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5 Stocks Serving Up Bargains - 26588 views
MINNEAPOLIS (Stockpickr) -- There is a fundamental shift taking place in the economy. Huge losses on personal assets, including real estate and housing, combined with a challenging job market has changed consumer behavior. Budgets are tight, and there is a renewed emphasis on savings.
The result of this very significant change is an emphasis on bargains and price. There are many loud voices in the financial world concerned about inflation based mainly on current easy monetary policy. The fallacy of that argument is almost amusing. Simply take a look around and you will see the masses working hard to find bargains at every turn.
When consumers don't spend, prices will be hard-pressed to increase. The pressure on prices for most goods and services is tremendous at the moment. Last month, import prices fell thanks to lower fuel costs. Food and materials prices fell as well.
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My mentor in this business had all the money in the world, but he would drive out of his way to find a gas station with prices a nickel lower than the rest of the market. That mentality helped him build wealth. Today, that mentality is a necessity for many just to survive.
The situation makes for interesting speculation in stocks. Most are familiar with retail names that offer low prices. Companies such as Dollar General (DG), Wal-Mart (WMT) and Costco (COST) are taking advantage of bargain-hunting to grow their businesses. Companies in other industries catering to low prices are also likely to benefit.
With this in mind, investors should consider adding these href="http://stockpickr.com/jdlugosch/portfolio/5-stocks-of-companies-serving-up-bargains/">five stocks of companies serving up bargains to their portfolios.
The pharmaceutical business is designed to allow companies to profit handsomely from years of very expensive research and development. When a new drug finally makes it to market, it is in essence a monopoly, operating without competition. Eventually, though, that protection expires. Competition emerges in the form of generic copies sold at lower prices.
Teva Pharmaceuticals (TEVA) is one of the biggest generic drug sellers in world. The current market is fertile ground for the company given the number of high-profile drugs losing patent protection. While the larger research and development drug companies struggle to replace these drugs coming off patent, Teva’s pipeline of product is growing.
One wouldn’t know it by the action in Teva shares, though. The stock is down 27%, a victim of the overall bearishness in the market. Investor antipathy toward the drug sector hasn't helped Teva. I would view the selling as an opportunity to buy the stock at a discount.
The average Wall Street estimate for Teva's current-year earnings is $5.05 per share, with an expectation for profit growth of 13% in the following year to $5.72 per share. At current prices, Teva trades for just 7.5 times current year estimated earnings. That is incredibly cheap given the expected profit growth. In addition, the company pays a dividend of 2% enhancing future returns.
I would buy this seller of name brand drugs at cheap prices.
Teva shows up on recent lists of 8 Biotech Stocks to Watch and 12 Top Health Care Picks for Hedge Funds. As of the most recently reporting quarter, it's a holding of John Paulson's Paulson & Co. and John Griffin's Blue Ridge Capital, among others.
The airline sector has been brutalized this year. Rising oil prices and an economy showing signs of weakness brought sellers out of the woodwork. Not one carrier has been spared the carnage. The very popular and well-run Southwest Airlines (LUV) has seen shares decline 36% so far in 2011.
The concerns for lower profits are legitimate, but the airline industry is better poised to deal with these challenges than at any other time in history. Consolidation and more-focused management have kept supply tight. Planes are filled to the brim, and there is no sign of excess capacity coming on line in the near future. Some carriers have been able to pass along higher operating costs to consumers in the form of ticket charges.
Higher fuel prices resulted in Southwest's missing earnings estimates in the last quarter by 5 cents per share. The news was bad but not disastrous. During the third quarter, oil prices have drifted lower. That should help profits in the near term. Unlike current investors, Wall Street analysts have a rosy view of the future for Southwest.
The average estimate for the current year is for the company to make 33 cents per share. In the next year, profits are expected to more than double to 75 cents per share. At current prices, shares of Southwest trade for 25 times current-year estimates of earnings. That is very cheap given expected growth. If oil prices hold steady here, shares of Southwest could double in value in the coming year.
Southwest is one of TheStreet Ratings' top-rated airline stocks.
Take a look at the one-year chart of Domino’s Pizza (DPZ) -- it's one of the few stocks that's been unscathed during this year’s market malaise. The low-price home-delivery pizza company has seen profits soar. Its shares are up 70% this year, making it one of the best-performing stocks in the market.
Delivery pizza may not be the healthiest alternative out there, but it's cheap and convenient. Cash-strapped consumers -- especially those with children -- can forgo the dining-out experience and save money on food and gas.
Helping support Domino’s share gains are earnings that have exceeded Wall Street estimates over the last two quarters. For the full year, the average Wall Street estimate of profits is $1.61 per share, with that number growing 13% to $1.82 per share in the next year. Those estimates have been on the rise but are likely still too conservative. At current prices, Domino’s trades for 17 times current-year earnings estimates.
I’d be willing to pay that slight premium to expected earnings growth as more consumers opt for the quick, cheap and satisfying option of Domino’s Pizza.
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A deflationary spiral impacts companies across a broad spectrum of industries. Customers aren't the only ones looking to save money. For example, builders are also trying to save money in order to support profit margins in a highly competitive market with excess capacity. One of the largest low-price steel companies is Nucor (NUE). The $10 billion market cap company provides a variety of steel products, including hot/cold rolled steel, plate steel, structural steel and bar steel.
Shares of Nucor are down 23% this year on speculation of a double-dip recession. All this talk of a recession could be good for the company, which will be among the first to benefit from any policy response to boost the economy. There are plenty of infrastructure projects crying out for attention and needing products from Nucor. Even without any stimulus spending, the company is doing just fine.
Nucor has exceeded Wall Street profit estimates by a wide margin in each of the last three quarters. For the full year the average estimate is for the company to make $2.62 per share. In the following year, Nucor profits are expected to grow by 35% to $3.54 per share. With the stock trading for only 13 times earnings, Nucor is a discount steel maker worthy of any bargain hunting portfolio.
What started as a company offering discounts in the travel space, Travelzoo (TZOO) is quickly transforming into social networking business, providing members with bargains in their respective communities on everything from dining to entertainment. If this sounds familiar, it should. It is the same model of the ultra-hyped Groupon. With that company looking to delay its IPO, investors may be wise to pick up shares of Travelzoo instead.
Even if Groupon does go public, shares are likely to go parabolic. Travelzoo has already been tested by the market, with shares rising initially and only recently falling back to earth. Since late April, shares of Travelzoo have lost nearly 70% of their value. With the mustard off the hot dog, now may be a good time to buy Travelzoo.
The company is profitable and growing rapidly. In the current year, the average Wall Street estimate is for Travelzoo to make a profit of $1.41 per share. In the following year, the estimate increases by 29% to $1.82. At current prices, the company trades for 23 times current-year estimates.
It is unusual for growth companies to trade for multiples of earnings lower than expected profit growth rates. It is reasonable to assume that when Groupon goes public, that will not be the case. Consumers are hungry for discounts, and Travelzoo is positioned to prosper from that trend. I would buy this fast-growing company that serves up bargains.
Travelzoo was also featured recently in "5 Breakout Trades on the Radar."
To see these stocks in action, visit the 5 Stocks Serving Up Bargains portfolio.
-- Written by Jamie Dlugosch in Minneapolis.
At the time of publication, author had no position in stocks mentioned.
Jamie Dlugosch is a founder and contributor to MainStreet Investor and MainStreet Accredited Investor. Formerly, he was president and CEO of Al Frank Asset Management. He has contributed editorially to The Rational Investor, The Prudent Speculator, Penny Stock Winners and InvestorPlace Media.