Some investors might be reluctant to buy stocks in the bull market's 10th year due to concerns about valuations. However, plenty of high-quality stocks still trade at absurdly low valuations, and patient investors who buy them today might reap big profits over the long term. Today, a trio of our Motley Fool contributors will highlight three value plays in an aging bull market: Macy's(NYSE:M), General Mills (NYSE:GIS), and Markel (NYSE:MKL).
An iconic retailer with a 6% yield
Leo Sun (Macy's): Macy's lost about a quarter of its value over the past six months as its comparable-store sales decelerated and its gross margin contracted annually and sequentially during the crucial holiday quarter. However, that sell-off reduced Macy's forward P/E to 8, and it pays a hefty forward dividend yield of 6.1%.
Macy's has been gradually closing stores over the past two years, selling its prime real estate and leasing it back to cut costs, and expanding its e-commerce ecosystem with a wider range of products and faster delivery options. But despite those efforts, Wall Street expects Macy's revenue to stay flat this fiscal year (which started on Feb. 2) as its earnings tumble 26%.
The main problem is that the expansion of Macy's loyalty and e-commerce platforms are weighing down its near-term margins. Loyalty members get exclusive discounts, and its digital sales generate lower margins due to fulfillment expenses. Macy's also doesn't have much room to raise prices, since it aggressively competes with Amazon.com and Walmart.
Macy's turnaround isn't as aggressive as Walmart's, but it's still generating flat to slightly positive comps growth, and it still has other irons in the fire. Its Macy's Backstage off-price stores and Bluemercury beauty product stores are generating robust sales growth, it's shrinking down its massive stores, and its recent introduction of “narrative-driven” Story marketplaces (which feature community events and do-it-yourself stations from a wide range of brands) could bring shoppers back to its brick-and-mortar stores. These catalysts could enable Macy's to eventually mount a comeback, so investors who buy shares today could be well rewarded over the next few years.
Already showing progress
Reuben Gregg Brewer (General Mills): It might be a stretch to suggest that packaged food giant General Mills is absurdly cheap after a 30% stock price advance so far in 2019. But it's still trading below its five-year averages for price-to-sales, price-to-earnings, price-to-cash flow, and price-to-book value. The discounts on each vary, but the total sum of that information is that the stock still looks cheap today. Where it gets a little more exciting is the 3.8% dividend yield, which is toward the upper end of the company's historical range.
