With the market near all-time highs, it isn't as easy as you might like to find stocks that are on sale. Generally you have to look at companies that are out of favor for some reason. When looking at investment opportunities of this kind, however, careful investors will focus on safety. Here are three stocks that appear to be on sale, but have the financial strength to live through the troubles they are currently dealing with: ExxonMobil (NYSE:XOM), Simon Property Group (NYSE:SPG), and A. O. Smith (NYSE:AOS).
1. Oil is long from dead
The big knock against energy stocks like Exxon today is that they are part of the global warming problem. While that is true, oil is still in high demand, and likely to remain a key part of the energy market for decades to come. The problem investors have with Exxon specifically is that its production has been weak, and fixing the issue is going to cost a lot of money -- as much as $35 billion a year through 2025. That said, Exxon's efforts to turn production around are starting to bear fruit, so it looks like it is spending wisely.
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Meanwhile, Exxon's stock looks pretty cheap today. The stock's 4.9% dividend yield is near the highest levels it has seen since the mid 1990s, and the company's price to tangible book value is the lowest it has been since the late 1980s. Thus, Exxon also appears to be on sale today.
The best part, however, is that Exxon is a historically conservative company with a rock-solid balance sheet. For example, financial debt to equity sits at about 0.15 times. That's toward the low end of its peer group. And while it is spending heavily right now, which means leverage will likely increase over the next few years, it is also selling less desirable assets to help fund its capital investments. So it is taking a balanced approach to repositioning its portfolio for growth. All in, investors looking for stocks that are on sale should like what they see here.
2. The mall isn't dead, either
Next up is real estate investment trust (REIT) Simon Property Group. The average REIT was up nearly 25% over the past year or so, using Vanguard Real Estate ETF as a proxy, but Simon was down roughly 13%. What gives? Simon owns a global portfolio of roughly 200 enclosed malls and factory outlet centers. The growth of online retail has led to ongoing troubles at brick and mortar retailers, in what has come to be known as the retail apocalypse. The big-picture trend is obvious, but the fire and brimstone is likely to be hyperbole. It is more likely that retail will shift to accommodate new consumer trends, and that the strongest retailers will survive with a mix of online and physical stores, the latter located in the most desirable malls.
On that score, Simon has one of the strongest portfolios in the mall sector. It ranks among the top in its peer group in sales per square foot and rent per square foot. Its occupancy, despite all the doom and gloom, is nearly 95%. Both of these facts make sense given that its malls tend to be located near large and wealthy population centers.
It isn't the only mall REIT that can make claims like this, but that brings up the second reason to like Simon: financial strength. Simon's funds from operations (FFO, like earnings for an industrial company) payout ratio is among the lowest in its peer group at roughly 70%. Its financial debt to equity ratio is well below that of its closest peers, and it has stronger interest coverage. Backstopping these facts is roughly $7 billion of liquidity, consisting of cash on hand and a credit line. That should give the REIT ample room to adjust to the changes taking shape in the mall space.
SPG Financial Debt to Equity (Quarterly) data by YCharts
The yield, meanwhile, is a hefty 5.8% or so (the highest it has been since the 2007 to 2009 recession). To be fair, that's not the highest in the mall REIT space, but it appears to be among the most secure. Moreover, unlike most competitors (which are simply trying to muddle through the retail apocalypse), Simon also comes with a growth component via ground-up construction projects in foreign markets. All in, Simon looks like a financially strong play in the out-of-favor mall REIT space.
3. Expanding beyond China
The last name here isn't quite as rewarding dividend-wise, since A. O. Smith, which makes water heaters, only offers a yield of roughly 2%. However, that's the highest the dividend yield has been in a decade. Since stock price and dividend yield move in opposite directions, it shouldn't be too much of a surprise to hear that the stock is currently around 30% below its early 2018 highs. That drop, meanwhile, has left the company's price to sales, price to earnings, price to cash flow, and price to book value ratios below their five year averages.
So what's going on? The answer, in a nutshell, is China. Roughly 65% of the company's business is in the slow-growth North American market. This region is doing just fine. The rest of Smith's sales come from overseas, however, largely China. After years of strong growth, that business has been weak of late as China's economy has slowed down. Investors fear that this water heater maker's growth days are over.
AOS Financial Debt to Equity (Quarterly) data by YCharts
But it's too soon to make that call. A. O. Smith is taking action to right-size its Chinese operations, of course, but the market is still large and important. And hot water is still a luxury that everyone wants as soon as they can afford it. Equally important, Smith it is currently pushing into India using the same plan that was so successful in China for so many years. The company expects its target market in India to more than double by 2030. Meanwhile, the company's financial debt to equity ratio is an incredibly modest 0.05 times, and it covers its interest expenses by a robust 50 times. This water heater maker has what it takes to survive China's slowdown and thrive again in the future.
Value and safety
To be honest, it's actually pretty easy to find down-and-out stocks even with the market near all-time highs. What's hard to do is find out-of-favor stocks worth owning. Exxon, Simon, and A. O. Smith are all out-of-favor, and still worth owning. Sure, there are reasons for their stocks being in the dog house, but they all appear financially capable of dealing with the problems they face. Add in relatively high dividend yields, and you'll be paid well to wait for better days. If you have a value bent, this trio is worth a deep dive today.
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January 13, 2020 at 12:20AM
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3 Great Stocks You Can Buy on Sale - Motley Fool
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