Now may be a great time to look for value stocks -- that is, stocks that trade at low price-to-earnings or price-to-book ratios, and which pay outgrowing dividends and share repurchases.
Of course, stocks with such low valuations can also be signs of a struggling or declining business. But these three names are each riding strong growth trends. Combined with bargain values, put these three stocks in your portfolios today and let their businesses cook for years.
1. Applied Materials
It is thought that a lot of the larger semiconductor markets like PCs and smartphones are bottoming, with a potentially massive artificial intelligence (AI) investment cycle just starting to kick in. So, if Applied Materials' (AMAT 2.98%) trailing earnings indicate the trough of the cycle, its trailing P/E ratio of 24 still looks downright cheap -- even as the stock hits all-time highs.
Applied is the most diversified semiconductor capital equipment provider, with an especially large focus on etch and deposition applications that will become even more important in the age of AI as leading-edge chips begin to use new novel structures like gate-all-around transistors, backside power, and advanced packaging. Applied excels in these new areas, and management expects big market share gains as these new chipmaking techniques turbocharge growth.
On Monday, Feb. 26, Applied Materials announced several new expansions of its etch and deposition portfolio at the SPIE Advanced Lithography + Patterning conference. This includes greater adoption of its Sculpta technology introduced last year, along with new chemical vapor deposition and etch systems that fine-tune the edges of EUV patterns.
In addition, Applied introduced a new e-beam metrology system called Aselta, which help chipmakers better align each layer of chip designs. This product lineup helps prevent costly defects and boosts yields, as logic and memory chips require greater vertical stacking of components in more exacting specifications.
Applied's diverse product portfolio and deep relationships with chipmakers allows it to anticipate problems and develop solutions years ahead of time, which we are currently seeing in the company's new product releases. The focus on solving the chip industry's most pressing problems has led to an exceptional 46% return on equity and long-term market-trouncing returns.
Despite recently hitting all-time highs, Applied still looks like a solid compounder at a still-very-reasonable price.
2. T-Mobile
The 5G transition is still ongoing, which is why T-Mobile (TMUS -0.06%) continues to gain market share even four years after closing the acquisition of Sprint. That acquisition allowed T-Mobile to leapfrog its rivals in terms of 5G coverage, and the company is still gaining net subscribers from rivals hand over fist.
Last quarter, T-Mobile reported 934,000 postpaid phone net subscribers, trouncing the 526,000 and 449,000 recorded for rivals AT&T and Verizon, respectively. That led to 3% services revenue growth and 6% postpaid service revenue growth -- the best in the "boring" telecom industry. Of note, postpaid revenues are those bought on subscriptions and thus thought to be "recurring," whereas prepaid tends to be a pay-as-you-go model typically for lower-income customers, and is therefore thought to be less dependable.
Yield-focused investors tend to flock to T-Mobile's rivals for their high dividends, but that has proven a mistake. Even factoring in those dividends, T-Mobile's total returns are 10 times those of its high-dividend rivals over the past decade:
TMUS 10 Year Total Returns (Daily) data by YCharts
Meanwhile, T-Mobile just got into the dividend game itself, implementing a small dividend for the first time late last year. While the stock currently yields just 1.6%, management has said it aims to grow that payout by double digits every year going forward for the immediate future.
On the valuation front, T-Mobile forecasts $16.6 billion in free cash flow this year, up from $13.6 billion in 2023. But that's likely wildly conservative, as the forecast doesn't consider any securitization sales of phone leases. Yet T-Mobile has brought in $4.8 billion in phone lease securitizations in each of the last two years. So, it appears as though a $20 billion free cash flow year is well within reach.
Given that T-Mobile's market cap is just $193 billion as of this writing, investors are paying just a 10 times forward cash flow multiple for this proven winner.
Image source: Getty Images.
3. Toll Brothers
While AI and 5G are the sexier growth areas, investors shouldn't look past the U.S. housing market as a more "traditional" sector with strong tailwinds. Following the housing crash of 2008, the homebuilding industry underbuilt what was needed to keep up with household formation and replace older and obsolete houses to the tune of about 6.8 million units between 2010 and 2020.
Constrained supply and resilient home prices are of course making buying a home difficult for many, but Toll Brothers (TOL 2.44%) is likely best positioned to have this be a nonissue. That's because Toll tends to cater to the luxury and affordable-luxury segments of the housing market.
These are customers who are likely moving from an existing home that has also appreciated in value, and also likely benefiting from a stock market that just reached new all-time highs. Either that, or they're the children of this fortunate group who are likely to tap Mom and Dad for help with a down payment. As evidence, Toll Brothers' average delivered price on its homes is over $1 million, double or more the average of the next four largest homebuilders in the U.S.
Speaking of the largest public homebuilders, they're taking market share from smaller private builders hand over fist in what is still a somewhat fragmented industry. Benefiting from the ability to negotiate lower costs from suppliers, as well as providing steady work for scarce labor, the market share of the top public homebuilders has grown from just 27% in 2012 to 51% today.
The large homebuilders have also been using more options to control land, rather than outright purchases, with options accounting for 49% of all lots controlled last year, up from just 19% as recently as 2015. That has freed up more cash for share repurchases and dividends for investors. In fact, Toll's return on equity has jumped from the high single digits a decade ago to the mid-20s, while Toll has increased its dividend at a 23% annualized rate over the past six years.
The pent-up demand for housing doesn't seem to be abating with a strong economy, low unemployment, and surging stock market. Still trading at less than 9 times earnings, Toll looks like an absolute bargain.
