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In a high-flying market, gravitating toward stocks that present comparatively small risk profiles can be one of the best ways to position your portfolio for market-beating performance.
Read on to learn why our panel of investors thinks that CVS Health (NYSE: CVS), Buckeye Partners (NYSE: BPL), and Verizon Communications (NYSE: VZ) are value stocks that have the potential to add to your investing success.
More than just your grandfather’s drugstore
Dan Caplinger (CVS Health): The healthcare retail space has evolved dramatically in recent years, and gone are the days when drugstore chains could get away with simply selling prescription drugs and offering a small variety of sundries for occasional shoppers. CVS Health has found that the recipe for success involves taking a more active role in its customers’ health, and initiatives like incorporating pharmacy benefit management operations into its business and providing in-store health clinics to serve populations in need of medical services have proven vital to the long-term success of the drugstore chain.
Many investors are nervous about the potential for healthcare reform and its potential impact on the industry, especially in the areas of drug pricing. However, CVS has already worked hard to be a pioneer on attractive offerings that government regulators are unlikely to attack. Moreover, the stock offers a margin of safety even if adverse changes have a negative impact on earnings. With a current forward multiple of just 12, CVS shares are already incorporating the likelihood of some adverse action that might not come to pass. For investors willing to be a bit daring, now’s a good time to consider buying into the long-term success that CVS Health has generated over the years.
Cheaper than all the rest
Matt DiLallo (Buckeye Partners): Midstream MLPs like Buckeye Partners can be harder for value investors to identify using traditional metrics like the price-to-earnings ratio. That’s because these companies take heavy depreciation charges, which can cloud the earnings picture. As a result, value investors need to dig a little deeper into their toolbox to be successful. One useful tool for accurately identifying value in the space is the enterprise value-to-EBITDA ratio because it shows what the market is paying for a company’s underlying cash flow. When using that metric across several well-known MLPs, investors can spot value in the units of Buckeye Partners:
Investors are currently paying less for the cash flow of Buckeye than they do for rivals despite the fact that it boasts similarly solid financials. For example, it has an investment-grade credit rating, backed by a low (for an MLP) 4.5 times debt-to-adjusted EBITDA ratio. Meanwhile, the company’s generous cash distribution, which at the moment yields 7.4%, is well-covered at 1.08 times and supported by the fact that 93% of its earnings come from stable fee-based assets.
In addition to the underlying stability of Buckeye’s business model, the company also offers compelling growth prospects. It currently has several hundred million dollars of high-return expansion projects under construction and another $2 billion of projects in the pipeline. These growth initiatives support the company’s view that it can steadily grow the distribution each quarter for the foreseeable future.
Add it up, and Buckeye Partners offers investors a stable growing income stream that they can currently buy at a discount. It’s a combination of factors that should make the company a successful investment over the long-term.
Big value with Big Red
Keith Noonan (Verizon): Shares of mobile communications leader Verizon have shed roughly 15% of their value year to date, making it one of the worst-performing large-cap companies across the stretch. Concerns about whether Big Red has overpaid for its acquisitions of AOL and Yahoo! and threats from lower-priced competitors T-Mobile and Sprint are at the heart of the market-lagging performance, but the stock now trades at just 12 times forward earnings estimates — a multiple that points to an attractive investment proposition when its substantial dividend component is taken into account.
The company’s dividend yield sits at an impressive 5.1%, and Verizon’s strong cash flow and 10-year history of annual payout increases suggests that shareholders can likely count on continued payout increases going forward. Still, a comparatively low earnings multiple and a chunky dividend wouldn’t be reason enough to jump on Verizon stock if the company did not have prospects that would help it maintain and grow business, and momentum in 5G and Internet of Things (IoT) technologies point to opportunities that recontextualize its recent loss of post-paid wireless subscribers.
The company’s heavy investment and early lead in 5G networks should once again elevate the value proposition of its wireless service relative to Sprint’s and T-Mobile’s offerings. Strength in next-generation network technologies puts Verizon in position to play a big role in connecting and managing IoT devices, and the company has been building internally and making acquisitions in order to benefit from the connectivity trend.
With a low earnings multiple, chunky dividend, and compelling positions in emerging technologies, Verizon has the characteristics of a successful pick for value investors.
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Dan Caplinger has no position in any stocks mentioned. Keith Noonan has no position in any stocks mentioned. Matt DiLallo owns shares of Verizon Communications. Matt DiLallo has the following options: short September 2017 $47 calls on Verizon Communications. The Motley Fool owns shares of and recommends Verizon Communications. The Motley Fool recommends CVS Health and T-Mobile US. The Motley Fool has a disclosure policy.