3 Value Stocks for Smart Investors

Markets Motley Fool

While the market seems full of investors looking for the next go-go growth stock, smart investors know to look at the value side of the equation. They also realize value and growth are inextricably linked.

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We asked three Motley Fool investors to identify a value stock that smart investors could sink their teeth into. Below, they give their reasons why Gilead Sciences (NASDAQ: GILD), IBM (NYSE: IBM), and Ambarella (NASDAQ: AMBA) fit the bill.

Looking past the problems

Keith Speights (Gilead Sciences): It would be easy to dismiss Gilead Sciences outright. After all, there's no end in sight to the continued sales declines for the big biotech's hepatitis C franchise. Gilead's HIV drugs are doing well, but they're not nearly enough to overcome the hep-C woes. The company's pipeline doesn't seem likely enough to produce new winners quickly enough to close the gap anytime soon, either.

On the other hand, Gilead stock trades at roughly 9.5 times expected earnings. The biotech generated free cash flow over the last 12 months totaling $13.4 billion. Gilead sits on a cash stockpile -- including cash, cash equivalents, and marketable securities -- of nearly $36.6 billion.

Smart investors will look past Gilead's near-term problems to see the real potential for the company. At some point, the biotech's hepatitis C franchise sales will stabilize. It's probably too soon to say that's already starting to happen, but Gilead recently boosted its full-year outlook for 2017 thanks to better-than-expected hep-C revenue.

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While it will be several years before several of Gilead's pipeline candidates will potentially make it to market, there are some very bright stars lined up. The biotech's experimental drugs for treating non-alcoholic steatohepatitis (NASH), particularly selonsertib, appear to be especially promising. And one pipeline candidate that should become a megablockbuster is likely to be approved soon -- Gilead's bictegravir/F/TAF combo for treating HIV.

Gilead Sciences also will use its pile of cash and strong cash flow sooner or later to make a major acquisition. It's just a matter of the company finding the right takeover target (or targets). Corporate tax reform in the U.S., which would allow Gilead to bring home a lot of its cash at lower tax rates, would also help.

Gilead has problems for sure, but the stock is cheap right now. Neither the problems nor the cheap price will last forever.

Big Blue offers big value

Keith Noonan (IBM): Big Blue's stock has languished in 2017 and trades down roughly 15% year to date as revenues have continued a five-year slide, but the company's low earnings multiple and chunky dividend make it a smart stock for value investors on the hunt for tech-sector exposure.

IBM is now priced at just 10 times forward earnings, packs a 4.2% dividend yield, and looks to be a safe bet for continued dividend growth. The company has delivered annual dividend increases for 17 years running, and its 43.5% payout ratio puts it in position to deliver solid payout growth going forward.

IBM has also been rewarding investors with buybacks, reducing its outstanding share count by roughly 18% over the last five years. The big share repurchase push can be taken as a positive on several fronts. The move indicates that the company is confident in its turnaround effort, and buybacks will also have the effect of creating earnings-per-share momentum and providing more room to increase the dividend. 

With IBM's sales at their lowest point in 15 years and the company facing uncertainties as it shifts from a hardware-centric model to one that hinges on cloud software and services, the recent poor stock performance is not without some justification. Still, Big Blue's low earnings multiple, big dividend, and comeback potential present a risk-reward profile that's worth pursuing for value investors.

Driving a transition forward

Rich Duprey (Ambarella): The loss of GoPro as a customer has been a big blow to system-on-a-chip (SOC) maker Ambarella as the action-camera maker accounted for 19% of revenues directly, and nearly a quarter of chip sales if you include GoPro's original design manufacturers, too.

Although GoPro is bringing chip design in-house, Ambarella is now looking to expand its horizons with its first computer-vision SOC that's dubbed CV1, which will vastly enhance its efforts to be an integral part of the so-called headless, or self-driving, cars trend. It's already sampled the chip to key customers in the IP security and drone markets.

The CV1 chip isn't going to do much for Ambarella this year and the chipmaker's stock will likely reflect this for some time. Shares are down 30% from their 52-week highs and well below the peak they hit when the company was riding GoPro's coattails higher.

With lots of cash available and no debt, Ambarella has the financial wherewithal to ride the bumps and use 2017 as a transition year to new growth. Smart investors will see this as an opportunity to get in early on a value stock before the CV1 chip makes Ambarella a go-to chip company again.

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Keith Noonan has no position in any stocks mentioned. Keith Speights owns shares of Gilead Sciences. Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Ambarella, Gilead Sciences, and GoPro. The Motley Fool has the following options: short January 2019 $12 calls on GoPro and long January 2019 $12 puts on GoPro. The Motley Fool has a disclosure policy.