3 Value Stocks for the 2nd Quarter

Markets Motley Fool

While true bargains are becoming harder and harder to find, there's still value to be found in the markets if you are willing to turn over enough rocks.

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So which stocks do we think could appeal to value investors today? We asked that question to a team of Fools and they picked VEREIT (NYSE: VER), Cisco Systems (NASDAQ: CSCO), and Celgene (NASDAQ: CELG).

Finally turning the corner

Reuben Gregg Brewer (VEREIT): VEREIT is a triple net lease real estate investment trust (REIT) that has something of a troubled past. Back when it was known as American Realty Capital Properties, it focused on acquisitions and prioritized growth at any cost. It ended up having to restate its results after an accounting error was found. That was enough to send the REIT into a tailspin, get management ejected, and cause the dividend to be temporarily suspended. None of that is good news, but things have changed a lot since the accounting error made headlines in late 2014. 

For example, new CEO Glenn Rufrano was brought on board and quickly laid out a reasonable business plan. He has, importantly, executed on that vision. That's included getting the company financially strong enough to achieve investment grade credit ratings, paying down debt, selling undesirable assets accumulated during the "growth at any cost" phase, and creating a more balanced property portfolio. In fact, the REIT is at the point where it's starting to look to acquisitions again. The dividend is back, too, with investors getting a roughly 6.6% yield today. 

Despite these positives, VEREIT's shares still trade around the levels seen in the aftermath of its accounting issue. It's no longer the same company and investors aren't giving it credit for all the positive change that's taken place. It also happens to be cheap relative to triple net lease peers like Realty Income (NYSE: O) which trades at a price to projected 2017 adjusted funds from operation (AFFO) ratio of more than 17. VEREIT's price to projected 2017 AFFO is around 11. 

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Now that the heavy lifting is finally over, which first quarter earnings proved, investors should be looking closely at VEREIT.

A strong income play

Keith Noonan (Cisco Systems): If you're looking for a value stock to buy and hold for the long term, why not go for one that pays you to own it? Cisco Systems trades at roughly 13 times forward earnings, is backed by an impressive balance sheet, and has an attractive returned income component to boot. For context, the stock's low multiple is partially down to slowing growth and challenges facing its core routing and switching hardware businesses, but the company is taking smart steps toward a more software-focused model that should make it better suited for the future.

As a leader in the networking space, the company has big advantages and opportunities in the Internet of Things and already looks to be emerging as a leader in security services for the next generation of device connectivity -- an industry that MarketsandMarkets estimates will grow from $6.6 billion in 2017 to $29 billion by 2022. Cisco also has the potential to benefit from its Internet of Things management platform and increased demand for routers that are tailored for IoT functionality.

The company's transformation isn't going to happen overnight, but shareholders can stack returned income and enjoy earnings momentum from share repurchases in the meantime. Cisco's dividend yields roughly 3.7%, which is well above the S&P 500 average yield of 1.9%, and the company's got tremendous free cash flow ($12.7 billion over the trailing-twelve-month period) and roughly $36 billion in cash net of debt to support its payout even if it were to hit a rough patch.

This growth stock is trading at a value price

Brian Feroldi (Celgene): It might be unconventional to call a biotechnology stock trading around 50 times trailing earnings a bargain, but so be it. When you take a closer look at Celgene's products, pipeline, and financial potential, I think it is safe to say that this stock offers investors a lot of value. 

Celgene has grown into a biotech giant thanks to a handful of hit drugs. Its top-seller is the multiple myeloma drug Revlimid, but it also owns a number of other nine- or ten-figure products like Otezla, Abraxane, and Pomalyst. When combined, these drugs allowed Celgene to pull in more than $11 billion in revenue last year and the company generated nearly $2 billion in total profits. What's more, most of these drugs are still growing at double-digit rates, which is allowing Celgene's total revenue and profits to continue to grow rapidly.

While those figures are impressive, what makes Celgene compelling over the long term is that it isn't shy about investing in its future. Last year the company spent more than $4.4 billion on research and development in order to move a number of exciting compounds down the clinical pathway. This level of spending puts the company on pace to produce 19 pivotal stage data readouts in the next two years alone. While it is unrealistic to assume that all of these trials will work out, Celgene boasts a long history of developing winning drugs. With so many shots on goal, I think the odds are favorable that another few blockbuster drugs are waiting in the wings.

Between its current portfolio and pipeline of products, Celgene's management team is highly confident in its financial future. So confident, in fact, that management is on record stating that revenue and EPS will exceed $21 billion and $13, respectively, by 2020. For perspective, these figures were $11 billion and $5.94 in 2016, so management's forecast represents double-digit growth for both of these key metric over this time period.

And yet, in spite of this bullish forecast, Celgene's stock is currently trading around 15 times next year's earnings estimates. I think that is quite a reasonable valuation given this company's long-term potential.

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Brian Feroldi owns shares of Celgene. Keith Noonan has no position in any stocks mentioned. Reuben Brewer owns shares of VEREIT. The Motley Fool owns shares of and recommends Celgene. The Motley Fool recommends Cisco Systems. The Motley Fool has a disclosure policy.