If you are like me, mid-30s, born and raised in America, you are shocked that it is almost 2017. I mean, where are our jetpacks? As we close out the year, I believe we are headed for a period of low taxation and solid business results that may not translate into growth for investors.
On the last trading day of the year, I wanted to find some value in the market going into 2017. My screening approach was simply to find stocks that have solid profit margins, low earnings multiples and are trading down on the year. Here is what I have found.
First Solar (FSLR, Financial)
First Solar is down 50% on the year, but more importantly, solar is now one of the cheapest power sources in the United States. First Solar’s thin-film utility scale solar PV produces electricity for $46 to $56 per megawatt hour (MWh). The range for wind is $32 to $62 per MWh. Natural gas, which is the cheapest conventional electricity generation source, runs at $48 to $78 per MWh. Taking into account current subsidies, the range for thin-film utility scale solar drops to $36 to $44 per MWh. Solar power will only become more necessary in the future as society moves to clean energy, and First Solar is in a great position to capitalize on it. The company has good capital expenditure rates, solid earnings and a book value that is 78% higher than the current stock price. In the long term, First Solar may be one of the best investments at the current price point as it remains the low-cost producer.
TripAdvisor (TRIP, Financial)
TripAdvisor is down 45% in 2016, but its website still reaches over seven million unique visitors a month and earned the company $122 million in the last 12 months. The company only spent $73 million on capital expenditures. Hotel inventory from select Expedia brands are being added to TripAdvisor's instant booking service, which further validates the platform’s importance in the travel industry. While mobile continues to weigh on its margins, the instant booking service should spur long-term growth. Investors should expect the company's global leadership position to remain in place as only around 25% of total travel advertising is spent online versus 40% of total travel bookings done online. Both of these numbers should rise in the next decade, pushing TripAdvisor’s numbers up even further. At the current price, the margin of safety is priced in.
Gilead Sciences (GILD, Financial)
Gilead was one of the more disappointing stocks of 2016, down 29% on the year. But, that is actually why I kept it on the list. The company has unbelievable profit margins across a portfolio of HIV and HCV drugs, requiring a small salesforce and cost-effective manufacturing. Yet, a wide moat does not always translate into short-term investor gains. With $12 billion in cash, I can see the company looking for acquisitions in 2017, yet it is also awaiting the results of a number of clinical trials that could continue to strengthen the company’s product line. The stock is trading at a year low, a 6.5 price multiple, share buybacks and pays a 2.55% dividend. The margin of safety is extremely high and reminds me of IBM at the end of last year.
Williams-Sonoma (WSM, Financial)
Williams-Sonoma is down 17% on the year, pays out a 3% dividend and trades just under 15 times earnings. It also has very little debt, generates 12% on assets and 25% on equity, and carries a surprisingly high short interest. Williams-Sonoma has a solid position in the $104 billion domestic home furnishing market with most of its brands launched organically in underserved segments. It is a good strategy that helped it book $302 million in net profit on $5 billion in sales over the last 12 months, while only spending $194 million on capital expenditure. Personally, I have never shopped at Williams-Sonoma, but do have a couch from Pottery Barn, the company’s largest subsidiary. With the stock below $50 a share, I think the value is at least 25% greater right now, and 100% to 200% higher in the long term. The company has already moved the majority of its sales online with 51% of total revenue coming from e-commerce. As they become a better merchant with supply chain and inventory optimization, Williams-Sonoma should boost operating margins to go along with share buybacks - driving the stock higher.
Each of these stocks offer exposure to different areas of the market at deeply discounted prices, but aside from these companies, I have found very little in terms of undervalued opportunities as we head into 2017.
Disclosure: I do not have a position in any of the stocks mentioned in this article.
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