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Value Stocks Are Back: 3 Stocks That Are Just Too Cheap

By Lou Whiteman, Rich Smith, and John Rosevear - Mar 13, 2021 at 8:00AM

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Three stocks poised to climb higher in the quarters to come.

Given how volatile markets have been of late, and growth stocks in particular, investors are beginning to give so-called value stocks a fresh look.

Value sounds great in theory: The proverbial opportunity to buy $100 bills for $80. The issue is that some stocks are "on sale" for a reason, and not all are bargains just because they are cheap. 

It all comes down to picking the companies with the best chance to soar higher from here. Here's why three Fool.com contributors see great value in Spirit AeroSystems (SPR 4.44%), General Motors (GM 3.07%), and Stamps.com (STMP) right now.

Illustration of a stock chart going up and down.

Image source: Getty Images.

The best stock to buy for a 737 MAX recovery

Lou Whiteman (Spirit AeroSystems): Boeing's (BA 3.52%) 737 MAX is making a comeback, cleared to fly last fall after more than a year and a half grounded following a pair of fatal accidents. Despite the plane's troubled history there is still ample demand for it, and the 737 MAX still could go on to be one of the top selling designs in Boeing's corporate history.

But given the number of challenges Boeing faces, there is a better way to invest in that recovery than buying Boeing stock.

That title goes to Spirit AeroSystems, a one-time Boeing subsidiary that makes the fuselages and other components for the 737 MAX. The stock was hit hard when the 737 MAX was grounded, in part because in good times the 737 MAX can account for upwards of 40% of total company sales. That makes Spirit the stock most leveraged to the plane's fortune, and should set it up well to rally assuming airlines take to the plane again and orders and deliveries normalize.

Of course, that reliance on the 737 MAX is also a long-term risk for Spirit. The company has long been criticized for its dependence on Boeing, which still accounts for upwards of 75% of its revenue a full 15 years after it was spun out as an independent company. Spirit has been working to change that, and last fall finalized the acquisition of the aerostructures business of Bombardier in an effort to diversify its business by adding more work with Boeing archrival Airbus.

Spirit today still trades at a discount to its multiples prior to the 737 MAX's March 2019 grounding. The bull case for the stock from here is that a strong recovery in the 737 MAX program will lift it in the near term, and by the time that program normalizes Spirit will have the Bombardier business fully integrated and Airbus revenue flowing in, making it a more attractive long-term investment option.

The jury is still out on whether Spirit can transform itself into a "buy-and-hold-forever" sort of quality stock, but over the next few years if nothing else there is a clear path for improved profitability and results. 

An electric car stock that's both profitable and cheap? Yes, really! 

John Rosevear (General Motors): Unless you've been living under a rock, you know that electric vehicle stocks have soared over the last year. But what if I told you that there was one that was not only profitable now, but that was also selling for just 10 times expected 2021 earnings?

Yes, GM is an old-school automaker. But it's doing a better job of moving into the electric-connected-self-driving future than most of the old auto companies, and of running its business generally. Consider: 

  • GM has gone all in on electric vehicles over the last couple of years. We've seen its new Ultium modular electric vehicle architecture, seen several of its many upcoming EVs, and heard that it's aiming to be 100% electric by 2035. But you may not know that CEO Mary Barra has promised that GM's upcoming new Ultium-based EVs will deliver something that even Tesla has found elusive: consistent profits. 
  • Yes, GM's still selling lots of gas-powered trucks and SUVs. In fact, sales of its big pickups and full-size truck-based SUVs have been terrific recently. But don't knock them -- the fat margins on those products are driving strong profits and helping GM fund its accelerating transition to electric vehicles. (And don't be at all surprised to see electric versions of high-profit "gas guzzling" mainstays like the Chevrolet Silverado and Cadillac Escalade before too long.)
  • GM, like other automakers, has faced some production disruptions from a global shortage of semiconductors. But CFO Paul Jacobson said late last month that he thinks the worst is over -- not necessarily for the industry, but for GM, which has secured good supplies of chips for itself.
A silver prototype Cadillac Lyriq, a sleek electric luxury SUV.

The Ultium-based electric Cadillac Lyriq, due early next year, is just one of many upcoming new GM electric vehicles. Image source: General Motors.

There's more, of course. GM's subsidiary Cruise is widely regarded as one of the leaders in self-driving technology development, and GM's OnStar service (remember that?) is being reworked into a connected-vehicle service that will allow buyers of future electric GM models to install apps, get real-time alerts, and much more.

Simply put, GM is a better bet for long-term profit growth than most of the old-guard auto companies -- and unlike so many of the hot new EV start-ups, it's a good bet to be a major global player far into the future. And, as I mentioned above, it's still fairly cheap at 10 times expected 2021 earnings. 

The takeaway? If you want to invest in electric cars and you like sleeping soundly at night, this might be your stock. 

This company doubled its profits last month -- and its stock dropped

Rich Smith (Stamps.com): Sometimes, the stock market doesn't make a whole lot of sense -- and that's OK.

Take last month for example, when online postage vendor Stamps.com announced its fourth-quarter 2020 earnings. Sales beat estimates for the quarter, climbing 28%. Profits beat, too, with adjusted earnings up 95%, and profits according to generally accepted accounting principles (GAAP) more than doubling to $2.36 per share. And with these latest numbers factored in, Stamps.com stock looks cheaper than ever.

At a market capitalization of $3.4 billion, and enough cash to reduce its enterprise value to below $3 billion, Stamps.com's cash-adjusted price-to-earnings ratio is a low 16.8 -- less than half the average valuation of the S&P 500, which is close to 40 times earnings. Valued on its actual cash profits, Stamps.com is even cheaper, at an enterprise value-to-free-cash-flow ratio of just 12.2.

If Stamps.com can keep on growing at anything like the 28% rate it posted in Q4, the stock is incredibly cheap after its 28% post-earnings sell-off.

Of course, Stamps.com isn't making any promises that it will keep growing at that rate -- and that's precisely the problem. The company warned of "substantial uncertainty in 2021," because no one knows for certain whether consumers will continue shopping online once physical stores reopen. (Personally, I think they will keep shopping online.)

In any case, selling off the stock on fears of what might happen this year seems irrational in light of what has already happened for Stamps.com. Consider that over the last five years -- only one of which contained a pandemic -- Stamps.com grew its sales 29% annually on average, and its profits 31%.

Is that kind of growth worth a 29-times multiple to earnings, do you think? Maybe 31 times earnings? I don't know exactly. The one thing I am certain of is that 12.2 times free cash flow is just too cheap.

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Stocks Mentioned

General Motors Company Stock Quote
General Motors Company
GM
$38.57 (3.07%) $1.15
The Boeing Company Stock Quote
The Boeing Company
BA
$132.23 (3.52%) $4.50
Stamps.com Inc. Stock Quote
Stamps.com Inc.
STMP
Tesla, Inc. Stock Quote
Tesla, Inc.
TSLA
$759.63 (7.33%) $51.90
Spirit AeroSystems Holdings, Inc. Stock Quote
Spirit AeroSystems Holdings, Inc.
SPR
$32.01 (4.44%) $1.36

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