As an investor, your most important job is identifying quality companies that can drive their stocks higher with sustainable results. Everything else is just details.
Still, if you can jump into a quality company while its stock is undervalued, it never hurts to get a little extra bang for your buck.
To this end, bargain-hunting investors should add Discovery (DISC.A) (DISCK), Penn National Gaming (PENN 3.22%), and General Electric (GE 0.94%) to their watchlists, if not their portfolios. They're all well below highs reached in the not-so-distant past, and upon closer inspection, none of these sell-offs are as justified as the depth of the declines suggests. Don't be surprised to see them rebound sooner rather than later.
Discovery shareholders can't catch a break.
Yes, this is the same Discovery that saw its stock shellacked by 45% in March (over the course of just five trading days) after hedge fund Archegos Capital Management failed to meet a margin call. That in turn prompted the fund's broker to sell Archegos' stake in the television entertainment company to raise the required cash.
The stock drifted even lower for the next few months, and while it briefly traded higher last week following news the company would be merging with AT&T's entertainment arm WarnerMedia, not even this development could jolt shares back to life. The stock ended that day down 5% and has fallen even lower in the meantime. All told, Discovery shares are now priced 60% below their peak from just two months ago with investors still processing all that's happened.
If you're one of those people on the fence about stepping in, you might not want to delay much longer.
Sure, the $43 billion in cash, shares, and debt Discovery is paying for Warner isn't chump change. Discovery's current market cap is a relatively modest $16 billion, and it's already sitting on $15 billion worth of its own pre-merger debt. WarnerMedia is a respected name in the media business, but it's tough to see Discovery coming out of the deal financially better off than it was pre-merger.
Don't underestimate the potential of a combined WarnerMedia and Discovery, though. Aside from Warner Bros. movies, the former is also the name behind HBO (and therefore HBO Max), which currently boasts 64 million different worldwide users. The latter isn't just The Discovery Channel, either. It's also the parent to popular lifestyle channels like HGTV and Animal Planet, and already serves 15 million of its own streaming customers with a content library that isn't exactly splashy.
With a toehold in the television and streaming and movie markets, the company that Discovery is about to become will enjoy an enormous degree of leverage, and therefore lots of pricing power.
Penn National Gaming
When investors think of casino and gambling stocks, Penn National Gaming probably isn't the first one that comes to mind. Iconic names like Las Vegas Sands, Wynn Resorts, and Caesars Entertainment hold that honor. Not only are they bigger, but Penn's "Hollywood"-branded betting venues also lack the cachet larger competitors enjoy.
Penn National Gaming does have one serious edge on other gambling stocks, however: It's building one of the market's top online-gaming ecosystems, leveraging its relationship with Barstool Sports at a time when app-based betting is reaching critical mass.
For the unfamiliar, Barstool Sports is a sports-talk website drawing a big crowd mostly because of its blunt, unapologetic, and brash sports chatter. It's also a jumping-off point for the Barstool online sportsbook and casino available to bettors in Pennsylvania, Michigan, Illinois, and Indiana. More locations are likely on the way with the legalization of online sports betting being considered in several other states. In the meantime, the popular Barstool brand name is being used to establish sports-focused bar nooks in many of Penn's Hollywood Casino locales.
Even without the Barstool name, however, Penn National Gaming is building an impressive online gambling presence. Its more-generalized iCasino platform will be bolstered with homegrown games thanks to the impending acquisition of game development studios HitPoint and LuckyPoint, while the company's mychoice loyalty rewards program is driving consumers to become regular omnichannel users of all of Penn's offerings.
It all matters. Assuming the legalization trend maintains its current pace, Goldman Sachs estimates the nation's online sports betting industry will grow at a pace of 40% per year through 2033, while online casino-game betting will grow at 27% per year in the same time frame.
Now, all of a sudden, Penn's 41% pullback from March's peak looks like a buying opportunity.
Lastly, add General Electric to your list of bargain stocks to buy following its extended stagnation, now at a price that's still less than half of highs from 2016, and still only one-fourth of its peak level from 2000.
There's no getting around the fact that GE dug itself into a hole following former CEO Jack Welch's retirement in 2001. Accounting failures, faulty power turbines, and misguided investments in fossil fuel technologies are just some of the mistakes the two chief executives following Welch were unable to fix.
As the old saying goes, though, the third time's the charm. CEO Larry Culp looks like he's been able to turn the ship around after taking the helm in 2018.
Some of the evidence of this turnaround lies in this year's projected cash flow. Despite a so-so first quarter this year, GE still indicated it will produce free cash flow of between $2.5 billion and $4.5 billion this year. Even at the lower end of the suggested range, that would still be one of the best showings for annual cash flow since 2017, when the company began a series of major divestitures.
And even under the dark cloud of last quarter's revenue miss, we're already seeing hints of a new and improved General Electric. Renewable energy equipment orders were up 15% year over year for the three-month stretch ending in March, and while power and aviation orders were down in the first quarter, the company just inked a huge deal with India's IndiGo to supply engines for 310 new Airbus A320 passenger jets. GE has also been contracted to build as many as 84 turbines for the United States' first major offshore wind power project.
These are all baby steps to be sure, but for the first time in a long time, GE is taking those steps in the right direction.