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2 Stocks I'm Putting on My Watchlist

Timothy Green, The Motley Fool

It's been a rough year for shareholders of packaged food company General Mills (NYSE: GIS) and LCD display manufacturer LG Display (NYSE: LPL). Both stocks have tumbled, with General Mills down 24% and LG Display down 37% year to date.

Both companies are facing some serious problems, but I think the pessimism that has been building around these two stocks may present an opportunity. I don't own either one yet, but I'm putting both on my watchlist. Here's why.

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Image source: Getty Images.

General Mills

Packaged food stocks like General Mills have taken a beating over the past couple of years. A combination of aging brands, a consumer shift toward online retail and natural foods, and declining sales in key categories has put pressure on the entire industry. In General Mills' fiscal 2018, U.S. yogurt sales tumbled 12%, while cereal sales were roughly flat. Overall, organic net sales fell by 1% compared to 2017.

Brands that worked in the past, like Yoplait, simply aren't working anymore. Consumer tastes are changing, and General Mills needs to change with them. Shares of General Mills have tumbled 38% since peaking in mid-2016. With the company expecting flattish organic sales and an adjusted earnings decline in fiscal 2019, the stock may not recover anytime soon.

I dofn't think General Mills is in quite the dire straits that the stock's performance suggests. Some of its brands may be beyond saving, but others have solid growth potential. Haagen-Dazs is one of the company's growth platforms, along with snack bars, Old El Paso, and its collection of natural and organic brands. General Mills owns Annie's, EPIC, Muir Glen, Larabar, and a handful of other brands that are more in tune with current consumer preferences.

General Mills plans to divest some of its weaker brands, equivalent to roughly 5% of annual sales. The company is also aiming to grow Blue Buffalo, the pet products company it acquired earlier this year, at a double-digit rate. Blue Buffalo recorded $1.275 billion of sales in 2017, so the brand is capable of driving meaningful growth for General Mills.

General Mills expects to generate between $3.02 and $3.11 in adjusted earnings per share in fiscal 2019, putting the price-to-earnings ratio just shy of 15. That's not quite cheap enough for me to want to jump in, especially considering the challenges the company is facing. Debt is also a problem: General Mills now has $12.7 billion of long-term debt following the $8 billion deal for Blue Buffalo. That makes the company a lot more fragile, especially during a recession.

Despite the risks, I think the value of General Mills' brands is being underestimated, even if some are flailing. I'll be keeping an eye on the stock, ready to pounce if it keeps trending downward.

LG Display

LG Display, a South Korean manufacturer of LCD and OLED display panels, has treated investors to a rough ride. The stock has crashed since the beginning of the year, and it's mostly fluctuated within a range over the past decade or so.

The business of manufacturing panels that go into TVs, smartphones, and other products is a low-margin affair. LG Display's gross margin typically hovers around 15%. It's also highly cyclical, with the company's revenue and profits swinging up and down based on demand. On top of all that, it's capital intensive. Thanks to heavy capital spending, LG Display has booked a positive free cash flow in just four of the past 10 years.

Looking at the price-to-earnings ratio for a company like LG Display is inherently deceptive, since earnings can fluctuate so much. Currently, the P/E ratio is in the mid single digits. I think the price-to-book ratio is more telling in this case. LG Display trades for less than 0.5 times its tangible book value, which excludes intangible assets, the lowest value since the depths of the financial crisis nearly a decade ago.

LPL Price to Tangible Book Value Chart

LPL Price to Tangible Book Value data by YCharts.

To be fair, there are plenty of reasons to be concerned. With a trade war brewing between the U.S. and China, tariffs on TVs and other electronics could knock down demand and lead to a serious oversupply problem that would wreak havoc on LG Display's bottom line. China is also aiming to build its own display panel industry, which could push down prices on its own even if the trade issues are resolved.

These risks have prevented me from pulling the trigger so far. LG Display could have a tough time ahead of it, and the beaten-down valuation may accurately reflect the problems facing the company. But there's always the chance that the market is being way too pessimistic. The stock is on my watchlist for now.

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Timothy Green has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.