Brian Stoffel, Matthew Frankel, and Steve Symington, The Motley Fool
Updated
Value stocks -- eight years ago, when this bull market started, they were everywhere. These days, most investors would laugh at the idea that there are any value stocks left. A 400% run by the Nasdaq Composite can do that to investor perceptions.
Yet there are certain industries that have been left for dead. Energy and brick-and-mortar retail are foremost among them.
A man crossing his fingers with his eyes closed.
Image source: Getty Images.
Here, three Motley Fool investors will tell you about some value stocks they believe are ripe for the taking -- if you're a bold investor. While recoveries from any of these three would yield impressive results, they are far from a certain thing. That's why it's important to understand all of the moving pieces with Momo (NASDAQ: MOMO), Macy's (NYSE: M) and Chipotle Mexican Grill (NYSE: CMG) before buying in.
A value stock disguised as a growth stock
Brian Stoffel (Momo): It's not every day that you hear a stock that's up 300% since February 2016 -- and has seen revenue jump 285% during the first half of the year -- referred to as a "value" stock. But the case of Momo, one of China's most popular dating and live streaming apps, is an exception.
Before 2016, a simple dating app was Momo's claim to fame. But that all changed when live streaming took China by storm. Consider: In 2015, live streaming brought in $1 million in sales. Over the past 12 months, that figure has shot all the way up to $776 million. As more performers and broadcasters decide to use Momo's app to live-stream, viewers will be drawn to the site, creating the potential for a powerful network effect: The more viewers that come, the more additional broadcasters will have an incentive to use Momo, and so on.
But such an astronomical rise has some analysts wary that Momo's moat isn't for real. There are bigger players in China's live-streaming scene, and there's no way to tell if there's room for more than one winner in the niche. While investors need to be wary of that competition, the price tag already reflects pessimism. Shares are currently trading for 16 times free cash flow and forward non-GAAP earnings.
You won't often find such figures for such a fast-growing company. If you're daring enough to take a gambit on a Chinese stock with an unproven moat -- one that I don't own but am researching further -- the value could be enormous.
A leader in a beaten-down industry
Matt Frankel (Macy's): Department stores in general have had a dismal 2017, and Macy's is no exception. During the second quarter, comparable-store sales dropped 2.5% year over year, and adjusted operating income fell by a frightening 18%. Over the past year, the stock price has fallen by 42%.
However, there are reasons for long-term investors to be positive. For one thing, Macy's is one of the more financially stable department-store brands, with an improving balance sheet and a real estate portfolio that it has started to successfully monetize. Macy's is also implementing several new strategies to improve its customer experience.
I can see the situation at Macy's playing out similarly to Best Buy's a few years ago. Best Buy was struggling to adapt to the changing retail landscape and was able to successfully reconfigure its stores more efficiently and implement new programs such as in-store pickup. And because it was the strongest of its brick-and-mortar peers, including Circuit City, hhGregg, and Radio Shack, Best Buy saw its market share soared as those companies failed. Since the start of 2013, Best Buy's stock price is up by 368%.
Macy's trades for just 7.2 times its 2017 EPS guidance range of $2.90-$3.15 and pays a dividend yield -- which the company is committed to maintaining -- of 7.1% based on the current stock price. While I don't necessarily think Macy's will nearly quintuple in value over the next four years the way Best Buy has, it is one of the strongest players in its segment, and a successful adaptation to today's retail environment and some consolidation within the department-store industry could pay off tremendously for bold investors.
Buy this restaurant chain at multi-year lows
Steve Symington (Chipotle): It seems safe to say the market loathes Chipotle Mexican Grill on the heels of fast-casual burrito chain's painful third-quarter results last week. And it's hard to blame bearish investors for their skepticism. Comparable-store sales grew a meager 1% during the quarter, marking a big sequential deceleration from more than 8% comps growth in Q2. For that slowdown, the company primarily blamed the fallout of a norovirus outbreak at a single location in July -- though its overall performance certainly wasn't helped by a data security breach in May and more recent hurricane-related restaurant closures. What's more, Chipotle announced plans to significantly scale back new restaurant openings in the coming year.
So what's the good news? Chipotle Mexican Grill stock is now trading at levels we haven't seen since late 2012 -- and a significant discount from when I argued that shares were already absurdly cheap a few months ago. That doesn't mean it can't fall further. But however bad its situation might seem today, we're still talking about a solidly profitable restaurant concept, with plenty of room to grow over the long term.
Given its currently depressed profitability, Chipotle stock doesn't look cheap based on traditional valuation metrics; shares trade right now at around 58 times trailing-12-month earnings and roughly 29 times forward earnings estimates. But this perfect storm of terrible news can't last forever, and I think Chipotle's eventual rise will be fast and furious when the market once again smells signs of a sustained recovery
Brian Stoffel has no position in any of the stocks mentioned. Matthew Frankel has no position in any of the stocks mentioned. Steve Symington has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill. The Motley Fool recommends Momo. The Motley Fool has a disclosure policy.
