As heated as the stock market has been over the past decade, value investors might not feel like there's a good deal to be had out there. Moreover, the concept of what true value investing means has evolved over the years. So while you may not be able to find dollar bills selling for pennies, there are still high-quality business to be found, trading for a nice discount to fair value.
To help you get started finding the next value stock for your portfolio, we asked three of our most-seasoned contributors to put forth their ideas for value today, and they came back with Axos Financial (NYSE:AX), Vipshop (NYSE:VIPS), and -- you may want to sit down for this one -- Tesla (NASDAQ:TSLA).
Axos and Vipshop? Yep, those look quite cheap based on some pretty easy-to-identify metrics. But Tesla? We're pretty sure Steve Symington is rational, at least based on his track record. Don't worry -- we had someone check in on him, and he's fine, despite the, ahem, interesting suggestion that Tesla's a value stock. Moreover, he makes a compelling case, and with skin in the game after recently buying shares, he does, at least as far as we know, believe his own thesis.
Without further ado, keep reading to learn about two value stocks based on clear -- and compelling -- metrics, and Steve's surprisingly solid case that Tesla could be the biggest value out there if you squint your eyes just right.
The best value in banking
Jason Hall (Axos Financial): When it comes to valuing banks, the two most common -- and I think the two most useful -- metrics are price-to-earnings (P/E) and price-to-book-value (P/B) ratios. In short, these two metrics identify both how the market values a bank's earnings and the assets it makes those earnings from. My argument is that Axos Financial is cheap by both of those measures.
As this table shows, Axos has rarely been this inexpensive, by either measure, in recent years:
Don't get me wrong: I'm not saying it was necessarily fairly valued at some of the peak valuations it has traded for in the past, but trading for 1.5 times book value and 11 times earnings per share is simply cheap for such a high-quality business that's as profitable as it is. For context, it now trades for a similar book value to JPMorgan Chase (NYSE:JPM) and a discount to the mega-bank's earnings multiple:
Here's the rub: Axos has a history of delivering far better profitability and returns than even JPMorgan, which is rightfully considered one of the best-run banks in the world:
Here's the closing point: Axos is also much smaller and, under CEO Greg Garrabrants, has an incredible track record of both growth and de-risking, and I expect Axos to continue becoming more diverse and profitable for years to come.
Axos is already one of the biggest online-only banks, and its prospects to grow from a small internet bank to a national financial services powerhouse make it worth owning. The fact that it's cheaper than some of the best banks in America right now makes it worth buying today.
An oft-overlooked Chinese e-commerce company
Vipshop retained its first mover's advantage in the flash sale market, and it attracted big investments from JD and Tencent. Those investments and partnerships tethered Vipshop's flash sale platform to JD Mall and Tencent's WeChat, the top mobile messaging app in China.
As a result, Vipshop's growth in active customers accelerated over the past year, rising 14% annually to 29.7 million last quarter and marking its third straight quarter of double-digit growth. Its total orders rose 29% to 116.5 million, allaying concerns about slower consumer spending.
Vipshop's gross and operating margins both expanded annually during the quarter, indicating that its loss-leading model (which uses flash sales to spur purchases of full-priced products) is sustainable. Its total revenue rose 7% annually as its adjusted net income grew 12% (in RMB terms), and analysts anticipate 3% sales growth and 17% earnings growth (in USD terms) for the full year. That's a high growth rate for a stock that trades at just nine times forward earnings.
Vipshop controlled only 1.8% of China's e-commerce market last year, according to eMarketer. However, its steady growth, strong support from JD and Tencent, and low valuation make it a lucrative value play on China's booming e-commerce market.
An incredible value (depending on who you ask)
Steve Symington (Tesla): I chuckled earlier this week when Morgan Stanley analyst Adam Jonas insisted his firm continues "to believe Tesla is fundamentally overvalued, but potentially strategically undervalued."
That dichotomy perfectly explains how the market feels about the electric vehicle (EV) and solar solutions leader. With Tesla shares trading at roughly $220 per share as of this writing -- or more than 40% below their 52-week high -- various analysts have assigned price "targets" ranging from $4,000 all the way down to $0.
On one hand, there's the omnipresent threat of potentially underwhelming demand for Tesla's vehicles, and for this currently unprofitable business to run low on cash -- something bearish traders seized on last month after CEO Elon Musk reportedly told employees the company would be implementing a "hardcore" cost-cutting program -- as it implements ambitious plans for ramping EV production and funding geographic expansion.
On the other hand, Musk went on record at Tesla's annual investor meeting last week to insist there's no demand problem, with sales exceeding production. He also teased the end-of-summer unveiling of the company's affordable (starting at under $50,000) new electric pickup truck, and (earlier last month) outlined compelling plans to build a massive robotaxi fleet that -- to hear Musk tell it -- could be the catalyst to multiply the company's value to $500 billion (from closer to $40 billion today).
I'll take that last prediction with a grain of salt given Musk's history of overly ambitious goals. But I think there is enough potential positive catalysts for patient, long-term investors to lean on the "potentially strategically undervalued" side of the fence, which is why I added a small position in Tesla to my personal portfolio last week.