Everybody likes to boast about finding a great deal, and that can be especially true for investors who find a diamond-in-the-rough value stock. But not all value stocks are created equal, and many times, stocks are cheap for a reason. But for various and intriguing reasons, three Motley Fool contributors think Target Corporation (NYSE: TGT) , General Motors (NYSE: GM) , and Wells Fargo (NYSE: WFC) are worth a second look in February.
A retailer on the rebound
Jeremy Bowman (Target): Brick-and-mortar retailers present one of the biggest opportunities for value investors these days; the sector has been largely left behind, as the market seems to view the rise of e-commerce as an endemic threat to physical stores. However, that's not reality in the industry. While plenty of retailers are struggling, and some big names like Sears and Toys R Us have gone bankrupt, others are solidly profitable and even thriving.
Target looks like one of the best of the bunch today. The big-box chain trades at a P/E ratio of just 13.7 and is a Dividend Aristocrat , paying a dividend yield of 3.5%. Target is also putting up strong sales growth these days after making investments in e-commerce and its store base, and the stock is down about 20% from its highs last fall on a misguided sell-off , setting up an opportunity for investors.
Comparable sales jumped 5.7% over November and December, the key holiday shopping season, and digital sales increased 29%, showing that Target is executing both online and offline. That follows a third quarter in which comps rose 5.3%, digital sales jumped 49%, and adjusted earnings per share increased 20%.
With its "cheap chic" reputation and strength across categories like home, baby, and apparel, as well as an improving grocery operation, Target has a unique profile in retail. And its strategy of expanding delivery and pickup capabilities, remodeling stores, and opening new small-format locations in high-density areas like college towns and underserved urban neighborhoods is paying off. As sales growth continues, the bottom line will follow, rewarding investors who take advantage of today's discount.
Buffett backs up the truck
Daniel Miller (General Motors): If you're on the prowl for top value stocks to buy right now, you should take a second-look in an unlikely place: Detroit. It's easy to be down on Detroit automakers, especially as sales in the highly profitable North American market plateau, but even the world's most well-known long-term investor, Warren Buffett, is scooping up shares of Detroit's largest automaker . Buffett increased his stake in GM from 52 million shares to 72 million shares in the last quarter, making Berkshire Hathaway a top-five shareholder of GM. At a consensus forward-price-to-earnings ratio of less than 6 times, GM is certainly appetizing for value investors this month.
And despite the growing doom and gloom around automakers, GM has been busy improving its future outlook. It announced restructuring in November, which should generate $6 billion in annual savings, and is preparing to double its investment in self-driving cars and next-generation vehicles over the next two years. In fact, GM's set to launch its self-driving taxi service this year through GM Cruise, which could already be worth $43 billion itself .
2019 GMC Sierra Denali. Image source: General Motors.
While many investors are shying away from automakers, despite their long-term potential from a lucrative driverless-vehicle market, GM's performing well thanks to a focus on more profitable sales. GM North America, which powers its total results, earned $3.04 billion during the fourth quarter, compared to the prior year's $2.88 billion, despite a 2.1% decline in wholesales. GM's North American margin was a strong 10.2%, a 20-basis-point improvement, thanks to the all-new Silverado and Sierra selling well at high transaction prices.
GM still faces headwinds such as rising commodity costs and an uncertain China market, but it's taking serious steps to restructure and improve its business while developing driverless technology for its future. For those reasons, GM is a top value stock right now, and it appears the world's most famous investor agrees.
Big and cheap
Jordan Wathen (Wells Fargo): This year is likely to be an unexciting one for Wells Fargo. The bank now expects that it will remain capped at $2 trillion in assets for the remainder of 2019, which removes its ability to grow its balance sheet by taking in deposits and making more loans.
But even no-growth banks are worth buying at the right price, and with shares trading for about 12 times 2018 earnings and about 10 times what it could reasonably earn in 2019, Wells Fargo certainly checks the boxes for value.
Scale is the name of the game, and Wells Fargo has it. Across the country, the bank has more than 5,500 branches through which it houses roughly $1.3 trillion of client deposits. These deposits cost it very little, just 0.56% per year in the most recent quarter.
A stable, low-cost deposit base affords Wells Fargo the ability to earn high returns without taking on excessive risk in its loan and securities portfolios. Riskier, non-real estate consumer loans make up only about 7% of its interest-earning assets. Its commercial banking activities are largely restricted to plain-vanilla commercial and industrial and commercial real estate loans.
For as long as Wells Fargo remains capped at $2 trillion in assets, investors should expect the bank will pay out virtually all its income in the form of dividends and stock repurchases. It's not inconceivable that the bank could spit out a 3.5% dividend yield, all the while reducing its shares outstanding at a mid-single-digit clip each year until, finally, it gets approval to grow once again.
When Wells Fargo will get the green light to grow is anyone's best guess. But for as long as shares trade as cheaply as they do today, Wells Fargo may be better off simply staying in place, using its earnings power to pay a high dividend and repurchase stock at low earnings multiples.
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Daniel Miller owns shares of General Motors. Jeremy Bowman owns shares of General Motors. Jordan Wathen has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .