Nowadays it’s not really popular to focus stocks selling at a discount — that is, the so-called value investing approach. Instead, the interest is mostly on momentum.
For the most part, this approach has gotten… well… crazy! The phenomenon of Reddit investors has taken Wall Street by storm — and has even threatened the stability of billion-dollar hedge funds.
These investors have targeted heavily shorted stocks to gin up epic squeezes. The result is that there have been huge surges with companies like GameStop (NYSE:GME), AMC Entertainment Holdings (NYSE:AMC), Koss (NASDAQ:KOSS) and BlackBerry (NYSE:BB).
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But whenever there is this level of speculation, the markets are likely close to reaching a peak. And if this is the case this time, investors may want to look at value plays.
So then which ones looking interesting right now? Well, let’s take a look at seven otherwise familiar names:
Morgan Stanley (NYSE:MS)
Ameriprise Financial (NYSE:AMP)
Cisco Systems (NASDAQ:CSCO)
Verizon Communications (NYSE:VZ)
Lockheed Martin (NYSE:LMT)
Stocks Selling at a Discount: IBM (IBM)
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IBM stock touched a $180 high in February 2017 and hasn’t been anywhere close in the intervening four years. Shares are trading for under $120 a piece, bringing the current market capitalization to about $106 billion.
The main reason for this? It’s really simple: Revenues have been declining. In fact, the latest earnings report was yet another case of this, with revenues off about 6% to $20.4 billion.
OK, in light of this, why might it be a good idea for investors to consider IBM stock? There are several reasons. First of all, IBM plans to spin-off its managed-infrastructure services business, which should help streamline operations. Next, the company has been making bold acquisitions — such as for Red Hat — to reinvigorate its technology product line.
Then there is the R&D capability. The company has been investing heavily in key areas like artificial intelligence (AI), the hybrid cloud and quantum computing.
As for IBM stock, it is selling at a reasonable valuation. The forward price-to-earnings ratio is at 10.8x. The dividend yield is also 5.43%, which is one of the highest in the tech industry.
Morgan Stanley (NYSE:MS)
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Since late October, Morgan Stanley has been in the rally mode. The shares have gone from $48 to $68.
Yet MS stock is still trading at a discounted valuation. Consider that the forward price-earnings ratio is only about 12.08x.
This is reasonable in light of the potential growth opportunities. With interest rates at rock-bottom levels and the booming market for IPOs and SPACs (special purpose acquisition companies), the environment is quite favorable.
During the latest quarter, earnings jumped by 51% to $3.39 billion, or $1.81 per share and revenues were up by 26% to $13.64 billion. There was strength across all the company’s businesses.
However, the biggest bright spot was the investment banking division. The revenues soared by 46% to $2.30 billion. About $1 billon came from equity offerings.
True, IPOs can be choppy. But for the most part, the momentum is particularly strong — and this should be a nice source of growth in the new year.
Morgan Stanley has also been aggressive with M&A. To this end, the company acquired E*TRADE and Eaton Vance. There will not only be cost synergies, but also boosts of the top line.
The company is also ramping up its buybacks for MS stock. The most recent authorization is for up to $10 billion.
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Oracle has been a laggard in its move to the cloud, which has certainly been a drag on ORCL stock. But during the past few years, the company has been transitioning its various platforms. And yes, this should be key to get Oracle back on the growth path.
The components for the cloud story include NetSuite, which is a fast-growing ERP (enterprise resource planning) system, Fusion (middleware technologies) and Gen2 (for infrastructure). These platforms have been seeing nice growth ramps — and have good long-term prospects.
Then what about the core database business? Yes, this has come under pressure from upstarts like MongoDB (NASDAQ:MDB). But Oracle has been making considerable progress. At the heart of this is the Autonomous Database.
Oracle CTO and cofounder, Larry Ellison, told the latest earnings call: “it is certainly cloud first. It is the only database that really does both transaction processing and query processing. So query processing were much faster than Snowflake, the market’s current darling. And in transaction processing, we’re much faster than anybody.”
Meanwhile, ORCL stock is trading at a cheap valuation — at least compared to other tech operators — with the forward price-to-earnings multiple at 14x. The dividend yield is also an acceptable 1.657%.
Ameriprise Financial (AMP)
Revenues for financial advisory operators are projected to go from $57 billion to $200 billion in the next decade. One driver for this is the digitization of the industry. But then there is the impact of the Baby Boom generation, which has a population of 75 million. This group will demand more services to help with retirement needs (such as finding ways to live off their current assets).
Such trends are definitely good news for Ameriprise Financial. The company is one of the largest financial advisory firms. It has over $900 billion in assets under management and has more than two million clients.
Ameriprise Financial is also a highly disciplined organization. During the past eight years, earnings per share have nearly tripled and the company has returned a hefty $15 billion back to shareholders.
AMP stock is also selling at a discount, with the forward PE at 11x. As for the dividend, it is at 2.1%.
Cisco Systems (CSCO)
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Last year, investors saw Cisco Systems shares decline about 6% while the S&P 500 index gained more than 18%. Then again, the growth sputtered as competition heated up and there were delays because of the Covid-19 pandemic.
But as for the new year, things are likely to be better for CSCO stock. Analysts expect continued improvement in the operations after the company beat the consensus estimates in the fiscal first quarter. The company has been making a shift towards software and recurring subscription business models. Q2 results are due on Feb. 9.
Although, the WebEx videoconference business could be the biggest driver. Cisco has been making considerable updates to the platform, which should help boost growth. Some of the new features include real-time language translation, speech enhancement, and transcriptions.
Regarding the valuation of Cisco, it is at relatively low levels at least for big tech operators. The forward price-to-earnings multiple is 14.3x and the dividend yield is 3.2%.
Verizon Communications (VZ)
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The consumer mobile phone business in the U.S. is fairly saturated. But it is still a great source of cash flows. Just look at Verizon.
During the first nine months of last year, cash flows came to $32.5 billion, up from $26.7 billion in the same period in 2019. There are currently about 94.1 million subscribers.
But in the coming years, Verizon is poised to get a boost from its 5G network. And this will be more than just about consumer offerings. If anything, the opportunity for business customers may be even bigger. A key will be the development of edge network systems to allow for Internet of Thing (IoT) applications, such as on the factory floor.
The valuation on VZ stock is also at discounted levels. The forward price-to-earnings ratio is 10.88x and the dividend yield is 4.6%. Moreover, the company has increased the payout for 13 consecutive years.
Lockheed Martin (LMT)
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With the new Biden Administration, there will likely be more pressure on the defense budget. Another factor is the escalating budget deficits.
However, for the large defense contractors, there will likely be continued growth — especially since there remain considerable national security risks to address.
So one company that looks attractive is Lockheed Martin, which has the advantage of massive scale. Consider that it is the largest defense contractor in the U.S.
During the latest quarter, revenues increased by 7.3% to $17.03 billion and earnings were up by 20.6% to $6.38 per share. The big source of business is the massive F-35 program.
But there are other important drivers as well. In fact, the company recently acquired Aerojet Rocketdyne for $4.4 billion. The company is a developer of hypersonic technology, which is essential for missile and space systems.
Regarding LMT stock, the valuation is at a reasonable 12.2x times forward earnings. The dividend yield is also at 3.3%.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the author of courses on topics like the Python language and COBOL.
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