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5 Bargain Bin Stocks You Need to Buy - views
BALTIMORE (Stockpickr) -- “Stocks are cheap!” Or at least that’s the story that’s getting tossed around Wall Street right now.
But even though that phrase has been picking up in popularity this month, it doesn’t tell you a whole lot about what you should be doing as an investor. I mean, which stocks are cheap? And how cheap are they? Before you go off buying equities with both hands, let’s get a better picture of the cheap stocks that are out there.
To do that, we’re tearing the lid off of Wall Street’s “bargain bin” today.
In very broad strokes, stocks are looking cheaper in April. It’s earnings season, and one of the big data points that I’ve been harping on has been the disconnect between investor sentiment and fundamental earnings numbers flowing out of earnings calls this month. So far, 125 stocks in the S&P 500 have reported their numbers to investors this quarter. Of those, around 82% have reported positive earnings surprise. That means that analysts are dramatically underestimating corporate profits right now.
In the last year, the picture is even clearer: corporate revenues for stocks in the S&P 500 have climbed 7.5%; profits have climbed 6.8%. But at the same time, the S&P’s price has only inched 2.7% higher. So even if analysts were dead-on in their earnings projections, Mr. Market is still a lot cheaper than it was 12 months ago; and we know that those projections aren’t even close.
Still, the idea that “the market is generally cheaper” doesn’t do a whole lot for investors looking to buy bargains. That’s why we’re turning to the bargain bin. In our search, we’re focusing in on stocks that currently trade at or under book value per share -- a number that (generally) means that a company costs less to buy than the value of the stuff it owns.
Typically, stocks trade under book value for good reasons: it could mean, for example, that a company has a major black cloud ready to disrupt its businesses, or that its liabilities are under-represented on its balance sheet. To combat that, we’re focusing on larger bargains with consistent profitability, and assets that are primarily financed with equity rather than debt.
Without further ado, here’s a look at five of the stocks from Wall Street’s bargain bin.
First up is specialty glass and ceramics maker Corning (GLW). Corning lays claim to some of the most advanced glass technology in the business, providing companies such as Apple (AAPL) with its patented Gorilla Glass for iPhone and iPad screens, and selling leveraging its expertise in manufacturing larger, thinner glass panels to serve other display makers. While Corning operates in a handful of businesses, glass used in displays (for everything from screens to internal components) makes up 40% of revenues.
One possible black cloud for Corning is the iPhone. With investors concerned that a slowdown in Apple’s device sales could be around the corner, the reduced shipments are invariably going to trickle down to Corning. But that argument is overblown. Regardless of the handset maker, the touchscreen smartphone isn’t going anywhere -- and Corning lays claim to some of the most attractive technology used to fortify glass enough for phone and tablet screens.
Corning’s exposure to consumer discretionary spending is hinged on mobile devices, flat screen TVs, and LCD monitors, three product segments that aren’t slowing down in sales. On the other end of the spectrum, exposure to infrastructure like fiber optic cables and air filters skirts direct exposure to consumers completely.
A price-to-book ratio of just under one and an earnings multiple under ten put Corning squarely in bargain territory. Investors also shouldn’t ignore the 2.25% dividend yield shares currently sport.
Chicago-based derivatives exchange company CME Group (CME) has had a strong year, rallying more than 12% since the first trading day of 2012. That’s not a huge surprise -- investors flicked the “risk switch” into the “on” position at the start of the year, driving volume in derivatives trades and resulting in revenues for CME. Even though the risk switch got moved to “off” at the start of April, this stock in looking cheap.
CME Group operates four of the most well-known derivatives exchanges in the world: CME, CBOT, Nymex and Comex. While those initialisms may not mean much to investors who don’t deal with derivatives, they combine to make their parent the biggest futures exchange in the world, a status that has historically delivered dump trucks of cash to CME. The firm also owns the majority stake in Dow Jones Indexes.
The firm currently trades for around 86% of book value, a price that looks even cheaper when you consider the fact that intangible assets (which constitute a big chunk of CME’s value) aren’t included in the book value calculation. Because CME operates clearinghouses for its exchanges, it has a deep economic moat in spite of the attempts by rivals to step in on some of its business. A burgeoning OTC market could bring growth in 2012 as sophisticated investors search out exposure that they can’t get through traditional channels.
Even investors who don’t want to trade derivatives should give CME Group a second look in this year.
If there’s ever been a stock worth drinking to, Molson Coors (TAP) is it. This $7.5 billion beer brewer owns brands like eponymous Molson and Coors as well as Blue Moon, Keystone, and Miller Lite (the latter through a joint venture with SABMiller (SBMRY: Pink Sheets) here in the U.S.). That makes TAP one of the biggest beer stocks in the world.
Like other sin stocks, TAP boasts a hefty dividend payout (with a yield at more than 3% right now) -- but it bears mentioning that shares haven’t been immune to economic headwinds. With a surging dollar coming into play during the height of the recession, TAP got hit with reduced revenues and with currency exchange losses on its international business. That currency risk is going to continue to be a black cloud in this environment, but it’s one that investors can take advantage of to buy TAP on the cheap.
At the same time, Molson Coors has been leveraging big trends in the beer industry to find growth opportunities here at home. The firm has poured resources into the craft beer segment, one of the fastest-growing areas of the alcoholic beverage space. While craft beer offerings like Batch 19 aren’t going to supplant the firm’s mass market offerings, they have the potential to provide top-line growth and deeper margins in 2012.
With shares trading right around book value, TAP looks cheap right now.
I also featured Molson Coors recently in "5 Sinful Stocks to Buy for 2012 Gains."
Steel producer Ternium (TX) is another bargain bin name worth watching this month. The firm has exposure to massive steel processing capacity in Argentina, Mexico, Colombia and Brazil, giving the firm a front row seat to the Latin American growth story that’s been shaping up in the last decade.
As a holding company, Ternium owns a diverse set of steel-producing assets, from vertically integrated producers in Mexico to processing mills in Argentina. That mix means that commodity shifts don’t fully impact the firm in either direction, and helped the firm snap back its revenues in the wake of the financial crisis.
With emerging markets re-emerging as a growth story in 2012, investors could see demand perk up considerably for TX’s offerings -- especially in markets such as China, which currently make up a tiny fraction of output.
With shares trading at only 84% of book, this asset-intense company looks cheap right now. Especially when the net cash position on Ternium’s balance sheet is taken into account. So far this quarter, base metals companies generally have delivered impressive earnings surprise.
Investors get their first glimpse at TX’s numbers Wednesday morning.
Last up is oil and gas driller Rowan (RDC). Rowan has been providing specialized drilling services and equipment for oil and gas companies for the better part of the last century, an asset-intense business that has the potential to hemorrhage cash under the wrong conditions.
But Rowan has gotten it right in the last decade -- and the firm stands to benefit from sustained high oil prices in 2012.
Rowan didn’t always cut a fine figure for investors; over the course of the last several years, though, the company has shed its less attractive businesses and used the proceeds to focus solely on higher-margin offshore drilling. That major shift in focus means that RDC is one of the more speculative names on our bargain bin list, but as you might imagine, that means Rowan may not be trading so cheaply for long.
Profitability has been anemic in the last year as RDC brought new rig assets online. That means that profit metrics like P/E don’t provide a very accurate picture of this stock’s value. But price-to-book value does; presently, the firm trades for a P/B value of just under one. Compare that to rival drillers that typically trade for a P/B multiple of 2 or more.
With high oil prices sending demand for deepwater rigs on the rise, RDC should be a major beneficiary. Keep an eye out for earnings on May 2.
Rowan shows up on a list of 15 Stocks to Rdie the Energy Boom of the Next Decade.
To see these value-centric names in action, check out the Bargain Bin Buys 2012 portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.