The S&P 500 has been practically unstoppable over the trailing-12-month period, with the broad-based index up 15%. That's more than double its historic annual gain of 7%, inclusive of dividend reinvestment.
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Unfortunately, some stocks have been left in the dust. There's usually a reason that a company underperforms the market, but it's up to investors to determine whether these reasons are business-altering events or temporary obstacles.
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Three value stocks to consider buying
The term "value stock" has no universally agreed-upon definition, but I define it as a stock with a valuation that is substantially lower than the average of the broader market and its industry peers. Traditionally, either the price-to-earnings (P/E) ratio or PEG ratio is used to determine relative "cheapness," with a single-digit P/E or a PEG ratio around or below 1 signaling a "value stock."
If you're on the lookout for deeply discounted value stocks this spring, then I'd suggest looking no further than the following three companies.
The first deeply discounted company that value investors would be wise to get on their radars is pharmacy benefit manager (PBM) Express Scripts (NASDAQ: ESRX). PBMs are the middlemen that negotiate drug pricing between insurance companies and drugmakers.
Over the trailing 12 months, Express Scripts' shares have fallen by nearly 5%, marking a 20% underperformance to the S&P 500 over the same period. The reason? Part of it has to do with the company's rocky relationship with national health insurer Anthem. Both companies have sued each other over a contract dispute, and there's fear that Express Scripts could lose its contract with Anthem when all is said and done.
The other concern is that President Trump may introduce a prescription drug reform bill, which if passed would reduce the price negotiating power of PBMs.
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While these are genuine concerns for Express Scripts, I'd be willing to argue that they don't merit a 20% underperformance to the broader market index.
To begin with, drug reform is probably not a point that Trump will be able to tackle with any success anytime soon. He has a full plate with trying to reform healthcare, pass individual and corporate tax reform, and implement an infrastructure spending bill. There's little time for drug reform. Plus, with most Republicans believing in a free market economy, there's little reason to think prescription drug reform is in the offing. This suggests that PBMs are safely ingrained as having significant pricing clout.
It's also worth noting that the long-term data is heavily in Express Scripts' favor. As prescription drugs grow pricier, insurers will lean on them more for their negotiating prowess. Being one of the largest, Express Scripts should remain a popular partner of health benefit providers. Plus, as the U.S. population ages, there's a strong likelihood that prescription drug consumption increases, too. This all bodes well for Express Scripts.
With the company now valued at less than 10 times this year's earnings per share and a PEG of roughly 1, it's the healthcare sector name that value investors should be strongly considering for their portfolios.
For you consumers, Whirlpool (NYSE: WHR), the largest appliance manufacturer in the world, is a deeply discounted value stock worth your consideration this spring.
After years of successful top- and bottom-line expansion, Whirlpool has hit a couple of recent growth hiccups that have caused skeptics to flee its stock. Over the trailing year, Whirlpool shares have fallen by 9%, implying a 24% underperformance to the broad-market index.
Among the issues Whirlpool has dealt with is weakness in Europe, some of which stems from Britain's upcoming exit from the European Union, and adverse currency fluctuations. The company wound up modestly reducing its full-year EPS forecast last year, which was a marked break from what had been a number of market-topping quarters.
Image source: Whirlpool.
On one hand, there's little denying that currency fluctuations and weakness in the EU has tempered growth for its appliances business. Then again, there are reasons to believe these are just temporary speed bumps for Whirlpool.
For starters, seasoned investors are going to be able to look beyond the company's currency-impacted top and bottom lines. We as investors care about how the company is performing from an operating perspective, and from this standpoint, everything seems to be moving along just fine. Total fourth-quarter sales grew by 1.7%, with the North American product line packing a punch with 8% sales growth. Shipments to North America are expected to grow by a healthy 5% at the midpoint in 2017.
Whirlpool's long-term strategy to infiltrate faster-growing emerging markets in Asia, Africa, and the Middle East is also completely unaffected by currency fluctuations and the growth hiccup caused by Brexit. Last year was Whirlpool's fifth straight year of record annual EPS, and while the North American market played a key role, 18% constant currency sales growth in Asia during the fourth quarter exemplifies the opportunity at hand in emerging markets.
Currently sporting a forward P/E of a little more than 9, a PEG of 1, and a healthy dividend yield of 2.4%, Whirlpool looks to be a value investor's dream stock.
Though it's not often an industry most investors would associate with deeply discounted value stocks, precious-metal miner Sibanye Gold (NYSE: SBGL) is a name that should catch value investors' eyes this spring.
Sibanye Gold, which operates in South Africa, has faced a number of near-term challenges. For instance, mining in Africa tends to be exceptionally costly, and there's always the ongoing fear of a politically induced shutdown or strike. Add to that the fact that gold prices per ounce tumbled from $1,360 to about $1,150 between the summer of 2016 and December 2016. This ultimately pushed Sibanye's stock lower by 40% over the trailing 12 months, which is good enough for a 55-percentage-point underperformance to the S&P 500.
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Now for the good news: There are plenty of factors to suggest that physical gold prices could head higher. Even though interest rates are rising, which is normally a bad thing for gold since it increases the opportunity cost of owning gold as opposed to safer interest-bearing assets, inflation is rising, too. Higher inflation levels may be able to counteract the impact of higher interest rates. We're also seeing stronger demand for gold with supply of the lustrous yellow metal still somewhat constrained. That's often a recipe for higher spot prices, and thus higher margins for Sibanye Gold.
Beyond just physical gold, we've seen solid evidence from Sibanye that it can pull levers and cut its costs in order to generate positive cash flow and profits. In the fourth quarter, Sibanye reported an all-in sustaining cost (AISC) of $954 an ounce for its gold division, pushing its operating profit 60% higher. In fact, Sibanye has had the lowest AISC of all major South African miners in 2016, as well as the highest dividend yield in the entire gold industry.
Sibanye has little coverage from Wall Street, but it looks to be valued at a PEG of near 1. If physical gold continues to rise in value and Sibanye can keep its costs under control, then its stock could certainly head a lot higher.
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