It’s hard to find good value stocks in today’s market. After years of almost uninterrupted bull market, valuations are looking stretched. The S&P 500 trades at 27 times cyclically-adjusted earnings, making them 63.9% higher than their long-term average and implying annual returns over the next eight years of just 0.3%.
To give you a point of reference, U.S. stocks are more expensive today than they were in 2007 and nearly as expensive as they were in 1929—right before two of the biggest bear markets in history.
In order for stocks to grow into their valuations, we’d need to see a massive acceleration of earnings growth. But given that today’s earnings numbers are already inflated by years of massive share repurchases, I can’t say I consider that scenario likely.
Yet value investors need not despair. Here are three solid under-radar value stocks that I expect to do well even in a world of overpriced stocks.
Madison Square Garden
I’ll start with the Madison Square Garden Company (NASDAQ:MSG), the owner of the New York Knicks basketball and New York Rangers hockey franchises. This is a relative value play; sports franchises in general are very much in a bubble. But MSG is vastly underpriced relative to its peers, and I intend to profit as its value “catches up.”
The values of premier sports franchises continue to explode, regardless of sport. The New York Yankees and LA Dodgers are estimated by Forbes to be worth $2.5 billion and $2 billion, respectively, and this despite the declining popularity of baseball and its aging viewership. In football, my hometown Dallas Cowboys are estimated to be worth $3.2 billion, though I can’t imagine Jerry Jones ever selling. The New England Patriots are worth $2.6 billion, and the Washington Redskins are worth $2.4 billion. And these values are for a sport with only 16 regular season games.
I broke out MSG’s biggest identifiable assets and businesses and gave my best estimate of their current value. The New York Knicks franchise is probably worth something in the ballpark of $2 billion to $3 billion based on the recent sales price of the LA Clippers (Forbes puts the value at $1.4 billion, but this estimate was made before the Clippers sale).
The New York Rangers are estimated to be worth $1.1 billion, and the value of the Madison Square Garden arena is worth at least the $1 billion recently spent on its renovation. These assets alone put MSG’s value at $4.5 billion – $5.5 billion—or close to its current $5.75 billion market cap. At current prices, you’re essentially getting MSG’s other businesses—including its massive and profitable media empire—for free. And using industry comps, MSG’s media business is worth close to $2 billion.
Taken together, MSG’s major assets and businesses total $6.5 billion – $7.5 billion. Based on this very conservative estimate, MSG is worth anywhere from 13% to 30% more than its current market price. And let me stress, these are conservative estimates. It could easily be worth significantly more.
International Paper
Next up is paper and packaging company International Paper Company (NYSE:IP). In an age of green awareness, there aren’t too many more politically incorrect stocks to own than a paper company. But like it or not, packaging is an important part of the modern economy, particular in the age of internet commerce and home delivery. And paper is a lot greener than some of the alternatives, like Styrofoam.
International Paper trades for just 13 times expected 2015 earnings and 0.77 times sales. That’s not half bad in today’s market. But International Paper also pays a respectable 2.7% dividend and has been aggressively raising its dividend since 2010 (International Paper briefly cut its dividend by 90% during the 2008-2009 meltdown). International Paper has grown its dividend at a 46.2% clip over the past three years. That pace of growth isn’t sustainable over the long term, but I still expect solid double-digit dividend growth for a long time to come.
But there is one major catalyst that could cause International Paper to soar by 50%-100% within the next 12 months: conversion to an MLP. Management has openly considered the idea, and tax experts expect any such planned conversion to be approved by the IRS.
Converting to an MLP structure would allow International Paper to avoid paying federal income tax, would free up plenty of cash flow for tax-advantaged cash distributions and share repurchases.
I would never recommend a stock purely because it might reorganize itself as an MLP. That’s lazy research and not likely to generate viable returns over time. But in International Paper’s case, the stock is an attractive, dividend-paying value stock assuming no change of status. Any benefit from an MLP conversion would be icing on the cake.
Lar España
And finally, I’ll leave you with one value stock completely off the radar of most investors: Spanish REIT Lar España (Madrid: LRE).
After raising about €400 million in its IPO last year, Lar has invested about €318 million of the proceeds thus far in a collection of high-quality Spanish real estate assets. As Spain’s economy has modestly recovered over the past year, it’s reasonable to assume that Lar’s assets are worth at least as much as what it paid, meaning that at a bare minimum Lar should be trading at its IPO price of €10. Yet shares currently trade hands at just €9.18.
It’s hard to complain about buying $1 worth of assets for 92 cents. But that is exactly the situation we have today in Lar.
Buying shares of Lar can be tricky and expensive for American investors, so make sure you chat with your broker before placing an order. In my experience, I’ve found that Interactive Brokers charges very reasonable commissions for trades in the Spanish market, and in the interest of full disclosure, this is the broker I use both personally and in client accounts to buy shares.
Disclosures: Long MSG, IP, LRE