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9 Value Plays for Today's Market

07/01/2013 8:30 am EST


John Buckingham

Editor, The Prudent Speculator

Value investing expert John Buckingham takes us through a hefty list of the stocks and related investments he's most interested in right now.

John, you’re a great stock picker, and I know this from many years of knowing you and reading your work. Do you have any great stocks to share with us today?

Well, it’s hard to pick just a few, but unfortunately we have limited time. In my portfolio I have 80 undervalued stocks, and I’d like to see people own as many of my recommendations as they can.

Some of the stocks that I’ve brought to the MoneyShow on our lunch panel and other things are very much focused on dividends. We like dividend-paying stocks. We like them for the income they generate. We like them for the long-term returns that they’ve created, because capital appreciation is very important to us in addition to income. So stocks that haven’t performed as well of late are things that are going to attract us, because we’re comparing investments.

Sure, undervalued.

I don’t want to buy something that’s gone up 100%. I want to buy something that people don’t like today.

Are they spread across all the different sectors?

Yeah, we’re finding value in many areas, although a couple of sectors have appreciated significantly and are not that attractive, and one of those sectors are utilities.

Who would have ever thought that?

If you look at P/E ratios on the utilities sector, they’re very much at the high end of the historical range. Same thing with consumer staples stocks and US telecom stocks. So those areas we don’t find much value in, but I like a stock like Apple (AAPL), which believe it or not is now a value investment and an income producer.

It’s low, it’s very low.

You're getting a yield 2.8% versus people buying the bonds they just issued at 2.4%, which to me is crazy. I’d rather have the equity with capital appreciation potential. So in technology, Apple’s a great name to own. We also like Intel (INTC), Microsoft (MSFT), and Cisco (CSCO)—big dividend yields, low valuations.

The energy space is also attractive, so a name like Total (TOT), which is the French energy company, and even Royal Dutch Shell (RDS-B). We like the European energy stocks. Again, big dividends, low valuations.

Now because the price of gold has come down considerably, the gold mining stocks have absolutely been slaughtered, destroyed, whatever you want to call it. So a company like Barrick Gold (ABX)—which is down 40-some-odd percent this year, very inexpensive in my mind—has overreacted to the drop in the price of gold, as has Newmont Mining (NEM).

Both of those companies reward shareholders with dividends, inexpensive valuations, relatively low cost to extract the stuff out of the earth. And that would be where I would want to have exposure to gold in my portfolio—via the gold miners, which actually give me income, as opposed to buying the precious yellow metal itself, which gives you no income.

How affected are they now, like if the price of gold doesn’t go back up again? I mean, what’s the outlook for those stocks?

Well, keep in mind what their cost of production is. The cost of production for these companies including all-in sustaining cost to continue to develop new mines is something on the order of $1,100 and $1,200 an ounce. So if gold is below that than you’re in trouble, right?

If gold stays at the current level, I think these stocks are going to appreciate significantly, because I believe that investors have discounted a far lower price of gold in battering these stocks. So all you have to do is sort of maintain the current level...or heaven help us if gold actually goes up, then these stocks are going to be fantastic investments.

These are companies, again, that haven’t participated in this big rally we have, so I think it’s important for investors to understand that you want to look at things that are undervalued and not chase the hot stocks. Find the things, I like to call them the cold stocks, because guess what they will become tomorrow’s hot stocks.

Importantly, these miners are also solid companies that have been in business for a long time. These aren’t the guys that say, "Hey, I found gold."

Well, it is an important distinction to make. These are geographically diverse, not a mine only in one country or one area. And again, production costs are important.

So there are more speculative junior gold mining stocks that could go to the moon, right? If gold appreciates, you might get a bigger bang for your buck on those, but you also have a bigger downside risk. And often those companies don’t pay dividends, or if they do they’re relatively low.

I want an income stream. I want a solid company that has a good balance sheet and access to the capital markets if they need to refinance debt. Barrick Gold, for example, just refinanced debt, chopped a full percentage point off their interest payments. So they’ve added to the bottom line, because interest payments are lower.

Related Reading:

Stocks in 4 Separate Growth Sectors
3 UK Stocks for the Long Term
My Total Income Strategy

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