While the stock market has cooled a bit this year after nearly a decade of big gains, value hunters must still look harder to find the best deals. And although there are some super-cheap stocks to be found, investors willing to expand their horizons outside the bargain bin and consider higher-quality companies trading for a nice discount might do even better than those who focus exclusively on cheap. As Warren Buffett put it, "Better to buy a great business at a fair price, than a fair business at a great price."
To help you find the best values -- not just cheap stocks -- three Motley Fool investors did some legwork and uncovered three stocks that have some surprisingly attractive value properties: Starbucks Corporation (NASDAQ: SBUX), Apache Corporation (NYSE: APA), and Winnebago Industries Inc. (NYSE: WGO).
Take a look at what these real-world investors have uncovered below. If it's market-beating returns from undervalued assets you're after, there's a good chance you'll like one of these three stocks.
A hand drawing a scales with price written on one side and value on the other.
Image source: Getty Images.
Rare value in this growth stock
Jason Hall (Starbucks): Since reaching their all-time high in mid-2017, shares of Starbucks are down 22%. And while it hasn't been a fun ride for existing shareholders over the past couple of years, the sell-off has created a really good opportunity for investors to buy now. At recent prices, Starbucks shares trade for their cheapest earnings valuation in at least 10 years:
Starbucks isn't just cheap against last year's earnings, either. It's also in bargain territory based on the company's own guidance for 2018, trading for 15 times the low end of company guidance. It's also bargain-priced compared to other U.S. large-cap stocks. The S&P 500 trades for around 24 times last year's earnings, meaning Starbucks stock sells for 31% less than the average large-cap U.S. stock today.
Furthermore, the quality of its business is worth buying. Much has been made of its weakening sales growth in the U.S. over the past couple of years, but the coffee giant has multiple initiatives in place that are set to drive many years of growth. This includes its upscale expansion in the U.S. and major international markets, its growing retail distribution, and other opportunities to expand internationally. That is especially true in markets like China. Starbucks' presence there is much smaller than in the U.S., but China is on track to become its biggest single market.
Factor in a dividend that's now yielding almost 3% and a strong record of payout growth, and investors looking for value shouldn't overlook Starbucks.
Value where it's getting hard to find
John Bromels (Apache Corporation): The oil and gas industry -- hit hard by the oil price slump of 2014-17 -- has come roaring back, with many independent oil and gas exploration and production stocks seeing better than 50% appreciation over the last year.
The market's enthusiasm is hardly surprising. Brent crude is currently selling for about $75 a barrel, up from less than $30 in early 2016. Those low prices forced many oil and gas drillers to implement stringent cost-cutting during the price downturn. And with those costs already cut, most are seeing big paydays as the spread between their cost of production and the going price for oil widens.
In this sea of great returns, though, there's one big laggard: Apache Corporation, whose shares have bucked the trend and are down 5.8% for the year, despite benefiting from the same industry trends as its peers. Now, it's possible that investors are nervous about the slow pace of development in Apache's Alpine High play in the Permian Basin. Or it could be that they're concerned that Apache's best-in-class 2.1% dividend yield is too high to be sustainable.
Whatever the reason, Apache's shares are now trading lower than they were when the company first announced its massive Alpine High find. They're trading lower than they were when the company sold its underperforming Canadian assets to improve overall profitability. And they're trading at a much lower valuation than their peers. But in recent days, the company's share price has been creeping up, which means the market may finally be catching on. That makes this an excellent time to pick up some shares of this rare value in the oil patch.
A value for the outdoor lifestyle
Daniel Miller (Winnebago): There's no question that millennials are driving changes and trends across the world, whether you like it or not. Millennials, and technology, have changed the way we shop and socialize, and have powered trends such as eating healthier. What you wouldn't guess is that Winnebago is also benefiting from millennials, and it's a stock you can pick up cheap at only 13.5 times trailing P/E. That's a bargain compared to its valuation over the past couple of years.
Here's some context around the camping world: The total number of U.S. households camping was estimated to be more than 77 million in 2017, which was 6 million more since 2014. Not only are more households camping, they're doing it more often: The number of campers that take three or more trips per year increased 64% from 2014 to 2017.
And while many investors might first think the growth is coming from baby boomers, that notion is incorrect. Data from the 2018 North American Camping Report show that millennials represented 40% of all campers in 2017, and combine with Gen Xers to account for 76%. Baby boomers comprised 19%, down from 28% in 2015.
More people camping more often, and a growing younger demographic. You can see why that bodes well for Winnebago as a leading recreational vehicle manufacturer in a market dominated by three primary players, Winnebago, Thor, and Forest River. If that wasn't a strong enough growth story for investors, Winnebago went out and acquired the well-known powerboat manufacturer Chris-Craft. Winnebago is betting that this young demographic won't only enjoy an outdoor lifestyle on ground, but also on the water. An RV manufacturer wouldn't be your first guess when looking for companies benefiting from millennials. But at a cheap valuation of 13.5 times earnings, it makes the cut as a top value stock.
Daniel Miller has no position in any of the stocks mentioned. Jason Hall owns shares of Starbucks. John Bromels owns shares of Apache and Starbucks. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool has a disclosure policy.
