There are many tactics being used by money managers today, from growth-focused strategies to those that seek out high dividend investments. As astute students of the markets are probably aware, value hunting also serves as a solid way to screen stocks. In most cases, it’s important to determine how companies are priced as a function of their earnings. Below are two such stocks that are trading at below average valuation multiples, and are favorites of the iconic Warren Buffett.
DirecTV is the United States’ most popular satellite TV company, servicing nearly 20 million customers each year. The company’s stock has returned an impressive 24.6% in 2012, though it has been outpaced by competitors like Comcast Corp. (NASDAQ:CMCSA) at 45.3%, and Time Warner Cable (NYSE:TWC) at 42.9%.
From a valuation standpoint, DirecTV currently trades at attractive Price-to-Earnings (13.8X) and Price-to-Sales (1.3X) ratios, below its 5-year historical averages (20.2X, 1.4X), Comcast (19.8X, 1.6X), and Time Warner Cable (16.6X, 1.4X). This massive earnings undervaluation comes at a time when DirecTV has grown its bottom line by an average annual rate of 36.7% post-recession, above both of its aforementioned competitors.
In fact, when growth is factored into the equation, DirectTV sports a PEG ratio of 0.75; typically any figure below 1.0 signals that a stock is undervalued. Moreover, this ratio is also below Comcast (1.02) and Time Warner Cable (1.12). All PEGs are based on 5-year EPS estimates.
Hedge fund interest in DirecTV has been increasing, as 39 funds held shares of the company at the end of this year’s second quarter, compared to 34 at the end of 2011. The most prominent DirecTV bulls are Ray Dalio, George Soros, Steven Cohen, Jim Simons, and Warren Buffett. Buffett holds over $870 million in DirecTV, and increased his stake in the company by 379% between the first and second quarters of 2012.
Gannett Co. (NYSE:GCI)
Another favorite of Buffett, Gannett Co. is one of the largest newspaper publishers in the Continental U.S., having been in existent since the early 20th century. The company owns a variety of print media outlets, most notably USA Today. While Gannett faces the threat of online media, it has staved off this threat better than most of its competitors, as it’s revenues have declined by 8.2% a year since the recession, better than the -13.5% growth rate experienced by the publishing industry as a whole.
Consequently, above-average operating (14.7%) and net (7.8%) margins have Gannett on track to finish 2012 with earnings of $2.23 a share, up 4.8% from the $2.13 it reported in 2011. By the end of 2013, these forecasts stretch to a high of $2.32, though average estimates predict that EPS will stagnate in the next 18-24 months. Due to the fact that Gannett’s earnings currently trade at a 44% discount in relation to industry norms, fairly valued shares of the company have a moderate upside of $20; they currently trade in the $16 range.
Aside from Buffett, other hedge fund managers that are long Gannett include “Magic Formula” creator Joel Greenblatt, John W. Rogers, Leon Cooperman, and Randall Smith. Rogers’ Ariel Investments fund is the most bullish of the bunch, as his $4.5 billion portfolio includes a $178.8 million stake in the publishing company.