Blue horseshoe alert: These five stocks are underpriced

 

As I look out today over the lists of frequently checked stocks, so conveniently remembered by my browser without my even having had to ask, I reflect that technology is amazing, even as I paradoxically note that the prices of a lot of technology stocks have taken a small beating over the last two weeks.

“Like you said was going to happen?”

Yes, like I said was going to happen. Thank you, mysterious voice. After studying the market for 22 years, one finally knows the truth about the stock market: stocks go up, and stocks go down. It’s the same truth one knows after studying the market for 22 seconds, but that doesn’t stop nearly everyone else from forgetting it and pouring more money into overpriced stocks during a market euphoria, and yes, for those not yet aware, we just experienced a market euphoria. It was intense, but it was local, which is to say it happened not to the entire market, but to tech stocks and one car company.

I’m not stepping in to buy falling knives, but rather, to shop for values on the rest of the market. Fortunately, there is plenty there, as indeed there was even at the peak of the euphoria. I’m not looking just for stocks that are traditionally thought of as “value” stocks, but for any stock that appears to have a higher going forward value than the Street is currently giving it credit for. As always, that includes likely revenue and earnings growth rates.

And as always, remember to treat these ideas as just that, ideas, and do your own research before making any investment decision.

Charles Schwab (SCHW)

Schwab, as a brokerage, tends to be highly profitable when there is a lot of interest in the stock market, and with more and more investors staying in for the duration, the future looks good. Schwab was the brokerage that opened the markets to individual self-directed investors, but today, the company makes a great deal of its revenue from asset management, as the smart money increasingly is smart because it doesn’t always make every decision on its own.

Speaking of revenue, Schwab’s rose 17% last year, and is on track to do the same again this year. That’s due in part to the company’s dependence on short-term interest rates, so it is worth noting that those have been rising sharply over the last weeks, but analysts haven’t had time to adjust their targets up yet. Add to that the company’s steadily rising profit margin, and you’ve got the magic formula for growth. The trailing P/E of 30 is only slightly above the market’s average, meaning the Street hasn’t really caught on to how well this story is going yet.

SCHW

Chart courtesy of www.stockcharts.com

Mercadolibre (MELI)

As I said before, I don’t try to catch falling knives, but nor do I chase after running horses. I identified Mercadolibre twice earlier in the year, but the stock ran so quickly I never got a sizeable position of my own. That changed on Wednesday, when the falling market led me to conclude that MELI shares were back in the buy zone, though rather than buy the stock itself, I picked up some out-of-the-money call options instead. (Full disclosure: MELI January-2018 350 calls.)

For those not yet in the know, Mercadolibre is the Amazon.com of the Spanish-speaking world, and it is growing every bit as fast as that description suggests. You might be tempted to move on when you hear that MELI has a trailing P/E of 71, but instead, ask yourself how much growth you’d like to see in a company before paying that multiple. What the company can actually boast is 73% year-over year revenue growth and 60% year-over-year earnings growth. Those are jaw-dropping growth rates, and they don’t appear to be dropping off at all so far this year.

MELI

Chart courtesy of www.stockcharts.com

China Telecom (CHA)

There has been a lot of talk recently about the coming wave of low cost, feature rich Chinese mobile phones, though most of that talk has centered around how this new threat might impact Apple’s revenue. Apple is an important company, but in their haste to chart its decline based on this news, analysts seem to be missing another, just-as-likely effect: a rise in smartphone usage in China.

While China Telecom’s earnings and revenue are rising at only single digit rates right now, subscriber growth has been strong in recent quarters in both wireless and wireline services. Not surprisingly, wireless services are where the real money is, and with cheaper, better mobile phones on the way, more of the company’s future growth will likely be wireless.

CHA

Chart courtesy of www.stockcharts.com

CBOE Holdings (CBOE)

Last week, I pointed to the strong, seemingly inexorable rise of CME Corporation, which owns futures and options trading markets. Today, I note that CME’s top competitor, CBOE, (formerly Chicago Board Options Exchange) is also on a tear. With both companies doing so well, they clearly aren’t taking market share away from each other, though both are quite acquisitive. For its part, CBOE recently acquired BATS Global Markets, which will give it a broader line of products, as well as strong penetration into European markets.

Revenue growth is in the single digits at present, but CBOE’s margins are widening, and earnings per share growth will be somewhere between very strong and holy s***! EPS is expected to rise from $2.27 in 2016 to $3.20 in 2017, to $3.65 in 2018. The trailing P/E is 51, but the forward P/E is 23.5. Both numbers matter, as does the difference between the two. In this case, the suggested growth is very strong.

Just not quite as strong as for my next pick…

CBOE

Chart courtesy of www.stockcharts.com

Celgene (CELG)

It is true that Celgene, one of the world’s top chemotherapy companies, was in a bit of a slump in 2015 and 2016, but the slump appears to be over now, and CELG shares are nearly back at their all-time high of two years ago. Of course, we don’t care where the stock has been, only where it’s going. As far as growth goes, Celgene is back on track and then some. After 21% revenue growth in 2016, analysts are forecasting 18% growth in 2017. As for earnings growth, expect 18% to 22% compounded annually through 2020!

So yeah, that’s kind of incredible. And how high a multiple must one pay? The trailing P/E is 50, so you can be excused for not jumping out of your seat to make the buy… at least until you note that the forward P/E in this case is just 15. As I just pointed out, Celgene’s growth is likely to look as good a year from now as it does today, which means it will likely call for a far higher multiple than that. Nuts as it sounds, calling for a double of CELG’s share price over the next twelve months actually looks a little conservative. Plays like this don’t come around too often.

CELG

Chart courtesy of www.stockcharts.com

Symbols: CBOE CELG CHA MELI SCHW
Julian Close

Julian Close

Julian Close became a stockbroker in 1995. In his 20 years of market experience, he has seen all market conditions and written about every aspect of investing. Julian has also written extensively on corporate best practices and even written reports for the United Nations. He graduated from Davidson College in 1993 and received a Master of Arts in Teaching from Mary Baldwin College in 2011. You can see closing trades for all Julian's long and short positions and track his long term performance via twitter: @JulianClose_MIC.

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