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3 Top Value Stocks to Buy in February

Timothy Green, Tyler Crowe, and Rich Duprey, The Motley Fool

With the market trading at historically lofty valuations, honest-to-goodness value stocks are few and far between. Value stocks tend to beat out growth stocks in the long run, but with the pickings being slim right now, following a value investing strategy today is easier said than done.

But just because it's hard doesn't mean it's impossible. General Motors (NYSE: GM), NCR (NYSE: NCR), and Alliance Holdings GP (NASDAQ: AHGP) all sport knocked-down valuations, and three of our Foolish investors think they may be perfect for value-seekers.

Puzzle pieces spelling Value.

Image source: Getty Images.

Value eternal

Tim Green (General Motors): General Motors stock has been trading at rock-bottom valuations for a long time. The company produced $6.62 in adjusted earnings per share last year, putting the price-to-earnings ratio at just 6.5. Single-digit P/E multiples have been the norm for the auto giant in recent years.

The fear that a downturn in demand for vehicles would ravage GM's bottom line has been holding the stock back. But going into the next downturn, whenever it may occur, GM will be a leaner and more efficient company than it was last time around. GM shed its money-losing European operations last year, and the company believes that it would break even in the U.S. if annual new vehicle sales fell to somewhere between 10 million and 11 million. That would be a steep decline from the 17.2 million new vehicles sold in 2017.

On top of being a more efficient company, GM is aggressively placing bets on the future of the industry. Its all-electric Chevy Bolt was the second-best-selling electric vehicle in the U.S. last year, and the company plans to launch at least 20 new electric vehicles by 2023. A modified self-driving Bolt will serve as the base for GM's upcoming robo-taxi service, which the company hopes to launch in dense urban environments sometime next year.

GM expects its 2018 results to be in-line with its 2017 results, with new full-size pickups set to launch later this year helping to accelerate earnings in 2019. An unexpectedly large downturn in demand could throw a wrench in these plans, but with the stock trading for peanuts, investors enjoy a substantial margin of safety.

The express lane of value

Rich Duprey (NCR): There's a revolution under way in the supermarket industry as grocery stores race one another to eliminate cashiers from the checkout line, and one of the primary beneficiaries will be NCR.

The largest supermarket chain in the U.S., Kroger, is rolling out its new Scan Bag Go technology to 400 stores this year. It allows shoppers to use a scanner provided by the store or a mobile app they can download to scan items as they put them into their cart. When they get to check-out, they input the data on the handheld device or their mobile phone into the register, which automatically tallies their cart. Walmart is adding its similar technology to 100 more stores, as is Target.

The market analysts at RBR say self-checkout registers are a massive, global opportunity, with a record 49,000 units shipped worldwide in 2016, more than half of which are in the U.S.

The global leader in this technology is NCR, which owns some 75% of the market. The next closest competitor is Toshiba, with a 9% share.

The stock of NCR is down 30% from its 52-week highs and trades at a fraction of its sales. With its price at a deeply discounted 6.5 times the free cash flow it produces, the next-generation cash register manufacturer looks like a stock that value investors may want to ring up quickly.

Squeezing out the last bit of value in coal

Tyler Crowe (Alliance Holdings GP): Even the most optimistic coal investors have come to terms with the fact that coal is, and will continue to be, in secular decline. The low-cost extraction of shale gas, the continued cost decline of renewables, and an accelerated transition away from coal in places like China means that the energy source will continue to lose market share as new installations replace aging coal power plants. Based on that backdrop, there doesn't appear to be much upside to an investment in coal today. 

One exception to that thesis is Alliance Holdings GP and its master limited partnership, Alliance Resources Partners (NASDAQ: ARLP). Thanks to a suite of low-cost mines, the company has been able to stave off the impact of U.S. coal demand declining by taking market share from higher-cost and lower-quality coal. The company also benefits immensely from a management team that has been prudent with its capital allocation and avoided making too many balance-sheet-busting acquisitions that led so many other coal miners into bankruptcy over the past few years.

As a result, you have a company that can still reliably cover all its capital obligations and pay a dividend that yields 10.6% without too much concern of a cut anytime soon. Also, with the market being so bearish on coal in general, shares of Alliance Holdings have a modest enterprise value-to-EBITDA ratio of 4.5. It's hard to find a company that can reliably pay investors such a fat yield trading for that cheap.

Investing in coal may not be for everyone, and eventually, the decline in coal will catch up to Alliance as it has with the rest of the industry. However, that is still a few years off, and Alliance will likely throw off plenty of cash over that time to reward shareholders.

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Rich Duprey has no position in any of the stocks mentioned. Timothy Green owns shares of General Motors. Tyler Crowe owns shares of Kroger. The Motley Fool recommends Alliance Resource Partners and NCR. The Motley Fool has a disclosure policy.