Value investors know that getting a good stock at a good price can be difficult, particularly in markets like we face to day, but it's always worth it when you find one. They tend to offer the best returns over the long haul.
So we asked three Motley Fool investors to put together three of their favorite value stocks in this overheated market. Gilead Sciences (NASDAQ: GILD), NVR (NYSE: NVR), and Rush Enterprises (NASDAQ: RUSHA)(NASDAQ: RUSHB) may just fit that bill for three very different reasons.
Still a bargain after a big buyout
Keith Speights (Gilead Sciences): Smart investors know that time is on your side when you buy a solid company. I think that's why Gilead Sciences continues to be a great value stock even after the big biotech announced the acquisition of Kite Pharma (NASDAQ: KITE) for $11.9 billion.
News of the Kite deal caused Gilead stock to rise more than 10% in the following days. However, Gilead still trades at less than 11 times expected earnings -- definite bargain territory. Buying Kite won't change Gilead's earnings picture immediately, but it could be tremendously important for the big biotech over the long run to stand at the forefront of cell therapy, an area where Kite is an acknowledged leader.
Gilead Sciences is a textbook case, in my view, of why it's important to have a long-term perspective in investing. If you only looked at the short term, Gilead's slumping revenue and earnings caused by a steep downturn in hepatitis C drug sales would cause you to doubt the biotech's future. However, even in the midst of these problems, Gilead continued to make a lot of money and spin off huge amounts of cash.
In the past, the company used some of that cash to buy back shares. However, Gilead made no secret of its plans to buy smaller biotechs, particularly in the oncology space. Gilead still has an enormous cash stockpile and cash flow to fund several more acquisitions. I expect that will happen -- and I expect smart investors will look back in a couple of years and realize just how great a deal they got by buying Gilead stock now.
A homebuilder with significant downside protection
Brian Stoffel (NVR): Perhaps you've heard that the housing market is slowing down. That's true, but not for the reason we became accustomed to during the Great Recession. Instead, the big problem now is inventory -- and the lack thereof. There simply aren't enough houses to go around for all of the new families starting up today.
That makes homebuilders look awfully attractive, but they usually come with the requisite risk of huge up-front costs that can weigh a company down should the market of buyers dry up with a lot of inventory on hand. That's why I think NVR is such a good pick.
While I don't own the stock myself (I'm not a "value" investor per se) I appreciate the flexibility and protection the company's practice of using lot purchase agreements provides. Instead of spending the money to buy up lots and develop them, NVR simply pays a fee of up to 10% of the land's value for the right to build houses on them. If NVR decides that it doesn't want to use the land after all, it can walk away with no further liabilities.
Most homebuilders have a mountain of debt relative to cash on hand. But here, NVR bucks the trend: It has $788 million in cash and investments on hand, versus $596 in long-term debt. That, plus the fact that it currently has a PEG ratio of 1.04 in this frothy market, has me thinking this is a great value stock for smart investors.
A monster truck of an opportunity
Rich Duprey (Rush Enterprises): Even with a stock that has appreciated 75% over the past year, Texas trucker Rush Enterprises still remains stuck in the slow lane of its potential, but it will soon put the hammer down for growth.
Rush operates the largest network of commercial vehicle dealerships in North America, and it's been waiting for the sluggish energy sector to fuel a turnaround along with an improved freight environment. Those conditions may have arrived for the trucker in the second quarter as it reported generating $1.2 billion in revenues from overall gains throughout the economy that positively impacted all areas of its business and pushed sales of both heavy-duty Class 8 trucks -- the biggest trucks on the road -- and medium-duty commercial trucks ahead of the industry's pace.
Rush Enterprises expects conditions to continue to improve throughout the year, which will help in its parts and service business, which accounts for 67% of total revenue. The business looks like it's gaining speed, and while Rush Enterprises trades at 29 times earnings and 18 times next year's estimates, making it look fairly valued, it also trades at a tiny fraction of its sales and less than six times the free cash flow it produces, which makes it exceedingly discounted.
Analysts expect Rush Enterprises to grow earnings at over 20% annually for the next five years, suggesting the stock is undervalued and now may be the time to hitch a ride before it gets into the fast lane.
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Brian Stoffel has no position in any of the stocks mentioned. Keith Speights owns shares of Gilead Sciences. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Gilead Sciences. The Motley Fool owns shares of NVR. The Motley Fool has a disclosure policy.