The hard part is discipline, patience, and judgment. Investors need discipline to avoid the many unattractive pitches that are thrown, patience to wait for the right pitch, and judgment to know when it is time to swing.
-- Seth Klarman
The quotation above offers a nice illustration of value investing, which has investors looking to buy assets for less than they seem to be worth. It's easy to look for fast growers and to snap them up no matter their price, hoping for the best. It can be hard, though, to not let yourself buy stocks you want to buy because they don't seem undervalued, and therefore don't offer a margin of safety. Value investing may not be the easy road, but it's one that has led many investors to great wealth.
Here are three stocks that value investors might consider for their portfolios.
Potash Corporation of Saskatchewan (POT) is a global fertilizer giant that has been struggling in recent years, facing headwinds such as weak demand, oversupply, and low prices for nitrogen -- due to low prices for natural gas, an input for nitrogen. Its stock has fallen nearly in half during the past year, which has helped propel its dividend yield north of 8%. Some worry about a dividend cut, but even a 50% cut at this rate would leave a solid yield.
Potash Corporation of Saskatchewan may not recover in the next few months, but the coming years do seem promising, as demand cannot be slack for long. (Management recently noted that it expects strong demand from China.) After all, our global population keeps growing, and will demand more food. The company is based in Saskatchewan, which gives it ample access to a lot of potash, and helps it be a low-cost producer.
Another advantage is its diversification, with its nitrogen and phosphates business serving to stabilize profits when the potash business is weak. In addition, Potash Corporation is winding down a multi-billion-dollar capital-spending campaign that should position it for further growth, and that will likely boost free cash flow.
With price-to-earnings, price-to-book-value, price-to-sales, and price-to-cash-flow ratios all well below the company's five-year averages, Potash Corporation looks like a good value for patient believers.
Procter & Gamble Co (PG -0.39%) has a solid dividend yield, too, recently at 3.4%, and it has been hiking that payout by an annual average of 6.6% over the past five years. You're certainly familiar with it, but you may not appreciate its size and dominance. It sports 23 brands that rake in $1 billion or more in annual sales, and 14 more brands generating between $500 million and $1 billion. Its names include Always, Bounty, Charmin, Crest, Dawn, Downy, Febreze, Gain, Gillette, Head & Shoulders, Olay, Oral-B, Pampers, Pantene, and Tide, and their strength gives Procter & Gamble pricing power.
Procter & Gamble Co has been challenged in recent years with revenue shrinking, in part due to the strong dollar and unfavorable exchange rates. (P&G generates only 35% of its revenue in the U.S.) It has responded by cutting costs -- and cutting brands, too, as it focuses on its most-profitable and promising lines. This has helped push profit margins up.
Meanwhile, its free cash flow is massive and growing, topping $11 billion annually. A key selling point for Procter & Gamble is the defensiveness of its businesses. No matter the state of our economy, people will still need to buy shampoo, diapers, detergent, toothpaste, and other staples.
The stock is not at screaming-buy levels, but it's not to be avoided due to overvaluation, either, and is likely to reward long-term investors.
Ventas (VTR 0.90%) is a real estate investment trust (REIT) that's focused on the healthcare arena. That bodes well, due to our growing population that will need more and more medical services. (Ventas has noted that the senior population is growing seven times faster than the overall adult population.) It's not a minor player, either, with its market value recently near $18 billion. Its portfolio features close to 1,300 senior housing communities, medical office buildings, skilled nursing facilities, hospitals, and other properties in the U.S., Canada, and the U.K.
Ventas's revenue has roughly doubled since 2011, but its free cash flow has turned negative in the past few years, in large part due to aggressive acquisitions. These may pressure results in the near term, but they set Ventas up for further growth in the years ahead. In its last quarter, Ventas posted 9% year-over-year growth in its funds from operations, with net operating income rising by 4%. It also spun off Care Capital Properties, which will focus on skilled nursing facilities, leaving Ventas with more profitable and promising properties.
Ventas's forward-looking price-to-earnings (P/E) ratio of 27 is well below its five-year average of 43. And with price-to-book-value, price-to-sales, and price-to-cash-flow ratios all well below the company's five-year averages, Ventas, presents a compelling value proposition for income-seeking value investors. It offers shareholders a significant dividend, too, recently yielding 5.4%.
A little digging can turn up many other candidates for a value investor's portfolio, but you might start by taking a closer look at these three companies.