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The best companies often trade at substantial premiums, leaving those hunting for value out of luck. But pessimism can sometimes drive down the price of high-quality stocks to levels that are hard to believe. General Motors (NYSE: GM), Skechers (NYSE: SKX), and Disney (NYSE: DIS) are three stocks that aren't getting the credit they deserve. I own shares of both GM and Skechers, and Disney is on my watchlist. Those searching for great stocks trading at low prices needn't look any further than these three companies.
General Motors is having a blockbuster year, but you wouldn't know it looking at the stock. Shares of GM are actually down year-to-date, despite five consecutive quarters of blowout results. During the most recent quarter, revenue and adjusted EPS jumped 10.3% and 14.4%, respectively. Both numbers were well above analyst expectations.
Image source: General Motors.
GM expects to produce close to $6 per share of adjusted EPS this year. With the stock trading for around $31, the P/E ratio sits at a little over 5. To be fair, demand for automobiles in the U.S. is plateauing, and GM's earnings may decline going forward because of an increasingly competitive environment. But the market is pricing in a complete collapse. To say that the level of pessimism surrounding GM is excessive would be an understatement.
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You only have to look at GM's October sales results to get a sense of how well the company is doing. U.S. retail unit sales jumped 3% year over year, despite two fewer selling days, and GM's retail market share rose 1.6 percentage points to 18.1%. GM has gained retail market share in 16 of the past 19 months, and its average transaction price continues to rise. What's more, its incentive spending as a percentage of its average transaction price is below the industry average.
The market isn't giving GM the respect it deserves. There's no telling how long it will take for the stock price to catch up to the fundamentals, but for investors willing to wait, GM is a bargain.
Not a growth stock anymore
Shares of footwear company Skechers have fallen off a cliff since the middle of last year. The stock is down more than 60% from its peak, the result of a growth rate that's falling back to earth. Year-over-year revenue growth as high as 40% was common in 2014 and 2015. Those days are now over.
Image source: Skechers.
Skechers is still putting up solid numbers. During the most recent quarter, revenue grew by 10% year over year, driven by strong performance in international markets. EPS were down slightly because of a higher tax rate, but operating income jumped 8%. Skechers expects a slowdown in the fourth quarter, driven by slower international and retail growth and a slight decline in its domestic wholesale business. But given that total revenue grew by nearly 27% during the fourth quarter of last year, I'm not all that concerned.
Analysts expect Skechers to produce EPS of $1.67 this year, putting the P/E ratio just over 12. This valuation assumes minimal growth going forward, but I think its overly pessimistic. Another positive for investors: Skechers has a cash-rich balance sheet, featuring $665 million of cash and only about $75 million of debt. I would be surprised if Skechers didn't announce some sort of share buyback program in the near future, especially considering how much the stock has been beaten down.
Skechers is no longer the growth stock it once was. But rampant pessimism has made the stock a great opportunity for value investors.
An entertainment powerhouse
Disney isn't nearly as cheap as GM or Skechers, trading for around 16 times the average analyst earnings estimate. But given the quality of the company, I'd argue that Disney stock offers a solid investment opportunity. The company's cable networks, particularly ESPN, are cash cows for Disney, generating $5.3 billion of operating income over the past nine months. The future of cable is uncertain, but Disney's long history suggests that it will be able to navigate whatever environment it finds itself in.
Image source: Disney.
Beyond cable, Disney's movie business is firing on all cylinders. The company's Marvel films continue to impress, and the Star Wars franchise will likely be another major success. Disney's parks and resorts segment has also been growing, buoyed by the recent opening of Shanghai Disneyland. During the third quarter, total revenue grew by 9% year over year, while EPS jumped 10%.
Shares of Disney are down nearly 25% since peaking last year. The stock isn't a no-brainer like GM, but for investors looking for a nice balance between quality and value, Disney looks like a good bet.
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Timothy Green owns shares of General Motors and Skechers. The Motley Fool owns shares of and recommends Skechers and Walt Disney. The Motley Fool recommends General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.