Value stocks are the name of the game right now. With the S&P 500 falling precipitously in recent months and on track to close the year in the red, some stocks across sectors have officially entered bargain territory. For investors looking to back up the truck with some solid value names as we step into the new year, now's the time.
So we asked three of our Motley Fool contributors to pick a compelling value stock that they believe could be worth your money at current prices. Here's why they're eyeing Intrepid Potash (IPI 6.10%), A.O. Smith (AOS +1.74%), and AT&T (T 0.36%).
A successful turnaround that's getting no respect
Maxx Chatsko (Intrepid Potash): While fertilizer stocks have been ruinous investments in recent years thanks to collapsing fertilizer selling prices caused by a glut of supply, the market fundamentals are finally trekking in the right direction. The timing couldn't be better for Intrepid Potash, which has put its house in order and positioned itself to capitalize on the inevitable market rebound. Yet despite making solid progress on its turnaround, the stock is down 37% in 2018.
To be fair, the average diluted share count increased about 17% from September 2017 to September 2018, which might be expected to take a bite out of the stock price. Then again, investors appear to be overlooking the fact the business is the strongest it's been in years.
Value socks are plentiful when the markets crash. You just have to know where to look. Image source: Getty Images.
In the first nine months of 2018, Intrepid Potash grew revenue 10% over the prior year. It managed to lower production costs, which resulted in a 102% year-over-year increase in gross profit. The business turned in $6.6 million in operating income and $4.1 million in net income in the most recent nine-month period, compared with an operating loss of $11.5 million and a net loss of $21.6 million last year. Operating cash flow swelled to nearly $53 million, up significantly from $10.5 million in the year-ago period.
Improving strength in potash fertilizer markets is driving the turnaround, while the company's ability to sell some of its excess water reserves to oil and gas drillers in the Permian Basin is generating solid cash flow as well. Even the long-struggling Trio segment, Trio being the company's brand of langbeinite fertilizer, appears to be on the cusp of profitable production heading into 2019.
The significant improvement in financial health, coupled with the precipitous share-price drop, creates an opportunity for bargain-hunting investors. Intrepid Potash trades at just 0.9 times book value and 9.9 times enterprise value to EBITDA -- each lower than industry leader Nutrien. The stock will only look cheaper as water deliveries increase and the fertilizer segments continue to improve their profitability in 2019.
A classic boring but high-potential stock
Neha Chamaria (A.O. Smith): A.O. Smith shares are down 30% this year and now trading at 16 times price-to-operating-cash flow. That's well below the five-year average P/OCF of 23 and comes in spite of pretty strong cash flows in the trailing 12 months. So strong, in fact, that management increased dividends twice in 2018 -- and a good 22% increase the second time at that.
AOS Price to CFO Per Share (TTM) data by YCharts
Much of the pessimism can be traced to the water heater manufacturer's stake in China, which is also its priority growth market. Given that the company derived nearly 35% of its sales from the nation last year, fears of a looming slowdown in China have made investors wary. A management downgrade of full-year sales estimates in October further fueled the market's fears.
Investors, however, are missing the big picture. For one thing, A.O. Smith is still on track to deliver a record sales year, which speaks volumes about the strength of some of its key markets, such as unit replacements in North America. Two, even if China were to experience growth hiccups in the near term, A.O. Smith has other high-potential markets such as India to tap. Both nations share a similar story -- that of a burgeoning middle class with a huge market for water heaters and water treatment solutions.
Despite slower-than-expected growth in China, A.O. Smith is confident of growing total revenue by 7% and generating roughly $475 million in operating cash flow in fiscal 2018. Those are pretty good numbers, and while tariffs and China-related concerns could cap upside in the near term, I see solid potential in A.O. Smith stock for the long term.
There's much more to come from this telecom
Chris Neiger (AT&T): AT&T might not be at the top of the buy list for many investors, but don't be too quick to overlook this telecom giant's opportunities.
First, there's AT&T's acquisition of Time Warner. That deal faced some initial legal hurdles, but the company is now working on creating synergies between the two companies by bundling Time Warner content with AT&T's wireless services. This could help the company not only boost its subscriber numbers but also retain customers by offering shows, movies, and other content that its rivals don't own.
Second, AT&T is at the forefront of the wireless industry's next big tech breakthrough -- 5G. AT&T is just now turning on its mobile 5G network in 12 cities and will add many more in 2019. 5G will allow devices and services to send data at much faster speeds than 4G LTE and reduce the time it takes for devices to request data from websites and other sources. In short, mobile internet connections will be faster than ever before and allow new devices and services to come online through the Internet of Things.
Finally, AT&T just raised its dividend once again, which marks 35 consecutive years of dividend increases for the company and puts AT&T's current dividend yield at an enviable 6.75%. That's fantastic news for long-term investors, and it gets even better when you factor in that AT&T's shares are trading at just 8.4 times the company's forward earnings. Value investors looking for a strong dividend play with lots of future potential need to give AT&T a second look.
