Keith Noonan, Leo Sun, and Daniel Miller, The Motley Fool
Updated
Stock prices are on a tear, making it more difficult to identify equities that still trade at a discount. However, as finding great deals on the stock market becomes more challenging, the rewards for doing so typically become greater as well.
With the goal of turning readers on to underappreciated stocks that are trading at bargain prices, we asked three contributing investors to profile a company whose shares can be snatched up on the cheap. Here's why they identified HP(NYSE: HPQ), General Motors(NYSE: GM), and GameStop(NYSE: GME) as some of the most promising value plays on the market today.
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Image source: Getty Images.
This ain't your daddy's HP
Leo Sun (HP): HP, the biggest PC maker in the world, became a more streamlined company after it split with Hewlett-Packard Enterprise in 2015. The "new" HP now generates revenue from just two main businesses -- PCs and printers.
PCs and printers sound like slow growth businesses, yet HP's PC and printer revenues respectively rose 13% and 7% annually last quarter. HP attributes its growth in PCs to better high-end laptop designs, new gaming PCs, more secure systems for enterprise customers, and its ongoing strength in the North American market.
As for printers, higher sales of consumer units and supplies offset softer sales of commercial units. But HP is gradually evolving that business with its acquisition of Samsung's printing unit, the introduction of new 3D printers for industrial customers, and niche printing devices like mobile printers.
HP's PC margins have been under pressure, because of cyclically high component prices, but those margins should improve over the next two years. Its printer margins have been improving and should expand even more after it integrates Samsung's business.
Analysts expect HP's revenue and earnings to respectively rise 4% and 10% this year. It pays a forward dividend yield of 2.6%, and its low payout ratio of 36% gives it plenty of room for future increases. HP's stability makes it seem like an ideal investment for uncertain times, but it still trades at just 11 times next year's earnings -- making it an absurdly cheap stock in a frothy market.
Growth hasn't disappeared yet
Daniel Miller (General Motors): Investors have largely shied away from purchasing shares of General Motors while the U.S. new-vehicle market plateaus. And while a plateauing U.S. sales market will make growth more challenging, it doesn't make it impossible. Here are a couple of reasons why.
First, while sales are indeed peaking, GM's focus on its Cadillac luxury brand will help improve margins. In fact, in 2017 Cadillac recorded its second highest sales mark in the brand's 115-year lifespan. Its sales jumped 15.5% compared with the prior year and notched 356,467 global deliveries. Cadillac's average transaction prices (ATPs) continue to climb and remain well above $54,000, and the brand owns the second highest ATPs among major luxury auto brands in the U.S. market.
Another reason GM can drive its top and bottom line higher despite a slowing U.S. market is found overseas: China. GM and its joint ventures sold more than 4 million vehicles in China for the first time in 2017 -- a 4% increase from its previous record in 2016. China is also partly responsible for Cadillac's global surge, as the luxury brand's sales jumped 50.8% in 2017. GM added 18 new and refreshed models in China last year, and the fresher product mix should drive sales performances in the near term. GM also benefits from a surge in SUV popularity in China; GM's SUV sales surged 37% in China last year.
Many investors are weary of investing in GM as its bread-and-butter U.S. market slows, but that doesn't mean GM's growth story is over just yet. GM also trades at an absurdly cheap forward price-to-earnings ratio of 7, according to Morningstar consensus estimates, and it offers a 3.5% dividend yield -- a very compelling option for value investors.
An underestimated specialty retailer
Keith Noonan (GameStop): If you would have told GameStop shareholders that its holiday sales report would arrive with news of an 11.8% year-over-year same-store-sales increase, a 38.3% increase for hardware sales, and a 7.3% jump in new software sales, the reaction from most would have been ecstatic. Even in the context of a 8.1% year-over-year sales decline for pre-owned software, that would have probably been enough good news to send the stock soaring -- were it delivered in isolation.
Unfortunately, the company's holiday report also came with dismal results for its technology brands business, which mostly specializes in mobile hardware and service package sales. The segment's sales were down roughly 20% compared with the prior-year period, and GameStop's share price was once again sent tumbling. A change AT&T implemented to the compensation structure for selling wireless and DIRECTV service packages seems to have seriously dimmed the outlook for tech brands and overshadowed the noteworthy bright spots.
Strong results for the company's video game retail unit over the holiday sales period suggest that its business may be more resilient than many are anticipating. The success of Nintendo's Switch console bodes well for GameStop over the next few years, because the system's limited storage space means it's poorly set up for digital downloads. New consoles from Sony and Microsoft are also probably due to be unveiled within the next couple of years and should provide additional positive catalysts for the company's core business. GameStop is also making some smart moves with its rewards programs, and its collectibles segment looks to provide a new source of sustainable, high-margin sales growth.
The company's stock is priced at just 5.5 times this year's expected earnings and just a fifth of expected sales for the period. It's also sporting a whopping 8.7% dividend yield. With the company seemingly in good enough shape to maintain its payout, GameStop looks like a cheap play that could produce substantial returns for risk-tolerant investors.
Daniel Miller owns shares of General Motors. Keith Noonan has no position in any of the stocks mentioned. Leo Sun owns shares of HP. The Motley Fool owns shares of GameStop. The Motley Fool has a disclosure policy.
