7 Undervalued Stocks the Bull Left Behind

The U.S. stock market is following a terrific 2012 with a more robust performance this year. Even after a summer selloff, Standard & Poor’s 500-stock index returned 16.6% through September 3. Still, in all the excitement investors have left some sterling stocks behind. Here are seven of the undeservedly overlooked. (Unless otherwise noted, share prices are as of September 3.)

Apache Corp. (symbol APA)

This vividly named energy-exploration company has seen its shares get tomahawked in half from its 2008 high, thanks to worries foreign and domestic. At home, the stock was drained by low natural gas prices and disappointing results in the first three quarters of 2012, when the company failed to meet some of the overly optimistic production goals it set in 2011. Investors have also been fretting over the Houston-based company’s operation in Egypt, which has been racked by political turmoil. But they lauded the August 29 announcement that Apache will sell a 33% stake in its Egyptian operation to China’s Sinopec for $3.1 billion. Apache’s stock, which had been down most of the year, climbed 9% on the day after the announcement, to $85.66.

But even with the bump, value managers say the shares still trade at a discount to the value of the company’s assets. Kevin Grant, co-manager of the Oakmark Fund, puts the stock’s fair value at more than $130 (it closed at $84.79 on September 3; all prices are through that date). Enthusiasts applaud Apache’s strong balance sheet, saying that it affords the company the luxury of selling assets at fair prices, rather than being forced to sell at a discount, a fate that has befallen competitors. Including the Sinopec deal, Apache has raised some $7 billion so far this year, using the proceeds to repurchase shares. “We like this equation,” says Grant.

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Bank of New York Mellon (BK)

This old-line Wall Street denizen can trace its lineage back to Alexander Hamilton. But it’s unlikely the Founding Father would recognize much of the business today. A bank in name, the financial-services firm garners more than 70% of revenues from fee-based income—much more predictable than the old-fashioned business of making loans. Executives have gotten serious in recent years about securing higher fees for its services, from global custody services to asset management. Markets have taken a dim view of the troubles low interest rates have created for the firm’s money market funds, but supporters note that the stock’s $30.12 price allows little to no premium above the company’s book value (assets minus liabilities) of $29.83 per share. At that price, and with the company repurchasing more than $1 billion worth of stock last year, “we think it’s a terrific value,” says Victor Cunningham, a manager of the Third Avenue Value Fund.

Freeport-McMoRan Copper & Gold (FCX)

With the exception of 2009, when Freeport took a one-time write-off, this Phoenix-based mining firm has been consistently profitable since 2005, despite the 2007–09 recession. Freeport pulls copper, gold and molybdenum from the ground in the U.S., South America, Africa and Indonesia. But thanks to a global selloff in precious metals, the stock has lost half of its value over the past 22 months and, at $31.12, trades at 10 times estimated year-ahead earnings. “This stock is appropriate for investors who believe in worldwide economic recovery,” says analyst Don Cassidy, head of the Retirement Investing Institute. He notes that the price of copper, which tends to be an indicator of global economic health, has started to rise recently. The metal is widely used in infrastructure and housing in developing economies—a long-term plus. But even if the stock continues to tread water, investors can benefit from a generous 4.0% yield, happy in the knowledge that Freeport has lifted dividends nearly fourfold since 2003.

Life Time Fitness (LTM)

Thanks to the immensity of the company’s facilities—the average size is 114,000 square feet (think 40 good-sized suburban homes)—the Chanhassen, Minn., company can pump up as many as 12,000 members per center. Still, spooked investors slammed the stock in February on news of increasing member attrition and disappointing earnings predictions for the year. But the drop-off mostly involved financially struggling customers who opted to pay a smaller fee to hold their membership rather than quit the club altogether. (This allows them to avoid reenrollment fees when they return.) Attrition for the “non-access” group did rise in the fourth quarter of 2012, but at 100,000 members, it was a much smaller group than the 680,000 clients who pay full freight. Fans also applaud the plans to accelerate new club openings, which slowed during the recession. At $49.01, the stock is up slightly for the year and trades at 15 times year-ahead earnings estimates. Connor Browne, co-manager of the Thornburg Value Fund, thinks that the company can climb the stair-stepper to earnings growth of 15% to 20% a year over the next few years and that the stock can hit $80 by the end of 2014.

Omega Healthcare Investors (OHI)

This Hunt Valley, Md., real estate investment trust is riding the aging population through long-term health care facilities. The REIT does not provide health care services itself, but owns or leases 477 properties in 33 states, with 53,000 licensed beds. Earnings are at record highs, and Omega has raised dividends each year since 2004, tripling them in that time. With the stock at $27.74, the REIT yields a bountiful 6.8%. The fly in the ointment? The same thing that has afflicted many yield-oriented investments since early May: rising long-term interest rates due to the growing prospect that the Federal Reserve will soon ease back on its easy-money policies. Dubbed a “taper tantrum” by market wags, the selloff has put many high-yielding investments, including several health care REITs, on sale. Although Omega has topped the S&P this year, the stock has lagged the index over the past three years. A plus for Omega, says Cassidy, is that the REIT is relatively insulated from cutbacks in government payments for patients because it does not operate the properties.

Oracle (ORCL)

Like many other late-20th-century tech novas, this maker of software for businesses is long past its darling days. At $32.02, the stock is roughly one-third below its record high, set in 2000, and trades for a paltry 11 times estimated year-ahead earnings as investors fret about slowing growth. But bargain hunters see a company that generates vast amounts of free cash flow—the cash profits that are left after the capital expenditures needed to maintain the business. Even better, Oracle is returning that cash to shareholders. This summer the Redwood City, Cal., company announced a $12 billion share-buyback plan; over the past year Oracle reduced the number of outstanding shares by 5%. It also doubled its quarterly dividend, to 12 cents per share. Oakmark’s Grant dismisses worries about copycat competitors stealing sales because switching costs for customers are high. He says Oracle has an “incredibly valuable” pipeline of recurring income from clients paying for maintenance and support on software they’ve already bought.

White Mountains Insurance Group (WTM)

This specialty property and casualty underwriter trades at $555.82, or 7% below book value of $597 per share. It has lagged the market on fears that rising interest rates will erode the value of the bonds the company buys with customer premiums. But analysts credit the company with a prudent approach to underwriting and pricing policies on niche markets from crops to cargo ships, something that can’t be said of all its P&C competitors. The firm has $1 billion in excess capital, and executives have a good record of putting money to work, both in making acquisitions and buying back stock. White Mountains has reduced its share count by 49% since 2007. “Management is sitting back and waiting for things to happen—they will be able to put this excess capital properly to use,” says Cunningham. Like many insurers, the company is domiciled in Bermuda for tax purposes, but it is essentially a U.S. business.