It's always worth a look when a one-time growth stock falls into value
territory, and the market volatility of the past year has left its share of
former high-fliers stranded well below their recent highs. Three such stocks are
Monsanto (NYSE: MON ), Teva Pharmaceuticals (NASDAQ: TEVA ) and Ericsson
(NASDAQ: ERIC ). Once favorites of the press and institutional money managers
alike, these stocks have quietly maintained steady fundamentals even as their
valuations have come down. This disconnect presents an opportunity for
longer-term investors. Monsanto Monsanto is a case in point. The stock of this
global agribusiness giant delivered a 22-bagger for investors from mid-2002
through mid-2008 a period that saw its P/E surge from the mid-teens into the
50s. During this interval, the market became enamored with the "story" of
the company capitalizing on rising global agricultural production through its
genetically enhanced seeds. But Monsanto's market value has been cut in half
since its 2008 heyday thanks to rising competition, price pressures and slowing
sales for its signature Roundup product. The result: a stock whose valuation no
longer captures its earnings power. Click to Enlarge According to the USDA, the
average net cash income for U.S.-based farm businesses rose 17% in 2011 and is
on track for another increase for 2012. Notably, the latest survey of farmer
confidence showed continued strength, which obviously is a positive for
suppliers such as Monsanto. The company has a strong product pipeline including
drought-tolerant corn, expected to launch in 2013 that provides a solid
foundation for earnings in the years ahead. It also should be noted that
Monsanto, whose products help boost crop yields, still is in a prime position to
benefit from the long-term imbalance created by the rising demand for
agricultural products and the static supply of arable land. As a kicker, the
stock yields a 1.7% dividend. Despite these positives, the stock is trading at a
discount to its five-year averages for all key valuation measures: P/E,
price-to-book, price-to-sales and PEG. The chart also is potentially favorable
with the possibility of a breakout if the stock rises above $77. Monsanto
reports earnings Thursday. Teva Pharmaceuticals Israel-based Teva, the world's
largest maker of generic drugs, rewarded investors with a total return of over
1,000% from 1999-2009. The stock has been left in the dust in the past two
years, however from its April 2010 high near $65, Teva is off nearly 40% even
as the broader pharmaceutical sector has gained ground. Teva has been hit by
concerns about rising competition and the potential loss of exclusivity on a key
drug, but the stock is beginning to look like a value at these levels. Click to
Enlarge The IMS Institute for Health Care Infomatics is calling for the market
share of branded drugs (which stood at 70% in 2005) to drop from 64% in 2010 to
53% in 2015 as the use of generics increases. In addition, a number of
brand-name drugs are losing exclusivity in 2012, to the tune of a total sales
volume of $28 billion. Both of these trends work in Teva's favor. Although
Teva is a profitable company with important long-term trends working in its
favor analysts are looking for 13% EPS growth in 2012 the stock has been left
for dead. Among the numbers investors should take into account: The trailing
P/E, at 12, is less than half the five-year average of 24.6. (The forward P/E is
even more attractive at 7.2.) Price-to-book stands at 1.6 versus the five-year
average of 2.4, while price-to-sales is at 2.1 versus 3.3. What's more, Teva
yields 1.7%, and management recently announced a buyback program worth $3
billion. With numbers like these, it looks like it finally might be time for
this fallen angel to start playing catchup with its industry peers. Ericsson By
now, the broadband theme is well-known: Rising smartphone and tablet usage is
creating a surge in demand for broadband capacity, and telecom operators'
ability to meet this fast-growing capacity is limited. But what seems to have
been lost on investors is that Ericsson the market-share leader in providing
the equipment and services that will help operators meet demand in the years
ahead still is one of the companies that is positioned to capitalize on this
trend. Click to Enlarge Nevertheless, the growth-stock darling of the 1990s now
is a value play, with a forward P/E of 10.8 (and 8.6 net of cash), a trailing
price-to-sales ratio of 0.98 (versus a five-year average of 1.3%), $6.7 billion
in cash and a dividend yield of 3.6%. The stock was off 11% in 2011. It might
require patience for the market to pick up on the potential value here, but a
look at the total picture reveals meaningful upside potential and limited
downside risk from this level. The bottom line: All three of these
somewhat-forgotten market leaders have the potential to provide market-beating
returns in the year ahead, even if the broader investment environment remains
challenging.
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