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For investors, the Hollywood writers’ strike couldn’t have come at a worse time. After all, new episodes of mindless TV shows such as How I Met Your Mother would serve as a welcome distraction from dwindling stock portfolios, bleak economic data out of the U.S., and the threat of a global slowdown. But there is a silver lining: American stocks are starting to look cheap. Morningstar Equity Research recently reported the Dow Jones Industrials, as well as companies in the S&P 500 and Nasdaq 100, are trading at a 13% or greater discount to their fair value. Add to that recent comments from BCA Research Inc. of Montreal stating that the U.S. market could bottom in the middle of this year, and now is an ideal time to at least begin watching for bargain stocks.
For starters, keep an eye on Apple (Nasdaq: aapl). Shares in the Cupertino, Calif.–based company are trading 34% off their 52-week high. Concerns over tapped-out U.S. consumers, slowing iPod sales and management’s disappointing forecast for next quarter are to blame. But the stock’s price-to-earnings ratio is now at its lowest level in more than five years. That suggests Apple Inc. won’t need to grow as fast as in the past to please investors. While it may take some time before Steve Jobs unveils a blockbuster innovation like the iPod, other products could add up to impressive sales increases. In the most recent quarter, shipments of Mac computers rose 44% from the same quarter a year ago — despite a weak December for U.S. retail sales. Research firm Gartner Inc. predicts Apple’s share of the American PC market will double over the next three years to 12%. Unit sales of iPhones were 2,315,000 last quarter, and the company expects to sell 10 million in 2008. Piper Jaffray & Co. analyst Gene Munster recently wrote that “Apple is in the driver’s seat in terms of transforming the portable music market into a portable computing market.”
Another cheap-looking stock is Oshkosh Corp. (nyse: osk). Headquartered in Oshkosh, Wisc., the company makes heavy-duty trucks used by soldiers, firefighters, construction crews and the like. The stock has followed the downward market trend since October, and now trades at an attractive estimated price-earnings growth ratio of 0.6. (A value of 1 or less suggests an investor is paying a reasonable price for earnings-per-share growth.) Oshkosh shares recently fell 6.8% in a single day after the company reported a 9.5% earnings decrease in its most recent quarter compared with the same period a year ago. The reason was lower demand for its concrete mixers, stemming from the U.S. housing slump. But management expects a double-digit increase in earnings in 2008 in part from sales growth in the company’s defence products. Most analysts are bullish, with over 70% covering the company rating it a Buy. With shares trading at US$42.64, the average 12-month price target among analysts is $64.50.
Like Oshkosh, Coach (nyse: coh) isn’t immune to the effects of the U.S. economy. Sales at the North American stores of the luxury handbag maker fell 1.1% during the most recent quarter. “Consumers feel less wealthy and rein in their aspirational and luxury purchases,” says Touk Sinantha, an analyst at Members Capital Advisors in Madison, Wisc. Nevertheless, profits at Coach Inc. grew 11% from the same quarter a year ago, thanks to revenue increases from its retail operations in Japan and department store sales around the world. Although management has acknowledged the U.S. retail environment is challenging, they point out the North American bag market continues to grow. And through a combination of new stores (40 in North America, which include 13 new markets, and 15 in places such as Southeast Asia and the Middle East) and optimizing its product offering, which includes jewelry and perfume, the company expects sales will increase at least 17% in the back half of fiscal 2008.
Although stock pickers may not care for the company’s high-priced accessories, they should appreciate the business’s expansion strategy, product mix and financial measures. Coach boasts a five-year average return on equity of 42%, which is far above industry peers. The company has virtually no debt. Analysts expect earnings-per-share to grow 19.1% per year over the next three to five years. Not bad for a stock trading at a price-to-earnings ratio lower than the S&P 500 average. As for the risks, Coach generates three-quarters of its sales from the U.S. But with the stock at a 40% discount to its 52-week high, recessionary worries appear to be reflected in the price. On the flip side, though, the company has international opportunities. It plans to grow in China to about 80 stores from roughly 50 over the next few years. It also recently announced it will be entering Russia. The majority of analysts covering the company rate it a Buy, and their average 12-month price target is $37.08 on a stock that was $32.64 at press time.
Compared to luxury goods, Cognizant Technology Solutions Corp.’s (Nasdaq: CTSH) business is less glitzy. Based in Teaneck, N.J., the company supplies data warehousing, software development and other IT services to clients such as Nokia and Viacom. Founded in 1994 as a division of Dun & Bradstreet Corp., it operates 11 development facilities in India. The company has grown sales at a phenomenal rate, with annual revenues jumping nearly 700% over the past five years. Yet Cognizant appears to be a victim of its own success. Last November, its stock fell 19% in a single day after it beat analysts’ estimates for the third quarter but projected less than anticipated revenues and profits for the following quarter. Why? In the past, Cognizant consistently beat its forecasted numbers and frequently improved its projections. The shares have rebounded from a 52-week low of $23.37 on Jan. 22, but the stock still looks inexpensive. It boasts an estimated price-earnings growth ratio of 0.8. The company also has no debt and generates a ton of cash. Analysts are optimistic about this stock, too. Nearly 80% of research firms covering Cognizant rate it a Buy.
Cognizant employees likely use products made by another company whose stock looks cheap: 3M (nyse: mmm). Headquartered in St. Paul, Minn., the company makes more than 50,000 products, including the ubiquitous Post-it notes and Scotch tape. Annual revenues were a whopping US $22.9 billion in fiscal 2006, and 3M employs more than 75,000 people worldwide. Management projects earnings will grow 10% in fiscal 2008, in part helped by anticipated drops in the price of commodities such as wood pulp, paper, copper and aluminum. The company has also been expanding internationally. Last year, it began building 19 plants outside of the U.S. to move factories closer to the markets they serve. 3M expects international revenues, which come from more than 60 countries, will increase to 65% of total sales in fiscal 2007, from 61% in 2006. “I see tremendous financial strength in their expanding markets and geographic footprint,” says Daniel Ortwerth, an analyst with Edward Jones & Co. in St. Louis. Of the 17 research firms covering the stock, only one rates it a Sell. That lone call comes from Deane Dray, an analyst at Goldman Sachs who believes the slowing U.S. economy will hurt 3M’s growth in 2008.
While these stocks seem like bargains, do your own homework before investing. Sure, it can take time. But it can be more worthwhile than watching reruns of CSI.
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