It's not always easy to distinguish great value investments from failing businesses. Many of their features are often the same, and the attributes that will turn some such companies into long-term winners can be difficult to perceive.
That's why we asked three investors here at The Motley Fool to share some of their favorite value plays right now, and they came back to us with recommendations for WisdomTree Investments (NASDAQ: WETF), LG Display (NYSE: LPL), and International Business Machines (NYSE: IBM). Below, they detail the reasoning behind each pick. So read on. After that, it'll be up to you to decide which ones you might want to take a deeper dive into, and perhaps eventually add to your own portfolio.
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One of tech's top value plays
Keith Noonan (IBM): Shares of information technology giant IBM have languished as its legacy hardware and software businesses have eroded and dragged the company's overall revenue to its lowest point in more than 15 years. The stock is down roughly 14% year to date, and off roughly 29% over the last five years -- a stretch that has seen the S&P 500 index climb more than 70%.
It's not all bad news from here, however. The company has momentum in cloud services, and its leadership position in artificial intelligence technology could help it capture compelling slices of tech's biggest growth opportunities in the coming decades. Big challenges remain, but for value investors willing to weather some uncertainty associated with its comeback effort, IBM is a stock that's well worth diving into.
The company is currently valued at roughly 10 times forward earnings estimates, and packs one of the best returned-income profiles in the tech sector. Its dividend yields a chunky 4.2%, and, with a 22-year history of annual dividend increases and a payout ratio of just 43.5%, it's very likely that the company will continue to build on its impressive streak of annual disbursement increases.
Big Blue is also in the midst of a massive share repurchasing effort, having reduced its shares outstanding by 17.5% over the last five years; future buybacks will create earnings-per-share momentum and open up more room for dividend hikes over the long term.
With its big dividend, low earnings multiple, and credible turnaround prospects, IBM should be a top candidate for value investors.
A lottery ticket at a discounted price
Jordan Wathen (WisdomTree Investments): This index creator and ETF manager may not appear to be a value stock on a purely quantitative basis, but I'm increasingly warming up to the bull case for WisdomTree Investments as its valuation hovers around $1 billion, net of cash and investments on the balance sheet.
WisdomTree's most successful ETFs today focus on niche currency-hedged strategies that offer the ability to invest in foreign stocks without worrying about how the U.S. dollar fluctuates in value. Though these ETFs have been a home run, they aren't ever going to attract the types of mainstream investors who buy and hold ETFs in their retirement accounts. I think these funds may have found their limit, and so does the market, given WisdomTree Investments' declining valuation.
That said, I think there may be broad appeal for a rising group of simplistic but effective dividend ETFs under its umbrella. For example, the WisdomTree U.S. MidCap Dividend Fund (NYSEMKT: DON) offers a unique mix of high-yielding mid-caps, and has an above-average return that has more than justified its 0.38% expense ratio.
It would only take one big $20 billion home-run ETF (roughly the size of the 30th-largest ETF today) to make WisdomTree a really interesting acquisition target for asset managers eager to get into the ETF business. Is there such a home run waiting in WisdomTree's line up? I don't know. But I do know that its 87 U.S.-listed ETFs give it 87 chances to swing the bat, and the risk-reward balance skews toward the upside as its share price falls.
A deeply undervalued pixel-pusher
Anders Bylund (LG Display): As a leading manufacturer of LCD panels and OLED screens, LG Display has a secure place in the modern business world. As long as TV sets and mobile devices are in need of high-quality display panels, this company's products and services will be needed.
Over the last four quarters alone, LG Display's trailing revenues increased by 10% while EBITDA profits jumped 67% higher. There's real muscle in this company's growth.
At the same time, investors seem to be largely unaware of this high-quality business. LG Display shares are trading at just 5 times trailing earnings and 2.2 times free cash flow. These are the valuation ratios you might expect to see in a floundering failure teetering on the brink of bankruptcy and extinction. This company's fundamentally healthy business deserves much larger P/E and price to cash flow ratios.
It also pays a modest dividend and is occasionally the subject of buyout rumors. Both of these facts should boost LG Display's valuation and share price in the long run -- though neither has had that effect yet. This is one of the clearest examples of a deep-discount value investment I know of.
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Anders Bylund owns shares of IBM. Jordan Wathen has no position in any of the stocks mentioned. Keith Noonan has no position in any of the stocks mentioned. The Motley Fool recommends WisdomTree Investments. The Motley Fool has a disclosure policy.