Adios, 2015. Hello, 2016!
For many investors, 2015 was a year of mixed emotions. The Federal Reserve finally decided to boost its federal funds target rate, implying that the U.S. economy is strong enough to stand on its own two feet; the unemployment rate hit its lowest levels since 2008; and for a short time, all three stock market indexes hit an all-time high. On the flip side, many commodity prices tanked as China's growth slowed, and terrorism unfortunately took center stage once again. All told, the broad-based S&P 500 finished the year pretty much where it began.
The best value stocks of 2015
Despite the lack of a true up or down move by year's end for the broader market, some value stocks truly shined in 2015. Although there's no concrete definition for a "value stock," I define a them as having a price/earnings-to-growth (PEG) ratio of about one or lower. It also doesn't hurt if a company has a forward P/E ratio that's at or below the market average, but that also depends on the company's long-term growth rate, which is why the PEG ratio can be so helpful.
Using a PEG ratio of around one or less as our control, here are the best value stocks of 2015.
Ligand Pharmaceuticals (NASDAQ:LGND): up 104%
When it comes to value stocks, none tipped the scale more in investors' favor in 2015 than Ligand Pharmaceuticals in the biotech sector.
Ligand isn't like your traditional biotech stock that goes through the arduous process of discovering, testing, and marketing drugs for a profit. This process is often cost- and time-intensive, and it doesn't always lead to success. Instead, Ligand's strategy is simple: It buys royalty interests in drugs or licenses out technology from its portfolio. Arguably Ligand's top asset is its Captisol technology, which aids in the solubility and stability of certain drugs. As it stands now, Ligand derives a percentage of sales from Amgen's multiple myeloma drug Kyprolis, Novartis' Promacta, and around a half-dozen other marketed therapies.
The disadvantage of the royalty strategy is that patent time frames are finite, meaning a royalty interest company constantly needs to be searching for ways to replenish cash flow from drugs whose patents are set to expire. Conversely, this strategy can be pure gold because its overhead costs are low, which can translate to high margins.
Looking ahead, Ligand's full-year EPS is projected to grow from a reported $1.52 in 2014 to almost quintuple that ($7.57) by 2018, per Wall Street's consensus estimate. That growth, coupled with a reasonably low P/E, leads to a PEG ratio of around 0.7. Even with Ligand shares rising 103% in 2015, the company is entering 2016 still looking quite attractive on a valuation basis.
Dycom Industries (NYSE:DY): up 100%
One of the year's biggest surprises could be Dycom Industries, a contracting services company for the telecommunication industry and electric and gas utilities.
The bread and butter of Dycom's growth is tied to telecom. More specifically, Dycom relies on telecom infrastructure contracts (i.e., fiber installation and management), which have surged in demand as telecom giants race to expand their networks to reach more consumers and accommodate more data than ever. As noted by Dycom CEO Steven Nielsen during the company's first-quarter conference call, wireline network demand is up for Dycom's top five customers, with Nielsen commenting that 2015 could be viewed as a "foundational year" for an upswing in wireline networks investments. Organic growth for the company also rose by 18.2% in Q1 2016.
Further fueling Dycom has been its string of earnings beats. In each of the past five quarters, Dycom has beaten Wall Street's expectations by anywhere from $0.10 per share to $0.23 per share (its most recent report).
As my Foolish colleague Brian Stoffel recently noted, Dycom is highly dependent on a handful of telecom customers for a good portion of its revenue, so there's always the inherent risk that one or more could find a new contracting partner and do serious harm to Dycom's top and bottom lines. However, with a sub-one PEG ratio and the expectation of strong wireline network demand, Dycom could modestly add to its gains in the upcoming year.
Alon USA Partners L.P. (NYSE:ALDW): up 94%
Oil has been absolutely devastated over the past year and a half, with per-barrel prices falling from over $100 to just over $35 by the end of 2015. Thus it might be surprising to see an oil industry company, Alon USA Partners, turn out to be one of the year's best value stocks.
Alon USA Partners, which is a subsidiary of Alon USA Energy, is a refining and marketing company in the South Central and Southwestern United States. Unlike oil drillers and oil equipment servicing contractors that have been reeling as prices have plunged, oil refiners tend to live high off the hog when prices decline. The reason? Blame volatility. Prices for refined products such as a gasoline tend to fall at a slower pace than crude, allowing Alon USA Partners to benefit from the difference. Additionally, as prices continue to fall for refined petroleum products, demand increases, further benefiting refiners on a volume basis. Also, as Foolish energy guru Tyler Crowe has previously pointed out, Alon USA Partners helps service the highly demanding California gasoline market.
The big question, of course, is whether Alon USA Partners can deliver solid results in 2016. To that end, I'm not entirely certain, but I wouldn't count on a repeat performance. As crude supply and demand find an equilibrium, and prices stabilize, petroleum products will also find an equilibrium, potentially capping refiner margins and profits. Don't get me wrong: Oil oversupply forecasts won't be fixed overnight, and refiners look set to remain healthily profitable in 2016 -- Alon USA Partners' forward P/E is a mere nine. However, this is a cyclical play, and investors should be well aware that there could be more downside risk in 2016 than upside potential with refiners.