Good deals are few and far between in the stock market right now. Low interest rates and inflation worries have pushed the S&P 500 to its highest forward PE ratio since the Dot Com Bubble. Still, there are some promising companies that have slipped through the cracks for one reason or another. Adding these discounted stocks to your portfolio can boost your long-term returns, whether you're a growth or value stock investor.
1. Akamai
Akamai (AKAM +2.08%) is a leader in the content delivery network (CDN) industry. CDNs allow websites to run more quickly, and they've become more important with the proliferation of video streaming, richer website content, and data-dependent businesses.Demand for CDN services is expected to keep growing rapidly, but it won't necessarily translate to results for all of the vendors. Akamai competes with formidable foes, including Alphabet, Cloudflare, and Fastly.
Competition can destroy pricing power and growth, and Akamai has struggled with that exact problem. It's being outpaced by competitors and averaging slower than 10% revenue growth.
Its CDB segment was flat year over year in the most recent quarter. In a vacuum, it makes sense that the stock's forward PE ratio is only 18.4, while its competitors trade at higher multiples of sales.
The plot thickens when you consider that Akamai is transforming into a cybersecurity company through acquisitions. Over the past year, it has acquired businesses such including Guardicore, Inverse, and Asavie. These have improved its offering for mobile communications, enterprise software, and internet-of-things applications.
Image source: Getty Images
Security products generated 40% of Akamai's total revenue in the third quarter, and that segment will get another $6 million boost in the fourth quarter from newly acquired Guardicore. That segment is growing 25% year over year. As it expands, it should accelerate Akamai's top line. Looking at the valuation ratios attached to most other CDN and cybersecurity stocks, there's a lot of room for appreciation if Akamai can move into the 10-15% annual growth-rate range.
2. DR Horton
DR Horton (DHI +0.99%) is the largest homebuilder in the United States. It sold more than 80,000 homes over the past year, operating nationally in 44 of the top 50 housing markets. DH Horton is especially prominent among affordable homes, with nearly 85% of its sales under $400,000.
Homebuilder stocks can be tough to own. They are notoriously cyclical, and they can run into financial troubles when people stop buying homes during recessions. That cyclicality leads to volatility -- DR Horton's beta has been 1.65 over the past five years. Extended periods of net losses and cash outflows can really create stress for investors.
DHI Free Cash Flow (Annual) data by YCharts
Labor shortages, supply issues, and high material prices have created serious issues for homebuilders in 2021. DR Horton had to revise its forecasts downward to reflect these changes. There are also legitimate concerns that rising interest rates could reduce demand for homes.
Despite all of that, it's still a compelling investment opportunity. Since 2012, there have been approximately five million more households created than new homes built in the U.S. That is going to create a long-term catalyst for homebuilders, even if there are speed bumps along the way. The stock's forward PE ratio is extremely low at 7.6, and its enterprise-value-to-EBITDA is even lower. The company has $3.2 billion of cash on the balance sheet in case there are some lean times, and it's forecasting 10% growth for next year.
That's a bargain in today's market, and DR Horton has strong long-term drivers for further growth.
3. Medical Properties Trust
Medical Properties Trust (MPW 2.29%) is a REIT that owns nearly 450 healthcare facilities around the U.S. and eight other countries. General acute-care hospitals make up most of its portfolio, but behavioral health facilities and inpatient rehab hospitals are also meaningful holdings.
Medical Properties Trust doesn't operate facilities. Its tenants are healthcare providers that sign long-term triple net leases. This creates predictable and stable cash flow for the business. There's nothing too exotic about Medical Properties Trust -- as long as people need to visit medical facilities for healthcare, and care providers are able to meet their lease obligations, then the REIT should produce cash flow for investors. Telehealth and economic pressures could always create challenges, but demographics and the nature of medical care should give investors confidence.
Medical Properties Trust has been meeting analyst expectations on funds from operations (FFO), which is the most important profit metric for REITs. Its $0.34 in adjusted FFO last quarter was more than enough to support its $0.28 quarterly dividend. That translates to a 5.2% dividend yield, meaning that investors' capital works a little harder than with most dividend stocks. Income investors should consider this REIT for their portfolio.
