7 Value Stocks The Pros Like
You can find value in unexpected places. When seasoned bargain hunters gathered in New York City for the semiannual Value Investors Congress, they shared ideas that ranged from blue chips to turnaround stories to small-company stocks. Not every stock is a certain home run, but a number of them are worth your consideration. Here are seven compelling ideas:
Famed hedge-fund manager Julian Robertson has redefined what he considers to be a value stock. He used to search for stocks that were cheap in relation to his estimate of a company’s intrinsic value. Now he looks for stocks selling at low prices relative to what he expects a company to earn. “My favorite theme is to find low-cost producers,” Robertson says. That means he is bullish on Google (symbol GOOG), even though at the stock’s October 21 closing price of $551.10 it trades at 20 times the $26.29 per share that analysts expect the company to earn next year.
Robertson also views computer-chip maker Intel (INTC $ 19.86) and the two major credit-card-payment processors, MasterCard (MA, $225.67) and Visa (V, $75.19), as companies that benefit from their size and market dominance.
Lloyd Khaner, a turnaround specialist, likes what Starbucks (SBUX) is brewing. Khaner says that the return last year of founder Howard Schultz as chief executive, a revamped management team and the closing of more than 700 underperforming stores are signs the company is poised for a rebound in the U.S. At $20.34, the stock is up 109% this year and trades at 21 times the 92 cents per share that analysts expect the company to earn in the fiscal year that ends next September. Khaner thinks the shares are worth at least $34.
“In fashion, the new black is cheap,” says Candace King Weir, president of Paradigm Capital Management, a boutique investment firm that specializes in small-company stocks. That’s why she likes Wet Seal (WTSLA), a retailer of women’s clothing. The company operates two chains of mall-based stores, under the Wet Seal and Arden B brands, that offer “cheap clothes with a fashion edge,” Weir says.
Wet Seal, which operates nearly 500 stores, targets teenagers. Arden B, which has fewer than 90 stores, aims for women who have outgrown Wet Seal. Weir thinks that the Arden B chain has a lot of growth potential and that the company, with $143 million in cash and only $3 million in debt (at last report), has a balance sheet that’s strong enough to weather tight credit markets. The stock, at $3.59, trades for 12 times the 29 cents analyst expect the company to earn in the fiscal year that ends January 2011. Wet Seal’s market value is $343 million, putting it squarely in small-capitalization territory.
Another small-cap stock that got a plug was Core-Mark (CORE), the second-largest distributor to convenience stores. The stock, which closed at $28.82 and carries a market cap of $300 million, could rise by more than 50% over the next year, says Kian Ghazi, of Hawkshaw Capital Management. “Core-Mark is a high-quality, well-capitalized, hard-to-replace franchise,” says Ghazi, who co-manages a hedge fund that has beaten Standard & Poor’s 500-stock index by an average of seven percentage points per year over the past five years.
The company, he says, will benefit as its clients change their product mix. To offset declining cigarette consumption, convenience stores will add new fresh-food items -- such as sandwiches, fruit cups and salads -- which are more profitable for Core-Mark. The stock trades for ten times estimated 2010 earnings of $2.97 per share. Ghazi says that with the boost from fresh-food sales, the stock could hit $45 to $50 over the next 12 months.