While the stock market continues to climb higher and higher, a few significantly undervalued securities remain quite attractive. The thesis hasn't changed from a value perspective, but the mood certainly has.
General Motors ( GM) is up over 10% since the U.S. election, yet the company remains a market aberration: a dirt-cheap stock with strong future earnings power. Trading at 4x earnings with a yield of 4.5%, expect reenergized investors to start appreciating the value and potential of GM.
I've said it before and will do so again: I believe the market is just plain wrong on GM. Perhaps a political election will be tinder that ignites the sober share price, but it will be the fundamentals that will fuel the significant gains in the years to come (if not sooner).
It may be time to finally give airlines a closer look. The industry was recently put in the spotlight when Berkshire Hathaway ( BRK.B) revealed it had taken stakes in all four major carriers. I logged over 150,000 air miles this year, and I have been a keen observer. The planes are always full now. Data and technology have given airlines immense power to schedule flights much more efficiently. Capacity, the most critical component of the industry's health, in my view, has fallen significantly over the past decade. Consolidation has also lead to more-favorable cost structures for airlines.
Thus, it's likely that in a similar fashion to the railroad industry, a new era for airlines is here, in which return on invested capital is incredibly attractive and margins are strong. Current energy prices are also very favorable to the industry right now. That being said, oil shocks will come and go, but unlike the past -- in which airlines would live and die by the price of oil -- cash flows and balance sheets are a lot stronger today.
Most of all, the recent consolidation in the industry has made it very unlikely that we will see a proliferation of LCC's (low cost carriers) like we did in the 1990s and 2000s. In the U.S., Delta ( DAL) , American ( AAL) , United ( UAL) , and ( LUV) have consolidated and fortified themselves -- reminiscent of the days prior to deregulation.
At 13x earnings, Southwest commands the highest earnings multiple, while the other three are trading in the single digits. Operating profits and cash flows are healthy, more than justifying expanding multiples.
While the market bestows its attention on technology and mobility, it appears that the bedrock of our economy -- planes, trains and automobiles -- are very attractive bets today.
