The bull run in the stock market continues unabated, despite the pullback in December shaking investors' confidence. December was a great time to pick up some companies at a bargain, and the market is now back to within 5% of its highs, making bargain hunting a little more difficult.
There's something to be said for raising cash in a strong market that has continued for this long. However, it's important to remember that time in the market trumps timing the market, and regardless of overall market valuations, there are always bargains to be found.
(This is an actual book, and that makes me happy)
With that being said, I want to highlight 5 such companies here that I see as trading at relatively attractive valuations with decent long-term growth prospects. That being said, there will always be negatives for any of the companies I am writing about. Generally speaking, if everyone feels really positive about a company, it is trading closer to Amazon-levels of valuation, which can easily restrict future returns and make downside risk much more likely.
Take Two Interactive Software (NYSE:TTWO)
Breaking a little from form here, I chose to highlight a non-dividend payer. Even more surprisingly, TTWO competitor Activision Blizzard (NYSE:ATVI) does pay a dividend and I actually own it currently. That being said, when trying to be as objective as possible, I see TTWO as being in a better position today.
Coming off two of the most massive game releases of all time in Grand Theft Auto 5 (2013) and Red Dead Redemption 2 (2018), you would think that TTWO would be riding high on investor optimism. However, fears over the encroachment of Fortnite, an online first person shooter from Epic Games that has taken the gaming world by storm, have dragged down the sector as a whole (at least, that is the established consensus I have gathered from the financial media).
TTWO's wildly successful GTA V, which received a metacritic score of 97 and is considered widely as one of the best games of all time, has been transformed into a cash cow through the use of GTA Online. The massive development costs of the world for just a one-shot single player campaign has now transformed into an online experience whose user base is still growing more than 5 years since its release due to continue updates and support from the company. Additionally, recurrent customer spending rose 32% in the most recent quarter.
The company will attempt to mimic this success with Red Dead Online, adding on to the blockbuster success of Red Dead Redemption 2 last year, and again with GTA VI, which hasn't yet set a release date. The company also owns other game series like the 2K sports games, which have seen success with the NBA 2K19 coming in as the top sports game for the third consecutive year and the third best-selling game overall.
Based on TTWO having the #1 and #3 overall games for all of 2018, it's surprising to see how the company has been trading.
Like I said before, the gaming industry selloff is being blamed on the runaway success of Fortnite. However, it seems to me that TTWO is near the top of its game today (pun intended), and there is always going to be competition out there in this industry. The thing is, gamers aren't restricted to owning or playing just one game, and therefore I would really be more concerned about games that directly compete in terms of first person shooters online like the Call of Duty franchise.
Zooming out to a longer-term view shows just how much the video game industry has exploded in the last several years. Some of this is likely from the growth in e-sports and generally a resurgence in gaming. However, one important thing to note here is the relative spottiness of earnings. This brings me to the biggest risk in this company, which is the fact that even in non-GAAP earnings, the company has had huge ups and downs and even unprofitable years as recently as 2012. Based on the long tails with its new games, I think the company is becoming less cyclical, but if one of its blockbuster releases were to be a critical and commercial flop, it would be difficult for the company to absorb given its size relative to larger competitors.
Based on analyst estimates of earnings going forward and a return to the company's long term valuation of 21X earnings, an investment today could yield as much as 19% annualized going forward. Revenues have nearly doubled since 2016, and growth prospects look bright if the company can keep appeasing its target audience.
I don't see TTWO as a screaming deal right now, but I think there's a good case to be made that 10 years from now, investors will be looking back at today wishing they had bought some shares.
Stanley Black and Decker (NYSE:SWK)
The next company I want to highlight isn't necessarily trading at a deep discount, but it is definitely in a better spot today than any time since the selloff at the beginning of 2016. SWK is a storied company, a Dividend Aristocrat, and boasts 142 years of dividend payments. That's an achievement, and represents the stability and conservatism of management over time.
Growth hasn't blown the doors off, but it has been steady, and the company's long-term chart looks about exactly like I would want to see for a company I am buying to add stability to my portfolio. It also gives a better picture of where the company is at, valuation-wise, compared to its long-term trend. It looks to have spiked to a cyclical high and to have recently come back to its more normal trendline.
The company's purchase of Craftsman was well-timed, and adds to a strong portfolio of brands. I expect SWK to do much more with the brand than Sears has done in a long time, and you don't need to look any further than the company's iconic Dewalt or Black and Decker brands to see the kind of market penetration the company has. Dewalt's new Flexvolt system allows everything from drills to table saws to run off the same battery using gates that pump out varied voltage levels, which adds to the portability of the tools, although it's unlikely to be something that appeals to everyone. However, Dewalt continues to boast premium pricing power, and its iconic yellow emblem is something that most anyone would recognize, and its brands are household names with broad based appeal for DIY'ers and professionals alike.
That being said, it isn't all sunshine and daisies. The company is warning of slowing economic growth, and tariffs and forex issues have chipped away at results. Based on today's valuations and analyst estimates for earnings growth, an investment today could yield around 9% annualized, and the company's stability and smart capital allocation have convinced me that SWK will be a good industrial company to hold on to for the long haul.
General Mills (NYSE:GIS)
Adding General Mills to this list surprised even me. After all of the headlines about Kraft Heinz over the past few weeks (if you haven't read anything about it, I'm sure you can find some great articles on Seeking Alpha providing coverage), it doesn't seem too timely to highlight another center-of-the-store packaged food company that many believe to be in a secular decline. I wrote a couple of articles a while back highlighting Smucker, which has turned out to be one of my worst calls as an investor with the company having gone nowhere. Well, fighting the trend, or calling an end to it, can be a difficult proposition. Additionally, being early in value investing can be the same thing as being wrong.
However, it's hard to argue with the storied operating history of General Mills. The company didn't even suffer much in the Great Recession, making it one of the best in the market for shielding your portfolio from downturns. Additionally, it pays 4% while you wait for the market to turn around. That being said, it hasn't done much in the way of capital appreciation, and for some reason investors were willing to spend over $70 for a share of this company in 2016 that was facing many of the same issues that it faces today. There's a lesson to be learned there for patience. It is going to take a pretty long time by my estimation for someone buying at the top to recoup their losses in this company.
The dividend paid by GIS today is the most generous yield you could get from a purchase of the company in a long time, and it is currently trading at levels not seen since 2013. All of this is a moot point, however, if the company truly were entering some kind of terminal sales decline.
I really don't think it is, however. One thing to note is that the company definitely missed the boat on yogurt. Management let the greek yogurt trend pass them by completely, allowing Chobani, Oikos, and others to strip them of market share, and they didn't get the message, at all. Oui by Yoplait, a french style yogurt sold in a glass jar, is niche due to its cost base, and it's too little, too late in my view. The battle was fought and lost, and at this point, it's priced into the stock. Yoplait still maintains ~20% of the market, and I think it would take another shift in consumer preferences (or maybe an acquisition) to see GIS taking back lost ground. Moving forward from here, though, GIS bought Blue Buffalo, a premium pet food company, that opens the doors to a great tailwind with the trend of paying up for our pets and treating them more like a member of the family. This acquisition wasn't cheap, but it does bring some sales growth back to the company, and management seems committed to pouring all the resources it can into making the acquisition a success.
The acquisitions of Annie's is directly in the company's core competency, and showcases that shoppers still spend their money in the center of the grocery store. I think it's important to remember here that most of these mega-trends can be overblown, and they will generally settle out to a happy medium. GIS seems to have acknowledged its past mistakes, and its push towards more natural, less processed foods is likely to pay dividends well into the future.
One thing I'm not thrilled about is the company's debt load. GIS is similar to other large, stable companies in that the stability of its results allows for a pretty significant debt load, but the expensive acquisitions to stoke sales will have to be paid back. I don't see the dividend as being at risk, but the company's results could be materially impacted by its debt load at some point in the future.
All that being said, an investment today with a return to the company's long-term average valuation at 17.7X earnings could yield an annualized ~14% return based on analyst estimates of earnings. I don't foresee the company's return to its long-term valuation as a foregone conclusion, as there is a significant amount of pessimism surrounding packaged foods at the moment. However, the company's generous dividend yield pays you to wait, and if you believe that the company is making the right moves to stay relevant, this historic company is trading at a pretty enticing valuation.
BlackRock, Inc. (NYSE:BLK)
The fourth company I want to highlight isn't necessarily trading at fire-sale prices. However, it looks to be at fair value to me, and you're getting a market leader. Blackrock holds ~$6T in assets under management, and the secular trend moving money towards passive investing has paid off handsomely with the company's iShares brand offerings.
The company boasts >70% retention of its investor dollars, and is highly geared towards institutional clients, who tend to have stronger hands during downturns than retail investors. Net inflows have been solid, and the company's diversity across geography, clients, and asset classes seem to make this a pretty rock solid investment idea.
However, there are definitely some risks to consider. Another major trend in the financial industry is moving against Blackrock as the asset managers race towards charging zero fees. I will never root against that, as I personally think it's great that the average investor is able to pay less and less each year to invest their hard-earned money. In the fight for new assets, though, Blackrock pays the price for these lower fees in its bottom line, and that trend is likely to continue. Additionally, money managers don't have a great time when the market takes a dive. Although Blackrock is heavily weighted towards its institutional clients, inflows tend to become outflows when the market is down hard, and that will have an impact on the company's results. This didn't appear to cause too much damage in 2008, but it is still a real concern to consider.
Looking at the long-term chart, Blackrock is trading at the best spot since at least 2014, and likely earlier. This is another case where people were paying over $550 for the same shares of this company that cost $100 less a year later with mostly the same trends working for and against the company.
Based on analyst estimates of earnings growth and a return to the company's long-term average valuation of ~20X earnings, an investment today could yield ~17% annualized growth. Obviously, I would expect to see some positive news before that happens, and who knows when the next market downturn is coming. With somewhat tempered expectations, I could see BLK being an excellent long-term hold, and today seems like a good spot to make an entry.
Bank of Nova Scotia (NYSE:BNS)
I guess I never get sick of writing about Canadian banks. They haven't been my most profitable hold over the years, and they are rarely going to generate much excitement at the dinner table when I bring them up. However, these banks are a mainstay for me to add conservative, well-run financial exposure to my portfolio, and Scotiabank is currently the most attractively valued of the ones I cover. If you don't know much about the Canadian banking market, feel free to look at some of my past articles on the subject. Effectively, the banks managed to escape the worst of the Financial Crisis, and they operate in a state-sponsored oligopoly that limits competition but keeps the banks from any further consolidation. This gives the banks wide moats, in my view, but it does limit returns to some degree. The capital appreciation from BNS isn't going to set the world on fire. One thing to consider for American investors is the currency risk of holding BNS and other Canadian banks in USD, when they trade and operate largely in CAD.
BNS adds a significant emerging market exposure to the mix with its operations throughout the Pacific Alliance in Latin America. There's a chance that the issues Venezuela is having have weighed on the bank's shares, although its operations are centered in Mexico, Peru, Chile, and Colombia. This does add some risk, but the bank's returns from these emerging markets adds a growth component to its operations that it wouldn't otherwise have in the mature Canadian market.
Recent acquisitions in MD Financial and Jarislowsky Fraser to grow the company's asset management business have significantly raised expenses, and the bank faces integration risk. However, it has done well over time managing its expenses, and maintained itself in the top 2 or 3 among its peers in its efficiency ratio. I expect to see a return to form over the next couple of years, and hopefully these acquisitions will stoke some extra growth for the bank and improve its standing.
Based on analyst estimates of earnings going forward, and a return to its long-term average valuation of 12.5X earnings, an investment today could yield over 20% going forward. This value is inflated due to the estimates only going out to the end of next year, so take that value with a grain of salt. However, I do see the company as trading at an attractive valuation today, and its dividend yield of 4.9% is a nice way to compensate for investors waiting to see capital appreciation. I read somewhere once about how well an investor would have done buying the Canadian banks whenever they yielded 5%, and there's a good chance I'll be adding to my position in the near future.
I hope these candidates gave you some ideas for further research. I plan on writing more in-depth articles about at least a few of these, where the format would be more conducive to covering more than just the broad strokes. Let me know what you think in the comment section below.
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Financial statistics were sourced from Morningstar, with the charts and tables created by the author, unless otherwise stated. This article is for informational purposes only and represents the author's own opinions. It is not a formal recommendation to buy or sell any stock, as the author is not a registered investment advisor. Please do your own due diligence and/or consult a financial professional prior to making investment decisions. All investments carry risk, including loss of principal.
Disclosure: I am/we are long BNS, ATVI, SWK. 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.