The stock market has bounced 35% higher from the bottom of the first wave of the coronavirus pandemic. This sharp recovery still left a lot of great stocks trading at invitingly low share prices. As master investor Ben Graham wrote in his classic tome, The Intelligent Investor, "the stock market often goes far wrong, and sometimes an alert and courageous investor can take advantage of its patent errors."
Let's take advantage of some "patent errors" today, shall we?
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This isn't the end of the road
Shares of hotel-booking specialist Trivago (TRVG) are trading 33% lower in 2020. You can pick up this stock at the bargain-bin valuation of 8.6 times free cash flows and 0.6 times the company's book value. Ultra-low book value ratios like this one imply that investors would be better served if the company simply shut down its operations, sold off all of its assets, and distributed the resulting cash to shareholders.
That's hardly the right way to go for Trivago.
Yes, the novel coronavirus is strangling the entire hotel industry right now. Yes, this difficult market will stick around for several months. No, the travel industry will never be quite what it was, ever again.
But Trivago can weather this storm and get back to business in short order.
Trivago is no stranger to tough markets. The company's top-line sales fell 13% over the last two years but a generous dose of fiscal discipline nearly doubled Trivago's operating margins and drove free cash flows 63% higher over the same period. The balance sheet is pristine, with $220 million of cash reserves and zero long-term debt. So even if Trivago is burning a lot of cash during the coronavirus crisis, it would take a very long travel-market panic to destroy this company.
And if worse comes to worst, sector giant Expedia (EXPE 0.33%) holds a 20% ownership stake in Trivago, giving the company plenty of incentive to keep the lights on in Trivago's German headquarters. Expedia had $3.8 billion of cash reserves at the end of 2019 after adding another $1.6 billion to the cash pile last year. Trivago's bankruptcy risk is basically zero, but the market value only makes sense if the company is headed for Wall Street's scrap heap in a hurry.
You should take advantage of this "patent error." Consider buying Trivago today.
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Overstated insurance issues
Ebix (EBIX -10.89%) stock has fallen 41% year to date. The maker of cloud-based software and services for the insurance industry now trades at a minuscule six times trailing earnings and 13 times free cash flows, and the company is valued a 1.1 times book value.
I'm sorry, but that's a blatant error.
The company's full-year sales rose 17% in 2019 and earnings increased by 7%. The coronavirus may trounce the insurance industry as a whole, but Ebix stands an arms-length away from that danger. Even a struggling health-insurance or life-insurance carrier will need to use Ebix's tools for processing claims and evaluating coverage risks.
You don't have to take my word for it. Analyst firm Craig-Hallum ran a stress test of Ebix's financial model at the end of March, assuming a broad market crash. In this model, travel revenues were seen falling 90% due to coronavirus restrictions while foreign-exchange services were modeled 39% lower and professional services fees came in 71% lower -- for the entire fiscal year 2020.
Even so, Ebix would still come up aces with at least $130 million of earnings before interest, taxes, depreciation, and amortization (EBITDA) profits this year. The firm placed an $80 price target on Ebix, which would be quadruple the stock price we see today.
In other words, Ebix's lean, mean business model will survive this game-changing pandemic -- and investors who dare to bet on this downtrodden stock right now will likely pocket a massive return.
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In this case, it's a steal
Office-furniture maker Steelcase (SCS -1.49%) saw a 49% drop in its share price this year. The stock is changing hands at just nine times trailing earnings and 16 times free cash flows, and the price-to-book ratio stands at 1.3.
The COVID-19 outbreak is keeping workers at home, obviously reducing your average business owner's desire to invest in new office furniture. So far, so good. Steelcase was quick to batten down the hatches, drawing $250 million of extra cash from its revolving credit facilities and pausing a planned debt-reduction payment. Cash conservation is the name of the game as long as office workers are getting their work done from home.
Steelcase is another top-notch business with generally positive cash flows and a highly respected management team. And the coronavirus crisis may not be as tough on Steelcase's business as the massive drop in share prices would indicate. Many customers are simply kicking their orders for office supplies a few months or a couple of quarters down the road rather than canceling them.
"Importantly, we saw delays, but not many order cancellations nor longer-term project cancellations," Steelcase CEO Jim Keane said in the fourth-quarter earnings call. "Now we're starting to ship some of those orders we had to delay. And what's interesting, I think, is we continue to quote on new business, and we continue to be awarded new business that will be installed later in the year."
Buying Steelcase today also locks in a generous effective dividend yield of 4.5%. Feel free to take advantage of this huge market error.
