Value Stocks: 2 to Buy, 1 to Avoid
The recent market swoon has emphasized how important it is to look for stocks whose prices already include a margin of safety in the event of a decline in the overall stock market. By looking for inexpensive valuations, you can give yourself a better chance of avoiding a big downturn and reap the rewards of bigger gains when fellow investors finally recognize a stock's true value. Still, not every cheap stock is worth buying. With that in mind, let's take a look at three value stocks that many investors have found on their radars lately and pick out which ones have favorable prospects and which could be riskier than you think.
Gilead looks healthy Gilead Sciences is a giant in the biotech industry, which makes many value investors instinctively shy away given the sector's notoriety for being an expensive niche of the stock market. Yet Gilead trades at just 11 times trailing earnings, and based on forward estimates, you could buy shares today for just nine times expected earnings for 2016.
Some fear that Gilead will face increasing competition in the key hepatitis C market, with other pharma giants seeking to stake their own claims in the rapidly growing areas. Yet Gilead's dominant position in the HIV-therapy arena continues to give it further potential for growth as the company continues to aim research and development efforts at its core franchise, and the biotech's unusual policy of paying strong dividends is also attractive to many investors. At current prices, Gilead could be an irresistible opportunity for bargain-hunting value investors.
Corning shines again Corning has a long history as a glass maker, but more recently, the company has found its biggest growth opportunities by serving the mobile-device market with its innovative durable materials. The stock currently trades at less than nine times trailing earnings, and even though some analysts anticipate a pullback in earnings in the next year or two, a forward earnings multiple of just 11 based on 2016 earnings is still impressive for a tech company.
Worries for Corning include the fact that in its most recent quarter the company suffered sales declines in most of its segments, including the Display Technologies and Specialty Materials businesses. Yet much of those declines came from the strong dollar, and increased volume for LCD glass and Gorilla Glass products points to the sustained demand for some of Corning's most important products. As Corning continues to execute on cost-reduction strategies and other initiatives designed to enhance shareholder value, patient investors could reap big rewards if earnings rise and Corning's earnings multiple increases as well.
IBM hasn't found any growth On its face, International Business Machines seems like a smart value stock. The Dow component sports an earnings multiple of just 13, and based on expectations for the coming year, a forward multiple of just nine times 2016 earnings projections looks extremely interesting for a blue chip of IBM's reputation.
The problem, though, is that IBM hasn't executed well in recent years, with substantial declines in revenue having forced the company to abandon its long-term goal of reaching $20 per share in operating earnings by 2015. Over the long haul, IBM has seen sales of hardware and server equipment perform badly, which led the company to sell off a sizable chunk of its server business to a competing company. More importantly, IBM hasn't done as well in the key services arena as it did in past years, and given the importance of services in keeping IBM's overall margins up, the shortfall there has shown just how competitive new areas like cloud computing and data analytics have become. IBM is far from a lost cause, but even at an attractive multiple, the tech giant could see things get worse before they get better.
Value investors always like to see bargains in the stock market, but you still have to be choosy if you don't want to lose money on a potential value trap. By being discriminating in your selections, you can ensure that you'll find the best value stocks and avoid ones that are riskier than they appear.
The article Value Stocks: 2 to Buy, 1 to Avoid originally appeared on Fool.com.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns and recommends Gilead Sciences. The Motley Fool recommends Corning. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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