Investors can earn big returns by buying great companies that have temporarily fallen out of favor. However, buying shares of beaten-up business can be risky, since sometimes a stock is in the doghouse for a good reason.
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So which stocks do we Foolish investors believe could be smart buys for a risk-loving value investor? Here's why Alliance Resource Partners, L.P. (NASDAQ: ARLP), Under Armour (NYSE: UA)(NYSE: UAA), and Macy's (NYSE: M) could be attractive.
The ugliest fuel
Reuben Gregg Brewer (Alliance Resource Partners, L.P.): Thermal coal is probably the most out-of-favor carbon-based fuel. It would be easy to pass over Alliance Resource Partners and its 8% distribution yield because of the industry it's in. But if you're a daring investor, you should step back, take a deep breath, and jump in for a deep dive.
For starters, the partnership covered that 8% distribution two times over in 2016. That's a huge amount of coverage in the partnership space and helps explain why, when it reported first-quarter earnings, management hinted that it might soon start to increase the disbursement again. Debt is a modest 25% or so of the capital structure, placing the partnership on a solid financial foundation. And during the coal downturn, Alliance remained profitable while other miners were bleeding red ink and/or seeking bankruptcy court protections. It's easily one of the best-run coal miners.
But not only is it doing relatively well from a financial perspective, but it's also pretty cheap right now. For example, its price-to-sales ratio is currently around 0.8. That metric is normally around 1.1. The price-to-cash flow ratio, meanwhile, is hovering around 2, when it's normally a little over 3. And its enterprise value-to-EBITDA is hovering near 10-year lows. To be fair, there are other coal miners that are probably cheaper, but why buy a cheap and troubled company and when you can own an industry leader on sale?
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A footwear and apparel underdog
Keith Noonan (Under Armour): For a company that's valued at north of 50 times forward earnings estimates, Under Armour is facing challenges that make buying its stock a daring proposition. With domestic sales looking shaky and some evidence that its brand strength is wavering, there's a fair case to be made that Under Armour is overvalued at current prices, but I think investors who are willing to take on the risk will see big upside over the long term.
Fixating too much on one product, particularly in an industry such as sportswear, is often a recipe for disaster. But I think the company's upcoming addition to the Stephen Curry signature shoe line is a particularly notable and symbolic step in the right direction. Previous entries in the basketball star's shoe line have been criticized and in some cases even ruthlessly mocked for their designs, but the recently unveiled Curry 4s have been met with high praise. That's a good sign for Under Armour's domestic footwear sales this year, as is the fact that the company's most valuable celebrity endorser won his second NBA championship. But the favorable reception for the Curry 4s also points to an ability to adapt and learn from potentially valid criticisms.
Under Armour doesn't need to shed all of its unique aesthetic elements, but a smart course correction is one of the most important elements in running a successful business, and it's encouraging to see the company nail what will probably be its most important product of the year. It's the type of development that reaffirms my bullish outlook on the company's domestic and international growth potential and bolsters the case for Under Armour as an undervalued opportunity for the non-risk-averse investor.
There's more to this department store than meets the eye
Brian Feroldi (Macy's): Macy's stock has fallen by more than two-thirds over the past two years, which is a horrific performance that stands in stark contrast to the double-digit gains of the S&P 500. This massive underperformance must suggest that this company is doomed to become the next Sports Authority or Blockbuster, right?
While there's no way to know what the long term holds, I see reasons to believe that this tremendous sell-off is overdone.
First, Macy's owns a lot of valuable real estate assets. How valuable? Some estimates say as much as $20 billion. While that could be a wildly inflated figure, the company's current market cap is only $6.5 billion. It is possible that its real estate assets alone could be worth more than the entire business is trading at right now.
Second, Macy's is actively working on a turnaround plan to makes itself more profitable. This includes closing waves of stores and changing up its product offering. These moves are hurting results right now but could pay off if they work.
Finally, Macy's remains profitable and is actively returning capital to shareholders through buybacks, debt repayments, and a healthy dividend. In other words, the company appears to be more than capable of weathering the current retail storm.
Despite these positives, Macy's stock is trading for less than 8 times forward earnings, and its dividend yield has been pushed above 6.7%. While success is far from guaranteed, it doesn't take a lot of imagination to see Macy's turning into a big winner from today's depressed levels.
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Brian Feroldi owns shares of Under Armour (A Shares) and Under Armour (C Shares). Keith Noonan has no position in any stocks mentioned. Reuben Brewer has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Under Armour (A Shares) and Under Armour (C Shares). The Motley Fool recommends Alliance Resource Partners. The Motley Fool has a disclosure policy.