Great Companies at Fire Sale Prices

Here is our list of bargains that should be on your watch list.

Exxon Mobil [XOM]. Trading at a 13.5 P/E and paying a 4.2% dividend. The stock is down because the price of oil is down. But the price of oil will not stay down forever, and when it recovers, XOM will deliver capital gains in addition to the 4.2% yield.

Oracle [ORCL]. The market views Oracle as cyclical because it’s a technology company. But the vast majority of Oracle’s earnings power comes from maintenance fees on its installed base of relational databases and enterprise resource-planning software. That makes it actually a very resilient cash-flow stream.

Oracle has been out of favor because it’s transitioning from selling most software through upfront licenses to selling it in subscription format via the cloud, similar to what Microsoft (MSFT) has gone through. Oracle is arguably earlier in that transition. Investors have started to reward Microsoft because they now see the stability in the growth in that earning stream, but they have yet to reward Oracle.

Weyerhaeuser [WY] is a company that is valued at less than $2,000 an acre; it has been out of favor because timber prices are soft, given softness in the housing market. But long- term, timber is one of the few commodities that has gone up in real terms because of declining acreage, as urban areas and environmental restrictions grow.

This is a company that has a 5% dividend yield, and it has the best assets in the industry and is, in most locations, well integrated with lumber mills. Even in a tough environment, Weyerhaeuser is able to generate good cash flows and has extremely long-duration assets. The land value is perpetual, and often when it’s harvested, Weyerhaeuser has the option value of not just replanting, but selling the land for higher and better use.

Lloyds Banking Group PLC ADR [LYG]. Lloyds is a pure U.K. banking play, with 95% of its assets based domestically. After its massive restructuring, which started in 2011, the bank emerged as a low-risk domestic retail and commercial bank. While the current economic and political outlook, mainly driven by the United Kingdom’s decision to leave the European Union, could affect its operations more than others’, Lloyds can weather any short-term volatility. In our base scenario, factoring in some slowdown in GDP growth, we believe Lloyds will continue to increase its return on equity during our forecast period. We estimate that ROE will increase to 10% in 2018-22 on average from 7.1% in 2017, supported by declining operating cost, stable net interest margin thanks to revenue mix, and stable loan-loss provisioning driven by resilient asset quality.



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