The S&P 500 is at an all-time high. Can we still find cheap stocks? Absolutely. There are some real bargains in the stock market right now.
The key to finding deep value is to pay attention to future growth rates. You want to avoid value traps (stocks that are cheap and will stay cheap). Instead, look for stocks that are only down temporarily, in the short term, but will outpace the market over the next several years. Right now it looks like the market is under-valuing SciPlay (SCPL +0.00%) and Malibu Boats (MBUU +18.46%).
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A super-cheap mobile games provider
SciPlay is a smartphone spin-off from Scientific Games (SGMS +12.61%), a company that makes slot machines and other gambling devices. When you download one of SciPlay's games, you're probably going to be playing slots on your smartphone. Yet it's a mistake to think of SciPlay as a gambling stock. All of its games are free to play, and users aren't wagering anything. It's pretty much the opposite of a gambling stock, and more like playing poker with Monopoly money. In fact, the company mentioned on a recent earnings conference call that a lot of its players are practicing slots on its platform before they go into a casino.
Right now SciPlay has six mobile games based on various slot machines, a Bingo game, and Diving Ball 3-D. The company makes money the same way its competitors do: by offering its players the opportunity to make in-game purchases which improve their chances of winning the game.
It's strange to imagine that people will spend dollars playing a slot machine when they know ahead of time they're not going to win any money. And yet people do play these games, for the sheer entertainment value. Social casino games have grown into a nearly $6 billion annual market. And SciPlay plans to expand from this foundation to the larger $30 billion casual game market. Its mission is to become the No.1 casual gaming company in the world.
The stock is super-cheap right now. In its most recent quarter, SciPlay grew year-over-year revenue and net income by 11% and 170%, respectively. The company's profit margin was 8.7% last year; now it's up to 21.5%. And yet SciPlay's trailing price-to-earnings (P/E) ratio is just 4.86, while its price-to-earnings growth (PEG) ratio is 0.18.
Why such tiny multiples? Let's compare SciPlay's numbers to one of its competitors, Zynga (ZNGA +0.00%):
| Company | Market Cap | Revenue Growth | Net Profit Margin | P/E Ratio | PEG Ratio |
|---|---|---|---|---|---|
| SciPlay | $1.27 billion | 11% | 21.5% | 4.86 | 0.19 |
| Zynga | $5.95 billion | 48% | 4.0% | 125 | 1.26 |
Data source: SciPlay and Zynga.
The market appears to be discounting SciPlay because of its slight revenue growth. Zynga is perceived to have a larger upside because it's growing faster, and it's already competing successfully in the much larger casual game market with titles such as Farmville. Yet SciPlay is far more profitable than its larger rival, and a lot cheaper.
SciPlay is set to start dominating in the smaller market for social casino games. The company also has access to an incredible array of powerful brands that it can build future games around, including Star Trek, James Bond, The Godfather, Clue, the Flintstones, Cheers and Dean Martin. Next year SciPlay plans to release its version of Jin Ji Bao Xi, which is currently the No. 1 slot machine in Asia right now.
While SciPlay carries roughly $74 million of long-term liabilities owed to parent Scientific Games (which retains majority ownership of the company), it has no long-term debt on its books and sports a healthy balance sheet. At these prices, it seems like a bargain.
A stock that has been hit by recession fears
Speed-boat manufacturer Malibu Boats just reported a fantastic quarter, with revenues up 39% from last year, and net income up 39% as well. The stock jumped up 12% on the news. Yet even after this nice run-up, the stock's pricing multiples are still pretty low, with a price-to-sales (P/S) ratio of 1.17, a forward P/E of 9, and a PEG ratio of 0.66. Why are shares so cheap?
The market might be discounting the stock on the grounds that not all of Malibu's rapid growth is organic. Last year it acquired Pursuit Boats from S2 Yachts. However, Pursuit Boats is just a small percentage of the company's sales. In its fourth quarter, the company sold 1,992 boats; Pursuit sales made up less than 10% of that number. In 2017, Malibu acquired Cobalt Boats. This was a much larger acquisition -- Cobalt sales made up about 32% of Malibu's sales in its most recent quarter.
Malibu has successfully integrated Cobalt into its operations, and has dramatically grown revenues from that base. If the company can accomplish the same feat with its Pursuit acquisition, then core revenues should continue to grow in 2020.
The market's negativity probably isn't focused on Malibu's acquisitions, which seem to be a net positive, but rather, fear around macro events. It's likely the stock is on sale because Malibu's boats are high-priced luxury items, and many investors fear the luxury category when it appears that the economy could turn south.
It's similar in that regard to Farfetch, the online marketplace for high-fashion clothes, which has seen its stock slide a startling 70% off its recent highs. Perhaps the stock market is discounting these companies out of fear that a recession might hit us soon and ravage revenues of high-end retailers. And while that's a very real concern, it's worthwhile to remember that financially strong companies often get stronger in bad markets, as their weaker competitors go under. Malibu has only $113 million of debt to speak of, strong cash flow, and a healthy annual net profit margin of 10%, so it's in fine shape financially to withstand a downturn.
