Many investors are wondering if this aging bull market still has room to run. But instead of worrying about the inevitable decline in high-flying stocks with lofty valuations, investors should focus on the bargains that trade at lower multiples.
Alibaba is China's largest e-commerce and cloud platform company. Revenue from its core commerce platforms surged 44% annually and accounted for 87% of its sales last quarter. The rest of its revenue came from its cloud, digital media, and other units.
Alibaba already serves 860 million annual active customers worldwide, which include 730 million shoppers in China and 130 million shoppers overseas. It expects that figure to top 1 billion by the end of fiscal 2024 -- which could widen its gap against domestic rivals like JD.com and Pinduoduo.
The growth of Alibaba's core commerce business, its only profitable unit, supports the expansion of its unprofitable businesses -- which mostly widen its moat against rivals like Baidu and Tencent. Analysts expect Alibaba's momentum to continue with 32% revenue growth and 23% earnings growth this year -- which are solid growth rates for a stock that trades at 19 times forward earnings.
Investors aren't paying a premium for Alibaba due to the trade war and the economic slowdown in China, but its latest results (which were boosted by sales of big-ticket items like consumer electronics and home furnishings) and its long-term forecast indicate that consumer spending in China remains healthy.
Alibaba also has plenty of other irons in the fire, including smart speakers, a nascent chipmaking business, and a government contract for building China's smart cities. Therefore, Alibaba deserves to trade at a premium -- and its stock should rally if trade tensions wane.
Philip Morris International
Philip Morris International, the second-largest publicly traded tobacco company in the world, was spun off from Altria (MO 0.29%) more than a decade ago. PMI then shifted toward higher-growth overseas markets as Altria dealt with the shrinking domestic market.
PMI's total cigarette shipments fell nearly 4% annually last quarter, but its total revenues (on a constant-currency like-for-like basis) rose 9% as it raised prices. It also posted constant-currency year-over-year growth across all of its regions except Latin America and Canada.
Shipments of its IQOS heated tobacco products (which heat instead of burning tobacco) also surged 37% annually during the quarter as PMI promoted them as a healthier alternative to its tar-filled cigarettes. PMI expects those catalysts to boost its full-year adjusted EPS by about 9% on a constant-currency basis. PMI also pays a forward yield of more than 6%, and it's raised that dividend every year since splitting with Altria.
However, PMI's stock slipped over the past two months after it disclosed that it was in talks to merge with Altria again. I thought that was a terrible idea for PMI investors because it would expose its investors to Altria's weak domestic business and disastrous investment in Juul.
That deal was recently called off, but PMI remains down more than 10% over the past six months and trades at just 14 times forward earnings -- mostly due to Altria's unrelated troubles weighing down the tobacco sector. That low valuation and high yield make PMI a rock-solid buy for value-seeking income investors.
American Eagle Outfitters
American Eagle Outfitters is one of the few apparel retailers that survived the retail apocalypse. It posted its 18th straight quarter of positive comparable-store sales growth in September as the double-digit growth of its lingerie and activewear brand Aerie offset the weaker growth of its namesake brand.
Aerie's comps surged 16% last quarter (on top of its 27% growth a year ago), fueled by robust demand for its core bras, new apparel collections, and body-positive marketing campaigns, which are likely pulling shoppers away from L Brands' Victoria's Secret. To expand Aerie's retail footprint, AEO plans to open 60 to 75 new Aerie locations this year, as well as to reposition and remodel 80 existing locations.
AE struggled last quarter with a 1% comps decline, but it noted that demand for its jeans remained high and that it saw "meaningful improvement" in its sales throughout the back-to-school season in August and September. AEO's digital business, which accounts for nearly a third of its sales, also regularly generates double-digit growth.
Wall Street expects AEO's revenue and earnings to rise 7% and 8%, respectively, this year. Those stable growth rates make AEO an oasis in a desert of dying retailers, and the stock trades at just 10 times forward earnings while paying a forward yield of 3.4%.
Investors aren't willing to pay a premium for AEO due to ongoing concerns about mall-based apparel retailers, but this stock should rebound once they realize it's still a "best in breed" player in a cutthroat market.