Editors' Pick: Originally published Jan. 12.
The nerve-wracking start to 2016 should remind you that the stock market is still driven by the same emotional forces as it was decades past, when individuals dominated trading. Indeed, today's market is more susceptible than ever to fluctuating passions, thanks to the ability to move billions of dollars at the click of a computer mouse.
Over the near term, stock prices tend to reflect personal bias, "group-think," and other ephemera. The proven way to make money over the long haul is to follow the objective value criteria of super-investor Warren Buffett: pinpoint stocks that possess solid long-term prospects for capital appreciation, but trade at prices beaten down by irrational investor fears.
Below are five under-appreciated but sound companies that are excellent value plays in today's choppy market. The time to pick them up is now, before market passions cool and their prices rise to reflect their superb prospects:ALK data by YCharts
1. Alaska Air Group (ALK)
Based in Seattle, Alaska Airlines, a subsidiary of Alaska Air Group, together with its partner regional airlines, serves 95 cities through Alaska, the Lower 48, Hawaii, Canada and Mexico.
Alaska Airlines is the seventh-largest U.S. airline in terms of passenger traffic and it carries more passengers between Alaska and the contiguous United States than any other airline.
Alaska Airlines recently finished its transition to an all-Boeing 737 fleet of 115 jets that feature advanced technologies. While it upgrades its aircraft fleet, Alaska Airlines also is enhancing its labor relations. Airlines as a whole are vulnerable to burdensome labor contracts and worker strife; Alaska Airlines has sidestepped these costly hurdles by signing multi-year contracts with its pilots, mechanics and flight attendants.
Low overhead, rising passenger traffic, and a near monopoly in its territory should propel Alaska Airlines in 2016. The stock's trailing 12-month (TTM) price-to-earnings (P/E) ratio is 11, compared to 13 for its industry and 16 for comparable competitor Southwest. The stock now trades at about $70, with a median analyst projection for a one-year rise to $90, for a gain of nearly 29%.
2. Qualcomm (QCOM)
Qualcomm is the seventh-largest technology company in the U.S., boasting a market capitalization of $69.6 billion and $17.3 billion in cash on its balance sheet. The company is comprised of two segments, Qualcomm CDMA Technologies (QCT) and Qualcomm Technology Licensing (QTL).
QCT designs and sells chipsets that are integral to a host of popular electronic devices, including laptops, tablets and smartphones. The QTL division owns a large portfolio of patents for mobile telecommunications. The company's lock on this valuable intellectual property means that every time a manufacturer sells a handset that allows for high-speed data connections, Qualcomm reaps a royalty on the sale -- regardless of the brand of device.
Exploding smartphone use around the world will continue to fuel this under-appreciated stock. The TTM P/E is 14, compared to 21 for its industry. The stock now trades at about $46, with a one-year median projection of $60, for a gain of 30%. Qualcomm is among a group of great value plays that should perform well in what promises to be a turbulent year.
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3. Brinker International (EAT)
Dallas-based Brinker owns, operates or franchises 1,629 restaurants under the names Chili's Grill & Bar (1,580 restaurants) and Maggiano's Little Italy (49 restaurants) worldwide. Chili's is a a pioneer in "fast casual" dining, with high consumer awareness and loyalty.
Brinker is pushing into emerging markets, but it's doing so through franchisees, allowing the company to husband its capital for other uses. The company in recent years has sold off its lagging brands, such as Romano's Macaroni Grill, On the Border Mexican Grill & Cantina, and Corner Bakery Café, to focus on its flagship Chili's chain.
Brinker also is in the midst of a remodeling program for Chili's and Maggiano's, in tandem with the introduction of new menu items that cater to the health-conscious. Count on this company to benefit from the recent woes of fast-casual rival Chipotle Mexican Grill.
EAT stock's TTM P/E is 14, compared to 25 for its industry. One-year median stock price appreciation projection: nearly 20%.
4. Tenneco (TEN)
When auto sales surge as they have throughout 2015, investors focus on major OEMs such as General Motors and Ford, but they tend to forget auto parts manufacturers such as Tenneco. That's why the stock is a rare and compelling value play in a booming sector.
Tenneco is a provider of emission control products for light, commercial, and specialty vehicle applications worldwide. Tenneco also offers ride control systems, such as shock absorbers, struts, and vibration reducers. The company serves OEMs as well as the repair and replacement aftermarkets.
It's not just new sales that boost this vital sub-sector of the auto industry. Auto parts makers such as Tenneco also reap revenue from consumers who finally feel financially confident enough to tackle deferred maintenance on their aging cars.
The stock's TTM P/E is 12, compared to 17 for the industry. One-year median stock price appreciation projection: 46%. That's nearly double the current price, making Tenneco a superb value play that Buffett would love.
5. Union Pacific (UNP)
Based in Buffett's home of Omaha, Union Pacific is the largest railroad in North America, providing transportation throughout 23 states in the U.S. Union Pacific also connects with rail systems in Canada and is the only railroad serves all of the six major gateways to Mexico.
Union Pacific has adapted to the coal industry's long-term decline by placing greater emphasis on the rising need to ship petroleum and natural gas.
This strategy makes sense and has born fruit, despite the long fall in oil prices, as energy producers in the Bakken shale formation of North America remain desperate to transport their product. When oil prices inevitably rebound, Union Pacific will benefit further.
Increasing strength in the housing and automotive sectors also is boosting Union Pacific's freight volumes. The growing popularity of "intermodal" transportation is another boon for the railroad. Intermodal is a method of shipment whereby standardized containers can be shipped via truck, rail or ship.
The stock's TTM P/E is 12, compared to 18 for the industry. One-year median stock price appreciation projection: nearly 30%.
Warren Buffett, the genius investor behind Berkshire Hathaway, boasts a net worth of more than $62 billion. How did he do it? By following a set of time-tested value criteria. To learn what Buffett is buying and selling amid these difficult market conditions, click here.