Value investors are always on the hunt for temporarily mispriced stocks. The question is how to tell when you've found one. Sometimes, your clue can be a low earnings multiple; other times, a dividend that is set to rise; or even a looming opportunity for the company that the market has yet to factor into its share price. We put together three of our favorite value stocks across the market: IMAX (NYSE: IMAX), Nucor Corporation (NYSE: NUE), and 8point3 Energy Partners (NASDAQ: CAFD). They all present great value, but for very different reasons.
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The big picture still looks bright
Brian Feroldi (IMAX): 2017 isn't expected to be a banner year for Hollywood, which is why traders have pummeled IMAX's stock lately. That selling pressure makes sense, since most movie patrons won't pay up for a premium experience without a strong lineup of blockbuster films.
IMAX didn't do much to help fix the narrative when it reported first-quarter results, either. The company's sales plunged by 25%, while net income took an ever bigger hit. Given that backdrop, it isn't hard to figure out why IMAX's stock is down more than 50% from its all-time high.
However, while IMAX's near-term future looks tepid, I still see several reasons to stick with this company over the long haul. First, IMAX sold 104 new systems since the start of the year. That figure is up sharply over the year-ago period, which hints that movie operators are still hungry for the company's big screens.
Second, the company's backlog stands at 589 installations, so there's plenty of business for the company to chew through in the coming years, even if it doesn't sell another system. Finally, there are a number of big movie releases coming down the road, including several Star Wars and Avatar sequels. While box-office results will always be lumpy, there are still enough blockbuster titles waiting in the wings for investors to expect a bright future ahead.
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In total, the long-term thesis for owning IMAX's stock still looks like it remains intact. If you agree, then right now could be a great time to give this stock a closer look.
Seeing beyond big stock-price gains
Jason Hall (Nucor Corporation): Since early 2016, shares of steelmaker Nucor Corporation have gained almost 70%, a result that could cause many investors to overlook its stock when searching for value. But even as its stock price has surged on very strong profit growth, Nucor's valuation -- at least on an earnings basis -- has actually fallen:
Trading for less than 18 times trailing earnings, Nucor arguably is cheap today. This is especially true if you look forward and consider a number of other positive factors in the steelmaker's favor.
To start, North American steel demand is very strong. Even with domestic auto manufacturing at a cyclical peak and likely to decline a little in the next year or so and perpetually low oil prices keeping big spending from the energy industry in check, there's strong demand from housing and commercial building, along with expectations in the coming years for increased infrastructure spending. Furthermore, one of the domestic industry's biggest pain points -- unfair and illegal trade practices from major importers -- is getting put in check. Over the past year, a number of tariffs and duties against the bad actors has started to take affect, driving imports lower and prices higher.
Between the steady demand from a healthy market, improved economics with illegal imports getting pushed out, and Nucor's acquisitions and expansions over the past eight years, smart investors could do very well buying Nucor -- easily the best dividend growth stock in the steel industry -- at its current valuation.
The sunny value stock
Travis Hoium (8point3 Energy Partners): For energy yieldcos, one of the best measures of value is the dividend yield, which is based on cash available for distribution. Cash available for distribution is the excess cash a yieldco generates beyond its cost of debt, operations and any depreciation of assets. And those cash flows are normally backed up by long-term contracts to sell energy to utilities over a period of years or decades.
In the case of 8point3 Energy Partners, it only owns solar assets, which generate a predictable amount of energy -- and therefore cash flow -- each year. And its average contract length is nearly 20 years, so the dividend is safe for nearly two decades to come, which is rare for a dividend with a yield as high as 7.2%.
The downside of 8point3 Energy Partners is that it may not have a low enough dividend yield to issue shares to buy projects that are accretive to the business, which is what yieldcos intend to use to grow their dividends. But dividend growth may not be a deal breaker for value investors looking for a high, predictable dividend yield, and 8point3 Energy Partners' yield of 7.2% is enough to buy and hold for years to come.
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Brian Feroldi owns shares of IMAX. Jason Hall owns shares of Nucor. Travis Hoium owns shares of 8point3 Energy Partners. The Motley Fool owns shares of and recommends IMAX. The Motley Fool recommends Nucor. The Motley Fool has a disclosure policy.