Value stocks are generally defined as those whose underlying businesses have consistent revenue and profitability and that trade at low valuation relative to their earnings or other metrics. The general idea of value investing is to find the companies that are trading at a substantial discount to the intrinsic value of their businesses. Obviously, this is easier said than done.
However, there are some value stocks that look like exceptionally good bargains that could be worth a closer look. With that in mind, here are five stocks in different industries and with various levels of risk that look extremely cheap right now considering their future potential.
Of course, if you want to learn how to invest in value stocks the right way, be sure to first check out our guide on How to Invest in Value Stocks before you get started.
Image source: Getty Images.
5 top value stocks to buy now
General Motors (NYSE: GM)
Simon Property Group (NYSE: SPG)
Owns and operates shopping malls
Teva Pharmaceutical (NYSE: TEVA)
Wells Fargo (NYSE: WFC)
AT&T (NYSE: T)
Data source: CNBC.
As I mentioned, these five stocks look like tremendous bargains, so let's take a closer look at each company's business, its valuation, and why it could be such a great buy for patient long-term investors.
General Motors: Absurdly cheap with promising growth prospects
General Motors is one of the lowest-priced stocks in the market on a price-to-earnings basis. As of July 29, 2019, the company trades for about 6.6 times its earnings over the previous 12 months, and this is actually on the high end of the company's recent valuation history.
To be clear, there are some significant risk factors of which investors should be aware. For starters, trade tensions could ultimately cost GM money. A good amount of the company's manufacturing is based in Mexico, and its largest market is China.
Furthermore, the auto manufacturing business is a highly cyclical one; General Motors, along with most other major auto manufacturers, is facing a significant slowdown. Auto sales plateaued in 2017 and continue to fall, with GM's sales down 1.5% year over year in the first quarter of 2019. Plus, it's important to keep in mind that a worse-than-expected economic slowdown in the U.S. could cause sales to drop even more.
General Motors is a great play on the auto industry both in the current state of the industry (it earned net income of more than $8 billion in 2018) and in the future, because GM has major investments in autonomous vehicle technology as well as being one of the leaders in all-electric transportation. In fact, through its Cruise autonomous vehicles unit, GM has a goal of introducing its first self-driving vehicles to the market by the end of 2021, and it's rolling out a ride-sharing service based on this self-driving technology. Its Cruise autonomous vehicles business is now valued at $19 billion all by itself.
In addition to automation and electric vehicles, there are other reasons to have a positive outlook on General Motors' future. The company is investing heavily in its Cadillac brand with a new lineup of crossovers and refreshed sedans. It's too early to judge how successful this will be, but luxury brands generally run at high margins, so a boost in sales could translate to major profits.
The company is also doing a great job of capitalizing on the industry trend toward more full-size trucks and SUVs. Crossover SUV sales are up 17% year over year, and larger truck-based SUV sales grew 20% -- both highly profitable categories compared to smaller cars.
The bottom line on General Motors is that this is a solid company on the forefront of the automotive industry. Its current valuation suggests that the potential negativity in the industry over the next few years is already priced in and more.
Simon Property Group: Major competitive advantages over other mall owners
Simon Property Group is a real estate investment trust, or REIT, that owns and operates a portfolio of higher-end malls and outlet shopping centers. While many investors are understandably hesitant to get involved with any type of retail investments given all of the headwinds affecting the sector over the past several years, it's important to realize that Simon is different than most other mall and shopping center operators.
For one thing, Simon is a massive company. Excluding telecommunications companies, Simon Property Group is the largest real estate investment trust in the United States. The company's Premium Outlets shopping centers have a dominant leading market share in the outlet shopping industry, and its "Mills" brand of malls are some of the most valuable shopping properties in the entire world. This not only gives it the efficiency advantages that come with scale but also means that Simon has tremendous financial flexibility to keep up with changing consumer trends and to create the best shopping destinations in the market.
One way Simon has been repositioning its portfolio is by creating mixed-use shopping destinations that incorporate nonretail elements like hotels, office spaces, and apartments. Simon calls these "live, work, play, stay, and shop communities," and there were more than 30 redevelopment and expansion projects taking place as of March 2019 in Simon's portfolio with this vision in mind. Many of these are taking place in space formerly occupied by department stores like Sears, whose bankruptcy is seen by Simon as one of its best opportunities to innovate. Others are additions being built from the ground up, like a 430-unit apartment property and two hotels that are under construction at three of Simon's properties.
The benefit here is twofold. For one thing, these types of additions help diversify Simon's revenue stream away from just retail. Additionally, this provides a built-in source of foot traffic for Simon's retail tenants.
Furthermore, Simon treats the retailers who occupy the company's space more like partners than tenants. The company actively invests in omnichannel retail, such as with its recently launched Shop Premium Outlets online outlet-shopping platform. And Simon invests in things like e-sports and augmented-reality gaming in order to help increase traffic to its properties.
The proof of the company's business model is in the numbers. Simon's malls have not been hit by the retail slowdown nearly as much as most peers. In fact, in the 12-month period ending March 31, 2019, retailer sales per square foot in Simon's properties actually grew by 3.1%. This has allowed Simon to increase its rent steadily over the past few years. In short, the company's retail space is some of the most desirable in the industry, so as other retail properties continue to decline, retailers will gravitate toward space where there's been a proven track record of sales growth, even in the new retail environment.
The bottom line is that as the retail landscape evolves, Simon Property Group is likely to gain market share and get even stronger. And thanks to the uncertainty surrounding the retail industry, the company has been trading at a very low price-to-FFO valuation (the REIT version of price-to-earnings) for several years.
Teva Pharmaceutical: The best value in healthcare?
Teva Pharmaceutical is one of the worst-performing stocks in the market, down by about 82% over the five-year period ending June 30, 2019, despite a 50% rise in the S&P 500 over the same period.
The company is the largest generic-drug producer in the world, and as such, the sales of generics account for roughly half of its revenue. Teva also has several major brand-name drugs in its portfolio, including Copaxone and several respiratory drugs.
Despite its prominence, there are a few good reasons for Teva's poor stock performance:
Debt. Teva Pharmaceutical carried $28.9 billion on its balance sheet at the end of 2018 -- more than three times the company's market capitalization. That's down from 2016, when its debt totaled $36.9 billion following its leveraged buyout of Actavis for $39 billion. Clearly its debt has fallen considerably, but Teva has a long way to go to get back to what anyone would consider a reasonable debt load.
Litigation risk. Teva has been sued by 44 states over opioid sales; potential fines are estimated to be as high as $4 billion. Furthermore, Teva eliminated its dividend in 2017 -- a smart move when it comes to freeing up cash to reduce debt but not likely to make income-seeking investors particularly happy.
Increased competition. The FDA has ramped up approval of generic drugs in recent years, which has resulted in pricing pressure on its generics and rapidly falling sales for some of Teva's brand-name drugs. That is particularly true of Copaxone, which accounted for about 20% of Teva's sales in 2016 before generic competitors started to win approval. In fact, between increasing generic competition to Copaxone and pricing pressure on the rest of its products, Teva's sales fell by an alarming 16% in 2018.
The good news is that Teva is an extremely cheap value stock. As of July 29, 2019, Teva trades for just 3.3 times 2019's expected earnings -- a remarkably low multiple, especially considering that earnings are expected to rise in 2020. If Teva is able to overcome its significant issues and its litigation costs end up lower than feared, this could end up being one of the best long-term bargains in the market.
Wells Fargo: Ready to turn the corner?
For the better part of the past few decades, Wells Fargo was considered to be the most rock solid of the large U.S. banks. It consistently generated the strongest returns on equity and assets among its big-bank peers, and its asset quality was consistently best in breed. In fact, Wells Fargo remained profitable throughout the financial crisis, and its position of relative strength allowed it to scoop up rival Wachovia at fire-sale prices, which catapulted Wells Fargo to the top tier of U.S. banks by asset size.
That was until 2016, when news broke that thousands of Wells Fargo's employees had been creating millions of unauthorized accounts in customers' names in order to meet aggressive sales goals. In all, it is estimated that 3.5 million accounts were opened improperly. This turned out to be just the tip of the iceberg. A series of other scandals came to light, including (allegedly) charging auto loan customers for insurance they didn't need, improperly charging mortgage applicants for rate locks, and several others. The result was that Wells Fargo's reputation took a massive hit, and the bank has been doing damage control ever since. To make matters worse for Wells Fargo, the Federal Reserve slapped the bank with an unprecedented penalty that prohibits it from growing assets beyond that of its level at the end of 2017.
Not surprisingly, Wells Fargo stock has dramatically underperformed the market and the financial sector over the past few years:
However, for long-term-oriented value investors, it might finally be time to take another look. For one thing, Wells Fargo trades at a rock-bottom valuation. As of late July 2019, Wells Fargo trades for less than 10 times its earnings over the previous 12 months, and at a price-to-book multiple of just 1.24. For a bank that generated a 13.3% return on equity (ROE) in the second quarter of 2019, this is remarkably cheap compared with peers:
Return on Equity (Q2 2019)
Price-to-Book (Q2 2019)
Bank of America
Data source: YCharts and author's own calculations.
In other words, you're essentially buying more profitability for your money with Wells Fargo.
Value investors should also love the fact that Wells Fargo is taking advantage of the slump by repurchasing shares at a highly aggressive rate. From July 2018 through June 2019 alone, Wells Fargo had bought back roughly 10% of its own stock and is authorized to repurchase another $23.1 billion (more than 10% of the remaining outstanding shares) over the 12-month period from July 2019 through June 2020.
To be sure, Wells Fargo still has a long way to go. As of mid-2019, the Federal Reserve's growth restriction remains in place, and there's no clear timetable for its removal. Plus, the bank remains without a CEO, and reports indicate that Wells Fargo is having a difficult time finding any qualified external candidates who want the job.
Even so, the damage-control phase seems to be in its latter innings, so Wells Fargo could turn out to be an excellent long-term value at the current depressed valuation.
AT&T: Steady cash flows and an evolving ecosystem of services
Last but certainly not least, AT&T looks like a value investor's dream right now. Shares trade for a rock-bottom valuation of 9.7 times expected 2019 earnings. Beyond that, AT&T's dividend yield has remained well over 6% for some time now, and the company has increased its payout for 34 consecutive years.
To be fair, AT&T trades cheaply for a reason. The company has lots of debt, so investors seem to be pricing in a risk premium. Immediately after the company's acquisition of Time Warner closed in 2018, the company's debt stood at $180 billion. That's a large debt load for a company with a roughly $250 billion market capitalization.
However, it's important to realize that AT&T is making debt reduction a big priority. As of the second quarter of 2019, the company's net debt had already been reduced to $162 billion. And this could fall further, with AT&T expecting to put at least $12 billion toward debt reduction through 2019, aiming for a debt of $150 billion by the end of 2019. It's important to realize that AT&T generates a lot of free cash flow -- $28 billion is expected this year, about $14 billion of which will be paid to shareholders as dividends.
Another major concern is that while AT&T's wireless business is extremely strong, the company's DirecTV and other paid-TV businesses are hemorrhaging customers at an alarming rate. This is certainly worth monitoring, but the company now has a lot of ammunition to take on streaming rivals like Netflix. So far, AT&T's streaming services don't have a clear path to future growth. If AT&T can consolidate some of its existing streaming services and produce streaming products that offer unmatched value (which it could certainly do thanks to a combination of its vast media properties and ability to bundle services for its existing wireless customers), there's more growth potential than the market seems to be acknowledging.
Of course, there's a lot of execution risk here. AT&T's competition for consumers' streaming entertainment dollars is intense, and the company has yet to come up with any truly innovative ways to take market share. However, the company's valuable media properties and massive wireless subscriber base give it a big advantage, and patient value investors could be handsomely rewarded.
Which is best for you?
To be clear, there's a considerable variation in risk between these value stocks. Not all five of these are necessarily appropriate for all investors. AT&T and Simon Property Group fall on the lower end of the risk spectrum, Teva Pharmaceutical lands more as a higher-risk value play, and Wells Fargo and General Motors are somewhere in the middle. In addition, it's important to point out that I'd only suggest any of them as long-term investments, as there's no way of predicting what will happen with any of these companies (or their stock prices) over short time periods.
This article was originally published on Fool.com