Warren Buffett may be the most successful value investor of our time, but even he had mentors. At age 20, a young Buffett stumbled upon Benjamin Graham's book The Intelligent Investor. It was a pivotal moment in Buffett's life, and to this day he credits Graham as one of his greatest teachers.
Graham's value-investing philosophy was simple: Pay $0.50 to $0.70 to buy $1 of assets. With that in mind, we asked three Motley Fool specialists to cut through the clutter and find three stocks selling below their true value. Read on why Apache Corporation (NYSE: APA), Kroger (NYSE: KR), and XPO Logistics (NYSE: XPO) are on their lists.
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Still undervalued but rising
John Bromels (Apache Corporation): If you don't think a stock that's risen more than 34% so far this year could possibly still be undervalued, you don't know Apache Corporation. The well-managed oil and gas driller was one of the few independent U.S. drillers that didn't cut its dividend during the oil price slump of 2014-2017. But the market showed Apache no love, pummeling the company's shares worse than the vast majority of its peers'.
Apache's share price dropped 71.3% between the beginning of 2014 and the end of 2018. That's despite the company's announcement of a massive oil and gas find in the Permian Basin of western Texas in 2016. It's also despite the company's production starting to show consistent growth since bottoming out in Q2 2018.
But the market may have finally caught on to Apache's status as a deep value play. So far this year, shares have handily outpaced the overall industry, as measured by the SPDR S&P Oil and Gas Exploration & Production ETF, which has only risen 18.9%. However, it roughly tracks the increasing prices of crude oil. Brent crude prices have once again topped $70 per barrel, with WTI crude not far behind at about $64 per barrel.
With the big summer driving season just around the corner and crude-oil prices continuing to climb, industry trends look favorable to Apache. That makes April a fantastic time to consider buying this beaten-down driller.
Kroger is priced for Armageddon
Jamal Carnette, CFA (Kroger): Continuing the Buffett theme, the Oracle of Omaha famously stated that "you have to buy when there is blood on the streets." That sums up the opportunity Kroger presents rather succinctly. The stock is trading at an enterprise-value-to-EBITDA ratio of 6.5, versus 13 for the S&P 500; the forward price-to-earnings ratio is 10, compared to the S&P 500's 17.5.
Shares have been under pressure since Amazon announced it was buying Whole Foods. This risk appeared overstated, but that narrative changed with Kroger's fourth-quarter earnings report, showing top-line contraction of 9.5% and margin erosion. However, this was an overreaction, on account of a convenience-store divestiture, an extra week in the year-ago period, and lower fuel prices for gas sales. Excluding transient or extraordinary items, Kroger increased total sales 1.6%. The company has been taking advantage of this bearishness by strategically buying up shares at low valuations.
One thing I'm watching is margin erosion. Kroger has had to pay higher wages and invest in the digital experience for long-term viability, so I expect thinner margins in the short run. However, shares appear to be pricing in the worst-case scenario, and the sell-off is likely overdone in relation to its competitive position.
On the road to recovery
Rich Duprey (XPO Logistics): Companies fall into the "value" category for any number of reasons, including doubts about the efficacy of their business theses. XPO Logistics is going through that right now after its largest customer -- believed by most to be Amazon.com -- took $600 million worth of business away. Another $300 million worth remaining from that customer is seen as still at risk.
One of the ways XPO has grown to be one of the largest logistics providers in the world is by rolling up the industry under its umbrella. Chairman and CEO Bradley Jacobs has made a career out of buying up businesses and turning them into industry leaders; he did so with United Waste Systems and United Rentals, and he has been doing the same with XPO. The loss of Amazon's business might have put that on hold, but the case for XPO isn't dead.
Just last year XPO Logistics was considered an acquisition target, and by none other than Amazon. A good case could still be made that as Amazon builds out its own logistics business, adding XPO would immediately catapult it to the forefront.
Yet beyond a speculative acquisition play, XPO is worthy of consideration on its own. Its business is still expected to produce some $600 million in free cash flow this year, because it still provides services for major customers like Home Depot (one of the other companies reportedly interested in acquiring it), IKEA, and Wayfair. It provides a holistic, end-to-end system for customers who don't want the hassle of building one themselves.
The turmoil in the company, though, has knocked back its valuation to very attractive levels. It trades at just 14 times next year's earnings, at a fraction of its sales, and at only 12 times the free cash flow it produces. Right now, XPO Logistics is a value stock worth considering.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jamal Carnette, CFA owns shares of AMZN. John Bromels owns shares of AMZN, Apache, and XPO Logistics. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends AMZN and W. The Motley Fool recommends HD and XPO Logistics. The Motley Fool has a disclosure policy.