Buying and holding stocks with attractive valuations is a proven strategy when it comes to producing market-beating returns over the long haul. Nevertheless, value stocks -- or stocks priced below their immediate peers -- aren't always great investments. Many of these cheap equities, after all, are trading at depressed valuations for a reason.
In order to separate the wheat from the chaff, we asked three of our Motley Fool contributors which value stocks they think are outstanding buys right now. They suggested IBM (IBM 1.65%), The Children's Place (PLCE -1.99%), and Teva Pharmaceutical Industries (TEVA 1.15%). Here's why.
Big yield at low earnings multiples
Keith Noonan (IBM): Big Blue's recent fourth-quarter earnings beat and better-than-expected guidance for 2019 have given the long-struggling stock a meaningful boost, but shares still trade in value territory. Even with some additional data points and targets from management suggesting that the company's cloud businesses are slowly steering the century-old company in the right direction, the stock is still down roughly 20% over the last year.
That uninspiring performance hasn't been without cause, as sales growth has continued to be elusive amid declining demand for its legacy hardware and software products, but the stock remains undervalued, trading at just 9.5 times this year's expected earnings and sporting a 4.7% dividend yield. Income investors can look to the company's safe payout ratios and 23-year streak of delivering annual payout growth as indications that the company's dividend will continue to expand in the years to come -- even if IBM's recent $34 billion acquisition of open-source cloud software company Red Hat suggests that its payout will climb at a slower rate in the near future. The company still enjoys an entrenched position in the enterprise IT industry, and it's already had some success in using that positional advantage to generate business for its cloud, security, and analytics services.
Right now, the market is still betting against IBM's comeback -- and there's a clear case to be made that it hasn't shown enough to combat that pessimism. However, the company offers a great returned-income component, and shares are priced cheaply enough to set up big reward potential if its growth initiatives pay off.
A misunderstood retailer
Jeremy Bowman (Children's Place): Shares of Children's Place, the kids apparel retailer, are down 40% over the last year. You might think it's just another of the many chains struggling with the transition to e-commerce, falling mall traffic, or simply getting clobbered by Amazon.com, but that's far from the case here. Children's Place, which posted comparable sales growth of 9.5% in its most recent quarterly report, is a healthy retailer.
However, investors sent the stock plunging in December as management indicated that sales and profit growth would take a hit as the company invests in grabbing market share to take advantage of store closures from rivals like Gymboree and Sears. Children's Place also slashed its full-year earnings-per-share guidance from $8.09-$8.29 to $7.69-$7.79. Normally, such a guidance cut would be a warning sign, but management explains that the slimmer profits are due to investments in e-commerce capabilities and margin impacts from potential liquidation sales.
Gymboree, arguably Children's Place's most direct rival, is expected to close about 800 stores after declaring bankruptcy earlier in January. That's undoubtedly a positive long-term sign for Children's Place and not a reflection of the sector's woes -- Children's Place is in a much stronger position than its bankrupt rival as it's both profitable and growing.
In other words, the market is making a mistake by selling off Children's Place. Investors can capitalize by getting a shareholder-friendly stock with a fast-growing dividend currently yielding 2.2%, trading at a P/E of just 12.2. Once the Gymboree liquidation passes, Children's Place should be in a stronger position with more market share and ready to return to solid growth.
On the comeback trail
George Budwell (Teva Pharmaceutical Industries): Stocks that shoot up by a healthy 28% in a matter of just four weeks rarely qualify as value stocks. But generic drug king Teva Pharmaceutical is one of the few exceptions to this general trend. Even after this latest surge higher, after all, Teva's shares are still trading at a rock-bottom price-to-sales ratio of 1.09. Teva's stock, in fact, is among the absolute cheapest within the large-cap healthcare space right now.
Is there more upside to come? I think so and for a couple of solid reasons. First off, Teva's new management team has done an outstanding job of cutting expenses through a sizable workforce reduction and the suspension of the company's dividend. In turn, these strategic cost-cutting moves have enabled the drugmaker to reduce its outstanding debt load by over $6 billion in the past two years. That's no small feat, as Teva was literally drowning in debt following its acquisition of Allergan's generic drug portfolio.
Now, Teva still isn't out of the woods, thanks to falling sales of its flagship multiple sclerosis drug Copaxone. As things stand now, Wall Street has the drugmaker's top line dropping by 4.8% in 2019 due to this singular headwind, but better days do appear to be right around the corner.
Keeping with this theme, Teva now has two high-value branded medications on the market in the Huntington's disease drug Austedo and migraine treatment Ajovy. The generic drug market as a whole is also widely expected to surge higher in the coming years in response to the aging global population. Taken together, these favorable tailwinds should push the company past the Copaxone patent cliff and into a new era of growth. And the market, for its part, already seems to be coming to this realization based on Teva's stellar performance so far this year.