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3 Value Stocks to Buy With $3,000

By Daniel Foelber, Scott Levine, and Lee Samaha – Aug 29, 2021 at 7:00AM

Key Points

  • Unlike its water utility peers, Essential Utilities is trading at a discount.
  • The defense sector could be a great place to go bargain hunting right now.
  • nVent Electric is a pick-and-shovel way to play electrification.

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This utility stock, defense giant, and electrical equipment supplier are worth buying on the cheap.

When you hear the stock market is "expensive," that typically means that stock prices are outpacing earnings growth. That's exactly what's happening in today's market, where the average stock in the S&P 500 has a price-to-earnings (P/E) ratio of 31, significantly above the historical average. This doesn't mean that investing in the stock market is a bad idea, it just means that bargains are harder to come by.

With that, we asked some of our contributors for three value stocks worth buying now. They think it would be a good idea to put $1,000 into each of the following stocks: Essential Utilities (WTRG -0.58%), Lockheed Martin (LMT -1.12%), and nVent Electric (NVT -1.53%)

A worker on a production line.

Image source: Getty Images.

Now's a good time to put this utility player to work

Scott Levine (Essential Utilities): So you've put the back-to-school shopping for pencils and lunchboxes on hold, and you're on the lookout for a stock on sale. With the S&P 500 and the Down Jones Industrial Average flirting with new highs almost daily, it may seem difficult to find a quality stock in the bargain bin. But you can take a break from the search. Essential Utilities, a water and natural gas utility, is a quality stock that may fit your budget.

Unlike the stocks of leading water utility peers American Water Works and American States Water, which seem expensive right now, shares of Essential Utilities are attractively priced. Currently, shares of Essential Utilities are changing hands at 18.4 times operating cash flow, a discount to the five-year average multiple of 19.7. In addition, they're priced at 29.4 times trailing earnings, lower than the five-year average ratio of 34.5. Both American Water Works and American States Water, on the other hand, are trading at a premium to their five-year average cash flow and earnings multiples.

With momentum behind the passage of the infrastructure bill continuing to build, investors are on the prowl for stocks (like Essential Utilities) that can benefit once the bill reaches President Biden's desk. For example, Pennsylvania, which represents 47% of the water customers that Essential Utilities serves, could receive up to $1.4 billion over the next five years to improve water infrastructure. By improving its water infrastructure, Essential Utilities can operate more efficiently, thus generating a wider profit margin.

Passage of the infrastructure bill notwithstanding, Essential Utilities sees steady growth in the near future. From 2019, when it reported earnings per share (EPS) of $1.47, through 2023, management forecasts EPS will rise at a compound annual growth rate of 5% to 7%.

For those looking to fortify their portfolios with shares of a quality water utility that can be picked up on sale, Essential Utilities is a pool certainly worth dipping your toes in.

An industrial giant worth buying on the cheap

Daniel Foelber (Lockheed Martin): Despite record results, Lockheed Martin stock is underperforming the S&P 500 so far this year. Like its peers, Lockheed depends heavily on U.S. government defense spending. In June 2021, the U.S. House Appropriations Committee released its fiscal year 2022 defense funding bill. A budget of $705.9 billion may sound like a lot, but it's only 1.5% above FY21's budget. Defense spending has been growing in the low- to mid-single digits for years, and it looks like it could stay that way. This sectorwide headwind is one key reason why many top defense stocks are underperforming the broader benchmarks.

Despite this challenge, Lockheed has been able to grow its top and bottom line at a modest rate, including during 2020 when many industrial stocks posted awful results. Its most recent guidance for full-year 2021 suggests year-over-year sales growth of 4%, diluted EPS growth of 10.5%, and cash flow from operations growth of 8.5% -- which is impressive.

Metric

2021 (Midpoint of Estimate)

Change

2020

Change

2019

Revenue

$68 billion

4%

$65.4 billion

9.4%

$59.8 billion

Diluted EPS

$26.85

10.5%

$24.30

10.7%

$21.95

Cash flow from operations

≥$8,900

8.5%

$8.2 billion

12.3%

$7.3 billion

Data source: Lockheed Martin.  

Over the last few years, Lockheed's earnings growth has outpaced its stock price, compressing its P/E ratio in the process. Consequently, Lockheed stock is now priced at the lower end of its five-year average valuation.

LMT PE Ratio Chart

LMT PE Ratio data by YCharts

With a P/E ratio of just 14.2 compared to the S&P 500 average of 31, Lockheed Martin looks dirt cheap. Throw in a 2.9% dividend yield, a healthy balance sheet, and a diversified and industry-leading business, and you have a top-tier value stock worth buying now.

nVent Electric remains a good value stock

Lee Samaha (nVent Electric): There's no shortage of industrial companies declaring that a new age of electrification is upon us. They have good reason to. The economy is bursting with new technologies requiring electrification, from electric vehicles to renewable energy, smart grids, automation, and Internet of Things (IoT) connectivity.

And if you are going to need electrical equipment, you will need connection and protection solutions. That's where nVent's enclosures, thermal management, and electrical and fastening solutions come in. The company's solutions are relatively low ticket but critical for its customers' safety and connectivity needs.

nVent's key industry end markets include data centers, networking solutions, 5G, and power utilities, with 42% of sales going to the industrial sector, 31% to commercial/residential buildings, 19% to infrastructure, and the remaining 8% to the energy sector.

nVent's solutions may be boring, but the growth drivers in its end demand are not. Indeed, management recently upgraded its full-year organic sales growth guidance to a range of 10%-13% compared to previous guidance for 5%-8%. In addition, Wall Street analysts have nVent growing revenue at nearly 7% in 2022. Trading on just 18 times estimated free cash flow in 2021 and less than 17 times estimated free cash flow in 2022, nVent is a rare value option within the theme of investing in electrification.

Scott Levine has no position in any of the stocks mentioned. The Motley Fool recommends Lockheed Martin. The Motley Fool has a disclosure policy.

Stocks Mentioned

Essential Utilities, Inc. Stock Quote
Essential Utilities, Inc.
WTRG
$48.04 (-0.58%) $0.28
Lockheed Martin Stock Quote
Lockheed Martin
LMT
$490.67 (-1.12%) $-5.56
American States Water Stock Quote
American States Water
AWR
$97.60 (-0.59%) $0.58
American Water Works Stock Quote
American Water Works
AWK
$153.18 (-0.36%) $0.56
nVent Electric plc Stock Quote
nVent Electric plc
NVT
$39.23 (-1.53%) $0.61

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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