With equity prices still near record highs even after some recent pullback, finding great companies at bargain prices can be a challenge, but we’ve put together a team of contributors who are up to the task.
The last cheap bank stock?
Dan Caplinger (Citigroup): Bank stocks have gained a lot of ground since the election, as President Trump has said repeatedly that he intends to reduce the amount of regulation that covers American businesses. Citigroup has seen its stock climb significantly in response, yet its gains haven’t been as impressive as some of its competitors have seen. Moreover, the bank still carries an extremely attractive valuation of about 13 times trailing earnings, and it’s one of the only remaining major banks that trade at a discount to their book value.
Citigroup doesn’t command the valuations that its peers have because of unique attributes that raise concerns among some investors. The company has an extremely low return on common equity compared to other banks, and thus far, Citigroup’s efforts to boost its internal returns haven’t yet panned out as well as shareholders would like. At the same time, Citigroup’s complex global structure leaves it subject to international regulation, and the consequence is a greater capital reserve requirement than more locally focused banks.
Nevertheless, with the global economy beginning to show signs of recovery, Citigroup will be well-positioned to take advantage. For those seeking a bank stock with room to rise higher, Citigroup is worth a closer look.
American Express is worth more than 14 times earnings
Jason Hall (American Express): I’m not going to argue that American Express is about to spring forward with big growth over the next several years. The upscale charge card and business lending giant has its share of problems, and continues to work past the loss of multiple major corporate partners in recent years. But it’s still a wonderful business that generates absolute heaps of cash.
And at 13.9 times last year’s earnings, it’s cheap. As a matter of fact, that’s a world-class company, trading for a 45% discount to the S&P 500 right now.
And it’s not like it has no path to earnings growth. Not only is the global middle class growing at a fast rate — a trend that will lead to plenty of international growth — but the U.S. economy is quite healthy. Factor in a business-friendly presidential administration and with a congressional majority, and even the company’s recent struggles shouldn’t hold it back for long.
Finally, American Express is set to be a wonderful long-term dividend growth stock. It may only yield 1.6% at recent prices, but it only paid out 22% of last year’s earnings to cover it. This should lead to a continuation of the company’s long history of growing its dividend for years to come.
A transformation story to believe in
Keith Noonan (IBM): Shares of International Business Machines have regained some ground over the last year, but I think the stock is still in bargain territory. Right now, the story at the company comes down to whether it will become stronger as emerging businesses including cloud computing, analytics, mobile, and security increasingly replace its fading legacy hardware and software businesses.
Revenue has been declining as IBM is making this transition, which seems to have many investors spooked, but the emerging businesses under the company’s “strategic imperatives” umbrella are demonstrating real momentum. Cloud revenue in fiscal 2016 increased 35% over the prior year, while analytics, security, and mobile revenues increased 9%, 35%, and 14%, respectively. IBM is also guiding for an earnings increase in 2017 — a good sign that the potential upside outweighs the risk here.
The company trades at roughly 12.5 times forward earnings, suggesting it’s priced at a discount compared to S&P 500 index average and the information technology sector, which both have forward P/Es of roughly 18. IBM packs a chunky dividend as well. The stock currently yields roughly 3.2%, and the company has raised its payout for 17 years running — so the income component could provide some insulation in the event of market downturn.
Dan Caplinger has no position in any stocks mentioned. Jason Hall owns shares of American Express. Keith Noonan has no position in any stocks mentioned. The Motley Fool recommends American Express. The Motley Fool has a disclosure policy.