Finding good companies at a reasonable valuation isn't as hard of a task as you might think, even amid a market that's still hitting new highs daily.
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I recently scoured the universe of stocks, looking for those that not only trade well below the market average but are also expected to grow earnings at a respectable pace for the next few years and produce generous free cash flow that the market has failed to properly value. I turned up Big Lots (NYSE: BIG), Carrols Restaurants (NASDAQ: TAST), and Party City (NYSE: PRTY) as the best low-P/E stocks to buy in September. As of this writing, each sports a price-to-earnings ratio below 20, is expected to grow earnings at 10% or more annually for the next five years, and has a price-to-free-cash-flow ratio below 15.
The stock of deep discounter Big Lots was recently beaten up over an earnings report that failed to inspire. Although Big Lots reported that sales grew 1.5% in the second quarter as comparable-store sales rose 1.8%, leading to record profits of $0.67 per share, the market still sent its shares lower because results seemed tepid in a dicey retail market.
Dollar Tree, in contrast, reported better-than-expected increases in revenues, comps, and profits, as did rival Dollar General. The much stronger showings had their stocks jumping afterward.
Yet Big Lots has a dependable track record of margin expansion and exceeding Wall Street's earnings estimates, and with the market marking down its stock compared with its rivals, it gives investors an opportunity to pick shares up cheap.
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Big Lots stock trades at less than 13 times earnings and 11 times next year's estimates, but analysts still think it can widen profits by almost 13% for the next few years. It also trades at just a fraction of its sales, and with its stock going for only 13 times the free cash flow it produces, it's a discounted company that still has big things in front of it.
The biggest franchiser of Burger King restaurants, Carrols Restaurants operates almost 800 restaurants that are expected to generate a total of over $1 billion in revenues this year. Like its rivals McDonald's and Wendy's, Burger King is staging a comeback as better-burger rivals stumble.
It's quite likely the fad of overpaying for a hamburger has run its course, as both Shake Shack and The Habit have watched same-restaurant sales evaporate and even turn negative. In contrast, the big three fast-food chains -- McDonald's, Wendy's, and Burger King -- are rebounding sharply. Burger King is owned by Restaurant Brands International, which also owns Tim Hortons and Popeyes.
However, Carrols stock took a hit last quarter after reporting lower profitability as higher labor costs, rising beef prices, and greater discounting nibbled away at earnings. But even more so than at Big Lots, investors have a chance to pick up Carrols at a tremendous discount.
While the stock trades at just under 20 times earnings and 38 times earnings estimates, because analysts forecast it growing profits at a 25% compounded rate for the long term, it's trading at a fraction of both its growth rate and sales. Incredibly, the stock is valued at only seven times its free cash flow, meaning the market has thrown this stock into the bargain-basement bin.
Get ready for specialty retailer Party City to come into its own. Like the memes that tell you to brace yourself because everything pumpkin spice is coming, Party City is bracing for the onslaught that is Halloween, its biggest holiday of the year, representing more than 20% of its total annual sales.
Head into any local big-box store today and you'll see Halloween decorations beginning to appear, but Party City opens up a string of 250 to 300 pop-up stores every year under the Halloween City banner, which last year contributed $59 million in revenues.
Even bigger for Party City is the sale of balloons, which kicked in $106 million in revenues globally last year. And earlier this year it picked up the largest balloon retailer in Australia, so we should see those Mylar celebratory icons generating even more this year.
Yet it, too, has been left behind in this overheated market. Trading at 14 times earnings and only nine times earnings estimates, the specialty retailer is another stock valued fractionally compared with its sales. And its stock price goes for a deeply discounted nine times free cash flow, suggesting investors who pick up Party City's stock now may have a reason to celebrate later on.
10 stocks we like better than Carrols Restaurant Group
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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool is short shares of Shake Shack. The Motley Fool recommends Carrols Restaurant Group. The Motley Fool has a disclosure policy.