear over Celgene's patent woes is actually a strong contrarian indicator -- arguably making its stock a great value pick at these bargain-basement levels.
