3 Stocks Almost Priced Right

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I recently cashed out of a few of my stocks that had made a nice run, and now I am deciding what to do with money that is currently sitting on the sidelines.  The problem is that with the Dow hovering above 14,000 and many stocks trading at valuations that assume perpetual growth, there aren’t that many stocks that look very attractive.  But I have found 3 stocks that I feel were unfairly pummeled by the market and offer a healthy return over the next few years.

Life Time Fitness (NYSE: LTM)

The first stock that showed up on my radar is Life Time Fitness.  On Feb. 1 this stock got hammered – it fell by more than 20% in one day on an earnings miss.  The catalyst that sent the stock price plummeting was that the company issued weak preliminary results for 2012.  Instead of meeting analysts’ expectations of $2.69 per share on revenue of $1.13 billion, Life Time Fitness said that it expects to deliver between $2.63 and $2.66 per share for 2012 on revenue of approximately $1.13 billion.  That was down from its prior forecast of $2.73 to $2.76 per share on revenue of $1.13 to $1.14 billion.  Earnings did not meet prior forecasts because of expenses related to Sandy and technological investments. 

Life Time Fitness is a company that I have followed for several years.  In fact, just a few months ago I renewed my membership at the local Life Time Fitness.  If you have never visited a Life Time Fitness, then you should consider doing so.  The place is phenomenal – that is all that I am going to say.  All in all, this company is very well managed, has a very strong brand, is making wise investments in technology, focuses on profitable growth and the long term, and is poised to deliver solid returns for the patient investor.  An earnings miss of a few pennies does not justify this devaluation and presents a very attractive entry point.  At a forward P/E multiple of around 13, I am a buyer!         

Kohl’s (NYSE: KSS)

A second stock that hit my radar was Kohl’s.  Admittedly, I am not a big fan of most department store retail Stocks.  And like Life Time Fitness, Kohl’s was also impacted by the hurricane.  But given Kohl’s underlying fundamentals and valuation I feel that there is a solid 10% – 15% upside with limited risk.  After all, compared to its competitors (J.C. Penny, Macy’s, Sears, etc.), Kohl’s is trading at around a 15% – 20% discount to the market multiple.  Furthermore, Kohl’s has a conservative capital structure, strong gross margins, and effective marketing.  As long as Kohl’s can maintain its margins, minimize inventory, and strike the right balance between exclusive brands and national brands, its stock is well-positioned to deliver a solid 10% – 15% annual return or more with minimal risk.  If and when Kohl’s is selling at a forward P/E multiple of less than 10, I may consider initiating a modest position if I cannot find better value elsewhere.    

Family Dollar Stores (NYSE: FDO)

The third and final stock is Family Dollar Stores.  Not so long ago Family Dollar Stores and Dollar General were fairly hot stocks.  Because analysts’ liked their growth potential and thought that consumers would trade down in a recession, these stocks soared and were trading at price to earnings multiples that reflected a modest amount of growth.  Then Family Dollar and Dollar General had bad quarters and reduced guidance, which sent their shares plummeting.  Family Dollar shares, for example, are currently trading well off their 52-week high of close to $75 a share.  To combat this downward trend and restore investor confidence in Family Dollar's growth potential, Family Dollar CEO Howard Levine recently increased the company's dividend by more than 23% – which represents the 37th consecutive dividend increase for Family Dollar.  Over the past several years Family Dollar has grown earnings at around 12%, which is almost double the average rate of the S&P.  At a P/E multiple of around 13, I may consider purchasing shares.       

3 Factors to Consider

  1. Valuation.  All of these companies trade at very reasonable price to earnings multiples.  More importantly, their valuations will likely improve once their underlying fundamentals improve.         
  2. Growth Potential.  All of these companies have the potential for double digit growth.  Life Time Fitness and Family Dollar are in the best position to realize that potential. 
  3. Economic Conditions.  These three stocks are all affected differently by changes in the economy.  Family Dollar, for instance, is a good stock to own in a tough economy whereas the performance of Life Time Fitness is more correlated to the overall economy.      

My Foolish Take

These three companies have valuations and underlying fundamentals that merit placing them on your watch list.  Of the three, I like Life Time Fitness’ business model the most.  Life Time Fitness has an effective CRM system, their gyms are amazing, they have a deep understanding of their target market, they have the ability to set trends, and they are poised to benefit from selling more high-margin products and services.  I also like the fact that Dollar General’s stock price has almost no correlation to the overall economy and Dollar General’s potential for growth.  Overall, I feel that these are some of the best bargains in the current market!


RyanPeckyno has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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