3 Value Stocks to Buy Now

The market is trading near all-time highs. Valuations have gotten stretched, but that doesn't mean that every stock is overvalued right now. We're going to go through three stocks that are extremely undervalued for long-term investors. Welcoming in Lou Whiteman. The first one that we're going to talk about today is MGM Resorts. Now, Lou, the the wild thing here to me is just at a very very high level, MGM is a consumer goods company. If the economy is doing fine, which which the stock market is telling us it is, a lot of the data is telling us the economy is doing fine, why are these some of these consumer good stocks like this so cheap? Well, I think the vibes are definitely underperforming the actual performance, right? There is a lot of belief right now that things are about to crater. And look, I do think it to be fair, there is more pressure on Main Street now than there was say a year ago or two years ago. The big thing though is is that MGM doesn't need 100% of the US consumers to to do business with them. They just need a critical mass of people who can continue to spend and do what they do. That critical mass is still there. We can exist in a world where yes, there are more pressure on more people and more people are maybe cutting back, but there are plenty of people who aren't cutting back and so MGM's business is fine. that world exists and that's probably closer to the truth than these blanket statements we like to make. >> Yeah. So, let's go through just some of the assets that they have because I think it is easy to just look at Las Vegas and go, you know what, the the visitation numbers are down a little bit year-over-year. The Las Vegas market is really, I think, split kind of into two markets. is the budget market. So that's going to be, you know, Circus Circus, uh, the Luxerb casinos like that. And then you're going to have your high-end properties like Bellagio, Lake Win, where you're going to have the high rollers. A lot of Bakarat is actually played there. That's actually the biggest game in Las Vegas. Something, you know, that's an interesting fact when you start digging into the numbers. But the other thing that they own is a 50% plus stake in the business that they call MGM China. That's actually their Macau subsidiary. Macau, at least before the pandemic, and it it's back to almost these numbers, was six times the size of the Las Vegas strip as far as gaming revenue goes. So, that is actually a massive massive cash generator for them. And Macau is still growing and recovering. And the hidden asset that they have on the balance sheet is this Japan resort. This is a $10 billion resort that they're constructing in Japan. This is the only casino that's going to be built in Japan just like you saw in Macau where a lot of those, you know, particularly Chinese and Southeast Asian gamblers were it became a massive market that just kind of grew out of nowhere when Las Vegas Sands entered. This is an even better economic area to put a casino. They're going to be the only operator. Pachinko is a massive business. I think it's $40 billion business in Japan. This could be a casino. They've started to actually compare this to Marina Bay Sands that that surfboard casino that you may see in Singapore that that has been a massive success that's doing I think it's over $3 billion in adjusted ibida which is a proxy for cash flow coming from these properties. They've started to compare it to that resort. That's really interesting to me because if that's the case, that one casino alone could be worth about the market cap of MGM today, which is about $12 billion. So, you add all of these things together and the fact that, you know, this is a cash generating business. They're buying back when when they're doing their buybacks and they're actually putting money into Japan right now, but when they're doing buybacks, they're buying about 15% of shares outstanding back. Barry Diller has come in and said, "Hey, we want to just buy this entire company." a lot of opport opportunity for long-term investors even if that buyout doesn't happen to just extract the value that exists for MGM. >> You hit on it, the ability to generate cash and use that cash. That's going to be a common theme here and some of the other companies, but it's so important. Not everything has to go right. I am sort of bearish on Las Vegas. I just kind of as as operating costs go up, I I I don't know how good a business that is. I don't know what to think about bet MGM and the the digital thing. There are parts of this business that I get the bare case, but there is still the sum of the parts here. And you look at where it's trading, yet there is still really good opportunities just based on its ability to generate cash and use that cash in shareholder friendly ways. All >> right, the second stock we want to talk about you brought to the table. That is Net. What do they do exactly? >> So, Net is a weird little company with an even weirder name, and that might be part of the problem, but most people know Net. If you have a student loan, you probably used to send them a check. And the core business, the the beginning of this business was, I think, almost a $2 billion pile of student loans that they owned. They didn't issue all the loans. They bought a lot of them. But think of it as a melting iceberg of cash. And Nelnet is a story of we generate cash and we deploy cash in such a way that makes more cash. It's almost like a virtuous farming cycle when they get it right. And they have been very very good capital allocators. I joke but I don't really joke. They are the best capital allocation story in Nebraska. And yes, I know Birkshar Hathaway is there too. Look at both companies the last 10 years. Nelnet today they still have these student loans. They still have this melting iceberg. They have uh businesses that service these loans. So that's reoccurring fee revenue not just for the the loans that they own but like Discover's big student loan portfolio. They get fee revenue just for sending the bills out every month. They have built, if you have any kids or anything in a private school, you've probably dealt with faxet management, which is the payment portal that almost all private schools use to extract money from their customers. That is a nail company. They have similar services for colleges that handle payroll and billing. They now have a banking license so they can raise cash on their own. They have a venture portfolio that includes Huddle, which is if again anyone who knows high school athletics, if your kid wants to get a college scholarship, they have a Huddle profile. It's a huge deal. They are the Nelnut's the biggest single shareholder. Again, this is a very, very simple story of they generate cash and they redeploy cash in ways that benefits shareholders. You can get that today under the 12 times earnings. Color me intrigued. Is this one of those companies that you should almost look for companies that you you hate it when you get the bill from them because you have to pay them, right? Like you don't have a choice. I think Huddle is probably a good example. If you ever if you ever had to use those uh you know their products, it's like, "Oh my gosh, this is so expensive, but I need to to use it for this one thing." That always ends up being a really good business. I Every time I see it historically, >> there is. And I'll tell you, I have owned this one for over a decade just because when we were looking at private schools for our kindergartener preschool was like you have to set up a faxet account and I just wanted to know who owned faxet. So yeah, to your point there's something to that. One of the big criticisms that you get here is that well what about like student loan forgiveness and all of that. So I want to make that point too because I do think that's why you're getting a value here. That's constantly in the news. But remember, Nelnet's portfolio is government guaranteed loans. So if there is a student loan amnesty program or all that is wiped out, it doesn't just go poof from Nelnet. Net gets a check from the government, which it does sort of screw them up because they don't necessarily want a billion and a half right now. They much prefer that dripping iceberg of like money just, you know, so in a rate you're going to deploy it. But that isn't really a fear. These amnesty programs did cost the servicing business. So there is some, you know, like if you temporarily don't have to pay, there goes some of the fee revenue. But yeah, this is just something that most people want out of their life, but you're not going to get out of your life. And it is a very very well-run business. Basically, the people who founded it are still serving as executive chairman. They still have um the the CEO is is the successor to the original CEO. This is a tight-knit group that again just know how to allocate capital. >> Stock number three that is Adobe and Adobe is one of these companies that I think we've been talking about. Hey, is this is Adobe going to be disrupted by you? Whether it's generative artificial intelligence, whether it's products like Canva, you know, kind of on the lower end, that's typically where disruption comes from. I love a good disruption story, but this is one of those companies that I think is just so sticky. I mean it is taught in high schools and colleges and that means that every professional at the high end is not leaving Adobe products for Canva or for Descript which we're using to record this. They are staying with what they want. They fight tooth and nail to stick with those higherend products. Adobe's trying to go down market. That's one of the reasons that the stock has struggled a little bit more recently. Now it's been in a huge decline uh 67% off from its all-time high. But the valuation is now at the point where I think it's just too compelling to pass up. 13 times trailing earnings. If you look at forward earnings estimates, 11 times forward earnings, 10 times forward free cash flow estimates. This is one of those businesses that I just a decade from now. I think we're still going to be using Adobe products, particularly on that high-end if they're successful in going a little bit down market, making it easier for the premium user to start using Adobe's products and maybe pay them for some of these AI tools that they're building. You know, they have Firefly. They do have a lot of AI tools. It's more a matter of is it easy enough for for Travis to use versus a product like Canva, which is extremely simple. We're not quite there yet, but I think they've identified that problem. They need to figure out what their leadership is going to look like, what their strategy is going to look like in the future, but that provides opportunity because the core, I think, is really strong. So, is this a value stock that you at least have your eye on or have you been buying recently? >> To full disclosure, I bought this one a couple months ago, kind of on that same thesis. And yeah, with um with what's going on with management, it's just hard for them to articulate to the market what the plan is. and I think that's hurting them. So, they do need to get just things straightened out, ready to go. Um I, you know, look, I I don't think there's any scandal in management. It's, you know, it's people should be able to retire when they want, but it's unfortunate. But yeah, I it's important to remember that the those companies that are going to be disrupted are not standing still. And to your point, I think Adobe has a pretty credible set of tools. It's hard for me to imagine the power users giving that up as long as Adobe continues to provide value and continues to innovate. I think that that core is strong. Premium I do have questions about because yes, there are some levels where I think people will pay for some products, but the actual lowest level user, the you or me making stupid Twitter, that business is gone forever due to AI. And I don't envy Figma who built their business plan around just trying to kind of find this middle because that middle is smaller now than it was. But that coreal user base, they are not going to give this up unless they really have to. I think it's a lot stickier than the market is giving it credit for. Well, as you look for value stocks, let us know what you think about those three. MGM Resorts, Nelnet, and Adobe. What's on your watch list right now? Don't forget to subscribe here on YouTube to the Mly Fool. Thanks for watching. We'll see you here next time.