It’s not necessarily difficult to find cheap stocks, but value stocks that are beaten down for all the wrong reasons? That takes a bit more work. To help get you started, here are three value stocks for bold investors worth a good look. They include the world’s largest PC manufacturer HP (NYSE:HPQ), gaming king GameStop (NYSE:GME), and transportation logistics leader Energy Transfer Partners (NYSE:ETP).
No, PCs aren’t “dead”
Tim Brugger (HP): If you follow the tech industry, you’ve no doubt heard the news: PCs are dead. Fortunately for HP shareholders and investors in search of value, nothing could be further from the truth. Yes, global PC shipments declined again in the second quarter by 4.3%, but as it relates to HP, that was hardly bad news.
Outside of Dell, which rose a meager 1.4%, HP was the only other PC manufacturer to enjoy a jump in shipments in the second quarter, rising 3.3% to overtake China-based Lenovo as the top PC manufacturer on the planet with a 20.8% market share. Better still, HP’s quarterly earnings were a reflection of both its PC dominance as well as its resurgent printing division.
Total revenue climbed 10% in HP’s fiscal third quarter to $13.1 billion in large part thanks to its personal systems unit — home of PC sales — and strong printing results. Notebook sales, HP’s largest segment as measured by revenue, climbed 16% to $5 billion. As for the “dying” PC market, desktop revenue rose 5% year over year, and 8% sequentially, to $2.57 billion.
But the real feather in CEO Dion Weisler’s cap was the success of his initiative to target niche markets for both the PC and printing units. Printing supply sales, a thorn in HP’s side until recently, jumped 10% to $3.12 billion, and the printing division as a group increased revenue 6% to $4.7 billion. Toss in HP’s 2.7% dividend yield and bold investors in search of value and income need look no further.
Changing the game plan
Keith Noonan (GameStop): Last fiscal year, GameStop’s new and used software segments accounted for a combined 57% of sales and 71% of gross profit, but, unfortunately, these highly profitable revenue streams appear to be on an irreversible downward trajectory.
Video game sales are migrating to digital channels, and publishers are eager to speed this transition and capture the improved margins that come from selling directly to consumers. That means GameStop is tasked with a monumental pivot. So, even though the stock looks to present an appealing value proposition trading at just six times forward earnings and a packing a roughly 7.5% dividend yield, it’s an investment that requires some boldness.
To offset declines for its key video games segments, the retailer is undertaking a diversification effort that sees it increasingly relying on selling mobile hardware, AT&T wireless and entertainment service packages, and pop culture collectibles. One bit of good news is that the company is generating a roughly 35% gross profit margin from its fast-growing collectibles segment — putting it squarely between new software and used software in terms of profitability. Collectibles generated $496 million in sales last fiscal year, and the company believes the segment is on track to do between $650 million and $700 million this year on the way to reaching $1 billion in fiscal 2019.
For investors who see promise in GameStop’s growth businesses, the stock could be an appealing value play, but you should proceed with the knowledge that it’s not the low-risk investment that its earnings multiple and dividend imply.
Dirt cheap for a reason
Matt DiLallo (Energy Transfer Partners): Master limited partnership Energy Transfer Partners is trading at a bargain-bin price. The pipeline company currently expects to generate enough cash flow to distribute more than $2.20 per unit to investors this year. Just using that number as our baseline, at its recent $18.50 unit price, it implies that Energy Transfer Partners sells for just 8.4 times cash flow. That’s about 50% less than the typical valuation of an MLP.
That said, there’s good reason for this discount. First of all, the company has an elevated leverage ratio due to the massive borrowing needed to finance its current slate of expansion projects. In the meantime, it still has a huge funding gap left that investors aren’t sure it can bridge without more debt and significant dilution. Furthermore, the incentive distribution rights it owes its parent company Energy Transfer Equity are a drain on cash flow and an overhang on the valuation. Finally, it has had trouble completing several of its expansion projects due to opposition and construction problems.
The company is also nearing the conclusion of its current growth phase, which it believes will fuel significantly more earnings and cash flow over the next two years. That should enable it to increase the distribution to investors by a low double-digit rate in the near term. Meanwhile, it’s looking at options to address the weight of the payout to its parent.
If Energy Transfer Partners can deal with those problems while improving its balance sheet, it could lift the significant weight holding down its valuation. It’s a scenario that could lead to a spectacular payoff for investors bold enough to buy right now.
Keith Noonan has no position in any of the stocks mentioned. Matthew DiLallo has the following options: short October 2017 $22 calls on GameStop. Tim Brugger has no position in any of the stocks mentioned. The Motley Fool owns shares of GameStop and has the following options: short October 2017 $22 calls on GameStop. The Motley Fool has a disclosure policy.
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