Value investing is the art of finding hidden gems among stocks that have lost favor with the market. Or, as legendary investor Warren Buffett puts it: "Be fearful when others are greedy. Be greedy when others are fearful." Getting greedy, or simply buying great stocks that others aren't paying attention to while they trade cheap, is where value investors find success.
But with the S&P 500 racing to deliver its best quarter in nearly a decade, finding value in today's market isn't that easy. Fret not, for our Motley Fool contributors have identified three great value stocks you'll want to consider buying now: Viking Therapeutics (VKTX 2.14%), WestRock Company (WRK -1.58%), and XPO Logistics (XPO -1.96%).
A forgotten star
George Budwell (Viking Therapeutics): The market hasn't been kind to the clinical-stage biotech Viking Therapeutics over the last few months. Even though the company's nonalcoholic steatohepatitis (NASH) drug candidate VK2809 hit the ball out of the park in its midstage trial late last year, Viking's shares have somehow lost nearly 60% of their value since this top-line data release.
Adding to the mystery, Gilead Sciences reported a late-stage flop in NASH last year, and Intercept Pharmaceuticals' Ocaliva didn't exactly blow the investing community away with its mixed NASH results, either. Put simply, Viking still has a decent shot at bringing one of the first needle-moving therapies to market for this high-value indication. Yet investors have chosen to overlook this promising biotech stock.
What gives? Viking's shares are being weighed down by the fact that VK2809 remains a few years away from entering a pivotal stage trial for NASH. Later this year, the company plans on advancing VK2809 into a phase 2b trial to evaluate its clinical benefit in patients with biopsy-confirmed NASH. This next trial is expected to take up to a year to complete, which will put Viking well behind the leaders in the field in terms of clinical development.
Even so, the market seems to be severely underestimating this particular NASH candidate. While there is certainly a need for more data, VK2809's emerging clinical profile easily puts it in the running for a best-in-class designation. As such, Viking's latecomer status may not ultimately matter from a commercial standpoint.
The bottom line is that Viking currently offers a level of deep value rarely found in the healthcare sector, thanks to its aspirations in NASH. That said, this is a pre-revenue biotech stock -- meaning that investors should carefully mull over Viking's risk-to-reward ratio before buying shares.
A high-yield e-commerce bet you've been overlooking
Neha Chamaria (WestRock): WestRock shares have dropped nearly 40% in the past one year, but you'd be hard-pressed to find reasons that justify the stock's steep fall.
Fears of a trade war between the United States and China hurting WestRock's business have gripped the market, but the paper packaging manufacturer continues to generate strong sales. In its most recent quarter, WestRock's net sales jumped 11% year over year, thanks to higher selling prices and contribution from the recently acquired KapStone. WestRock reported 9.6% growth in sales and 21% growth in income before taxes (to exclude the impact of significant one-time tax gain for last year) in fiscal 2018. WestRock also increased its dividend by 5.8% last year.
Management remains optimistic about 2019 as it strives to integrate KapStone to achieve targeted synergies worth $200 million by 2022. At the same time, WestRock intends to pump nearly $1 billion into "strategic" investments to ramp up production and cut costs at key mills. Management believes this spending should generate $240 million in annualized EBITDA (earnings before interest, taxes, depreciation, and amortization) by FY 2022.
These two factors -- a larger, more diversified portfolio and reach thanks to KapStone and management's moves to improve cost efficiency -- should help WestRock exploit opportunities, especially in booming industries like e-commerce. In fact, WestRock's recent move to acquire Linkx Packaging Systems, a specialist in automated packaging and custom-sized boxes, is targeted to meet increasing demand for on-demand packaging, especially from e-commerce companies.
In short, the global packaging industry has strong growth catalysts and WestRock's a key player in the industry. The stock's current valuation of only 8.5 times price-to-forward earnings, four times price-to-cash flow, and a solid dividend yield of 4.8% make it a great pick for value investors.
Ready to deliver the goods
Rich Duprey (XPO Logistics): There are some very good reasons why XPO Logistics has lost over half its value in the past six months. Since hitting a record high of $116 a share in September, XPO stock is down 56% after a litany of issues hit the company: an international customer declared bankruptcy, which led to the logistics specialist cutting guidance; a second earnings warning; the loss of $600 million in business from a customer rumored to be Amazon.com; and a short-seller's report that called XPO's debt burden unsustainable.
As of this writing, XPO Logistics now trades at $51 a share, and some analysts worry that the transportation giant won't recover.
The worries seem overblown. Although there's no minimizing the loss of Amazon's business, which caused the greatest collapse in its share price, the revenues only amounted to 5% of the total. That's not an insignificant percentage, but it's not crippling, either, and XPO Logistics has a substantial number of other customers.
The company announced a $1 billion stock buyback, which could cynically be viewed as bluster in the face of a declining share price, but XPO has announced it will also once again be in the market for acquisitions, a speciality of CEO Bradley Jacobs, who has made a career out of successfully rolling up industries under his umbrella.
XPO Logistics trades at just 17 times trailing earnings, 11 times next year's estimates, and less than 11 times the free cash flow it produces, putting it in serious bargain-basement territory. With long-term earnings still expected to grow at a compounded rate of 28% a year, this is an opportunity to buy this logistics leader at an attractive price.