The stock market has rallied sharply ever since the Federal Reserve announced QE3. Even though the markets have seen a couple of tough days in the past week, most major indexes now trade at levels that have not been seen in about five years. That means it is getting harder to find real bargains that value investors would scoop up and hold for potentially big gains in the future. However, there are great values to be had in this market, if you are willing to buy stocks or sectors that are currently out of favor.
Warren Buffett has made huge sums for himself and his shareholders over many years by buying value stocks. While many investors ignore out of favor stocks, it seems that Mr. Buffett is able to see past short- and mid-term challenges that a specific company might have, or the recession that comes along every few years, and he uses those times to buy bargains. Mr. Buffett once said: "If you own a farm and you have a drought once every 10 years, you don't mark down the value of your farm 30% the year of the drought." However, that is exactly what the markets and many investors often do. All it takes is one bad quarter or cautious guidance and at times, that alone is enough to take a stock down by 30%, if not more.
Mr. Buffett thinks long-term to see past the current challenges and negative headlines of the day, and he takes advantage of pullbacks. Many fund managers and investors cannot, or will not, think very long term. It's this short-term mindset that smart investors can take advantage of, buying bargains when others are chasing short-term performance or selling in fear. With that in mind, here are two out of favor stocks that appear to be trading at bargain valuations:
Hewlett Packard (NYSE:HPQ) shares are now trading at multi-year lows. The past couple of years have brought an almost perfect storm of negative events and headlines for PC makers, and Hewlett Packard in particular. The PC business has become increasingly competitive as tablets and mobile devices grow in popularity. I regularly see articles and headlines claiming or predicting the "end of the PC." However, that seems to be an exaggeration, since in-depth projects, writing, and many other applications are still not suited for tablets or mobile phones. More likely, it seems that tablets like the iPad may have created a temporary reduction in demand, as they are the new "it" device. However, the novelty of tablets is likely to wear off once businesses and consumers get their fill and tablets reach saturation levels. Laptops and desktops have historically offered more computing power and features, and companies like Hewlett Packard will keep pushing advances in the future.
Many investors view Hewlett Packard as an old tech company rather than a fast-growing innovator, and this has not helped the share price. Many investors also seem to doubt if CEO Meg Whitman can turn this company around, and the share price the stock has dropped since she joined the company. However, investors seem to have pushed the stock down to deep value levels, as it only trades for about 4 times earnings and even below book value, which is around $19. It's important for investors to realize that many of the challenges facing this company are due to a weak global economy, and because of slowing growth in the PC industry. Those issues are not the fault of Hewlett Packard or Meg Whitman. The company is still very profitable, and it offers a dividend yield of nearly 4%. When the global economy comes back one day and PC sales rebound, investors might wish they had seized the opportunity to buy this stock now. PCs are not dead, and this could be the time to buy cheap during a "drought," as Warren Buffett has done many times in the past with value stocks.
Here are some key points for HPQ:
Current share price: $14.41
The 52 week range is $14.02 to $30
Earnings estimates for 2012: $4.05 per share
Earnings estimates for 2013: $3.60 per share
Annual dividend: 53 cents per share, which yields 3.7%
General Motors, Inc. (NYSE:GM) shares also appear very undervalued when looking at metrics such as the PE ratio, and future earnings potential. Even though auto sales have been very strong in the United States, you sure would not know it by looking at the price of General Motors or Ford (NYSE:F) stock. Both are trading well below 52-week highs. Investors have been wary of these companies because the auto market in Europe is seeing a sharp drop in demand due to high unemployment and economic uncertainty. GM has been posting significant losses in Europe for years, and that trend looks poised to continue. However, strong sales in the U.S. and China have been more than enough to offset European losses, so it appears that investors are overreacting to the negative European headlines.
On the bright side, the stock looks like a great buying opportunity, as it trades for just about 7 times earnings. Furthermore, earlier this year, Mr. Buffett's company purchased about 10 million shares of General Motors. That is a strong sign that investors should consider long-term thinking rather than short-term concerns. Another recent positive is that GM could see a spike in sales in China because a major rift has developed in relations with Japan. This has led many Chinese consumers to boycott Japanese products, in particular cars made by the likes of Toyota (NYSE:TM), Honda (NYSE:HMC) and others. In fact, Toyota just reported its biggest drop in sales to China since 2008 due to the dispute with Japan. China is one of GM's single largest markets, so it might really benefit from increased sales in the coming quarters.
Here are some key points for GM:
Current share price: $24.44
The 52 week range is $18.72 to $27.68
Earnings estimates for 2012: $3.11 per share
Earnings estimates for 2013: $3.88 per share
Annual dividend: None
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informational purposes only. You should always consult a financial advisor.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.