Many investors must be wondering which stocks to buy in fiscal 2017 for good returns at a time when broad markets are looking stretched. Stocks that are fundamentally strong and have good growth opportunities but are not yet fairly priced by the market should be the choices.
Undervalued stocks not only give good returns in the long term but also make the portfolio robust and limit downside risk. On the other hand investors should regularly analyze their portfolios and keep selling stocks that are overvalued and whose pricing is not justified. Three undervalued stocks can be good portfolio additions.
EQT Midstream Partners LP
EQT Midstream Partners (EQM, Financial) provides natural gas transmission, storage and gathering services in Pennsylvania, West Virginia and Ohio. The company owns, operates, acquires and develops midstream assets in the Appalachian Basin. The company has a rich asset base in Marcellus and emerging Deep Utica, which is expected to provide significant organic growth backlog.
Moreover, to increase its reach, the company has plans to extend its pipeline network in the growing market of the Southeastern U.S. It has stable cash flow visibility, which enables distribution growth, mostly supported by capacity reservation charges under firm long-term contracts. In addition to this, the company also has a 16-year average transmission contract life based on total projected contracted life on Dec. 31, 2016.
A strong fourth-quarter 2016 result has made the stock appealing in terms of valuation. EQT Midstream is currently trading at a price-earnings (P/E) of 15.98 against Standard & Poor's 500’s 24.48. Also, if we compare both the present and forward estimated valuations based on EV/EBITDA and EV/Revenue against its peers Antero Midstream Partners LP (AM, Financial) and Rice Midstream Partners (RMP, Financial), the MLP is grossly undervalued. The MLP is trading at EV/EBITDA and EV/Revenue of 12.8 and 10.2 against peer Antero Midstream’s 20.9 and 12.7 and Rice Midstream’s 14.7 and 19.5. Forward estimates based on the MLP’s growth potential look attractive as compared to peers with 2017 and 2018 estimated EV/EBITDA of 12.0 and 11.2.
Considering a strong growth profile and attractive valuation, EQT Midstream can be regarded as a long-term buy.
Air Lease
I discussed Air Lease Corp. (AL, Financial) in one of my earlier articles. It is an aircraft leasing company that is engaged in purchasing commercial aircraft and then leasing them to its airline customers. The company is globally diversified with a presence in seven countries. Since 2011 the asset base has grown at a CAGR of 23% with a steady growth expected in the coming years. The company has 372 aircraft due to be delivered by 2023. Importantly, 91% of its order book is placed for long-term lease of aircraft through 2018 and 82% through 2019. It also has strong growth potential in China where the gross domestic product (GDP) is improving along with increases in both adult population and per capita income. This would boost the trip per capita, which justifies why China alone owns 24% of the company’s assets according to the net book value.
The company is trading at a compelling valuation with P/E of 11.8 against industry average of 102 and a forward 2017 and 2018 price-book (P/B) of 1.2 and 1.1. Also, the company’s current EV/EBITDA of 9.6 is better than the industry median of 10.3. Also, based on revenue and earnings growth estimated EV/Revenue of 8.9 and 8.3 for 2017 and 2018 looks compelling. A stock like Air Lease with strong growth potential in China and with an increasing asset base can be considered a good value stock for long-term investment.
Chesapeake Lodging Trust
Chesapeake Lodging Trust (CHSP, Financial) is an equity real estate investment trust (REIT). The firm invests in the real estate markets of the U.S. Its primary focus is upper-upscale hotels in major business and convention markets and on a selective basis, premium select-service hotels in urban settings or unique locations.
The company currently has a portfolio of 22 hotels with 6,694 rooms with strategically diversified geographical presence, brand and management; 49% of the forecasted 2016 hotel EBITDA is located in top five U.S. lodging markets and 98% located in top 15. Also, it has nine hotel operators that provide diversification and ability to deploy best practices across portfolio.
This diversification helps the company give better service to the customers available in premium regions of U.S. The company also expects a modest RevPar growth over the next several years based on the GDP growth of U.S. and corporate profit growth. This would help the firm meet its estimate of 3.6% CAGR from 2016 to 2020, which is impressive.
Considering that the company has accessibility to premium clients and operations in primary markets, it has the potential to boost its growth. In addition to this, the industry has high entry to barrier, which gives it an advantage to tap potential customers with lesser fear of new competitors.
On comparing the company’s valuation with peer Summit Hotel Properties (INN, Financial), it looks fairly undervalued. Chesapeake Lodging Trust is trading at a forward 2017 and 2018 EV/EBITDA of 12 and EV/Revenue of 3.6 and 3.5. This is fairly valued as compared to the estimated value of Summit Hotel with forward EV/EBITDA for 2017 and 2018 of 13 and 12. Also, based on estimated 2017 and 2018 EV/Revenue of 2017 and 2018 of 4.4 and 4.2, Chesapeake Lodging looks attractive.
The company has been continuously increasing its dividend over the years with a CAGR of 15% since 2011. Thus its current dividend yield of 6.2% compared to Summit Hotels’ 4.0% looks more compelling. This REIT is worth investing considering both its undervaluation and a decent dividend yield.
Conclusion
As described, all three stocks are good picks based on their growth potential and relatively lower valuations. They have the ability to outperform in the long run. Considering the key growth drivers for each of them, investors who are willing to include value stocks in their portfolios can consider them as long-term opportunities.
Disclosure: No positions in the stocks discussed.
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