We're only a few days into August, but stocks are already going on sale. The market has dipped on tensions with China, setting up an opportunity for value investors. While the broad market still remains generally expensive as we're more than 10 years into a bull market, this is a great time for bargain hunters to make moves.
If you're ready to hit the buy button, we've got a few choice stocks for you. Keep reading to see why our contributors like AMC Entertainment (AMC -0.88%), Whirlpool (WHR -0.05%), and Children's Place (PLCE -5.04%) as value stocks today.
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A movie theater operator proving subscriptions can work
Billy Duberstein (AMC Entertainment): Value stocks are generally defined as unloved companies trading at a cheap valuations, which nevertheless have a chance of coming back into fashion. You'd be hard-pressed to find a stock less loved than AMC Entertainment. AMC is the largest movie theater chain in the world, having acquired three other theater chains in the late 2016-early 2017 time frame: Carmike (U.S.), Odeon (Western Europe), and Nordic (Northern Europe).
The problem? All of those acquisitions cost AMC a pretty penny, and each chain it acquired then required significant capital expenditures to install AMC's trademark recliner seating. That took a lot of money, which AMC mostly funded with debt, causing the company's debt load to balloon to a whopping $4.74 billion, over five times AMC's adjusted EBITDA.
Under the shadow of that debt load, the U.S. domestic first-quarter box office was down a scary 16.2% year over year, fueling concerns that cinema-going is in decline. That toxic combination sent AMC's shares down 13% over the past year, even as the market hovers near all-time highs.
That's left AMC's stock looking quite cheap indeed. Its dividend yield is up to a juicy 6.75%, its EV-to-EBITDA ratio is just 6.4, and the company's market capitalization is trading at just 1.3 times last year's adjusted EBITDA.
But could things really turn around? I think so. While the first-quarter box office was down big, that quarter was also lapping the 2018 mega-hit Black Panther. By comparison, 2019's film slate is much more back-end loaded, and according to boxofficemojo, the 2019 domestic box office has already recovered to being down just 7.1% versus last year -- a marked improvement over the 16.2% declines in Q1. AMC management has always thought 2019's full-year film slate could match 2018, and for those who think cinema-going is dying, 2018 happened to be an all-time record year at the box office.
In addition, AMC has been outgrowing the industry thanks to its hot AMC Stubs A-list subscription program. While the theater operator had thought the new program would only reach 500,000 members in its first year, A-List wound up attracting a whopping 860,000 members, greatly surpassing expectations. The launch of A-List dented AMC's margins in 2018 as it initially ramped up, and management now expects A-List to grow overall margin dollars in 2019 and beyond as it reaches critical mass.
The recent success of A-List combined with a dirt cheap valuation makes AMC a compelling stock for bargain hunters.
Brand-name stocks don't get much cheaper than this
Sean Williams (Whirlpool): Though it's considered to be a prime victim of escalating trade tensions between the U.S. and China, the deeply discounted value stock that I believe investors should consider buying in August is appliance giant Whirlpool.
Why Whirlpool? For starters, the company offers an excellent mix of well-known brands and a geographically diverse revenue stream. Make no mistake about it, the United States is Whirlpool's core market, representing well over half of its annual sales. But of its top 10 markets by total sales, Whirlpool is the market share leader in seven of those markets, including its top three in sales (U.S., Brazil, and Canada). The company's mix of premium, mass-market, and value appliances offers something for every consumer in most markets.
Whirlpool also has quite the game plan to grow its business: an increased reliance on digitization. The company is laser-focused on becoming a leader in appliances that are part of the Internet of Things. These smart appliances are becoming staples in American households, and Whirlpool is on the leading edge of this movement. Additionally, the company is using digitization to better understand the buying habits of its customers, which will allow Whirlpool to better reach these consumers and advertise to them, thereby improving brand loyalty and pricing power.
Whirlpool has also been exceptionally prudent when it comes to cost management. The digitization of Whirlpool's supply chain should result in ample long-term cost savings.
Altogether, Whirlpool has the potential to grow its bottom line, inclusive of ongoing share repurchases, by a mid-to-high single-digit percentage over the long run. Considering that it's already trading at less than nine times forward earnings, and taking into account its laundry list of growth initiatives, it looks to offer incredible value to long-term investors.
A beaten-down retailer about to turn the corner
Jeremy Bowman (Children's Place): For years, Children's Place was a best-in-class retail stock. Under the steady hand of the CEO Jane Elfers, the company grew comparable sales and profits steadily, while trimming its store base as it transitioned to the digital era. A dedicated capital return program also helped reward shareholders through dividend hikes and share buybacks.
The stock tripled from 2016 to 2018, but toward the end of last year investors got spooked. The unraveling and then bankruptcy of chief rival bankruptcy pressured the company's third-quarter results and full-year guidance last December, pushing the stock down nearly 50% during the market crash. It's struggled to get off the mat since.
However, Children's Place should turn the corner in the second half of the year. Gymboree completed the liquidation of its stores in the first quarter, meaning the worst of its impact has passed, and with its top competitor out of the way, Children's Place has a golden opportunity to capture market share, not least because it acquired Gymboree's intellectual property.
In addition, this year's back-to-school season is expected to be a big one, given that the economy's operating at full strength and that the stock market is near record highs. Though the company still has growth opportunities ahead of it, Children's Place shares are trading at a P/E of just 10 based on next year's expected earnings per share.
If the company can return to the growth path it was on before the Gymboree bankruptcy, with high single-digit comparable sales growth, 30% of sales coming from the digital sales channel, investors should see the retailer's profits and the stock price rise with it.
Don't be fooled by the Gymboree bankruptcy. The market is making a mistake in punishing Children's Place for Gymboree's collapse, and patient investors should eventually be rewarded. Keep an eye on the second half results as that's generally when the company makes the vast majority of its profit. With those seasonal tailwinds helping out and Gymboree out of the way, Children's Place should soon return to growth.
