With the rapid rise of US stock prices these past several years, it has become increasingly difficult to find reasonably valued stocks in the US market. Here are three stocks that we find are attractively valued relative to their growth prospects.
The Investment Reporter recently reviewed its list of 100 US all-star stocks. All are established businesses and most use their growing earnings to pay higher and higher dividends. Most of the 100 are currently rated as ‘buy’, some are ‘hold’. None is rated as ‘sell’. (This is a list of All-Stars, after all.)
Of those 100 all-stars, here are three that are attractively valued stocks relative to their growth prospects.
■ Facebook, Inc. (NASDAQ—FB) operates the world’s leading social networking service through its flagship web site.
The company first became profitable in 2012, when it earned just $0.02 a share. Since then, it has earned more in each succeeding year. In 2017, it earned $6.16 a share. The compound annual growth rate in earnings per share since 2012 has been 215 per cent.
In view of its rapid historical growth, we don’t find Facebook’s current stock valuation too high. The stock trades at 26.1 times the $7.10 a share the company is expected to earn in 2018.
Monthly users of Facebook have increased at a good pace over the past year, though the rate of growth for daily users has slowed a bit in the latest quarter. That’s because chief executive officer Mark Zuckerberg has made changes that include showing fewer viral videos.
Mr. Zuckerberg says he wants to ensure that people’s time on Facebook is well spent.
Meanwhile, strong monthly user counts show that users are still coming back to the site, even though they spend less time on it.
Prospects appear bright in the coming years. Facebook is a consumer stock to buy for above-average capital appreciation potential.
■ Southwest Airlines (NYSE—LUV) is one of the largest carriers in the US by revenues and the largest by passengers flown.
Southwest’s earnings per share (EPS) have increased at a compound annual rate of 44 per cent these past five years. What’s more, EPS is expected to increase at an annualized rate of 27 per cent these next two years. Given these growth rates, we regard the airline’s stock, which trades at just 11.7 times expected 2018 EPS of $4.95, as undervalued. We think an expansion in this multiple is possible in coming years, assuming the airline performs as expected.
Southwest has a fleet of 737 MAX 8s, which are 14-per-cent more fuel efficient and have 14-per-cent more range. This gives the airline an advantage over its competitors, and should let it pick up market share in the California market where it will start to sell tickets to Hawaii this year.
Southwest Airlines is a stock to buy for solid growth potential and some income.
■ Walgreens Boots Alliance, Inc. (NASDAQ—WBA) is the world’s premier drug distributor, with a network of drugstores in North America and Europe.
Walgreens’ earnings per share (EPS) have increased at a compound annual rate of 15 per cent over the past five years. EPS is expected to increase at an annualized rate of 12 per cent these next two years. Meanwhile, this global stock’s shares trade at 12.5 times their estimated fiscal 2018 (ends August 31) EPS of $5.75.
Walgreens faces considerable competition from the likes of Amazon.com and CVS/Aetna. This is why the shares have performed poorly lately. But the company has the critical mass to survive and prosper over time.
Walgreens Boots is a consumer stock to buy for growth and income.
This is an edited version of an article that was originally published for subscribers in the February 16, 2018, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
The Investment Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846