2 Best Value Stocks to Buy Right Now

The term “value stock” often refers to companies that trade at cheap valuations in relation to their annual earnings or cash flows. While many of these companies are valued cheaply due to slow or declining growth, occasionally, high-quality and growing businesses simply get mispriced by Mr. Market. Two of those companies are Sprouts Farmers Market (NASDAQ:SFM) and Nelnet (NYSE:NNI).

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Sprouts Farmers Market

Sprouts operates 363 health-focused grocery stores located across 23 states. However, unlike its peers in the ultra-competitive grocery industry, Sprouts has carved out a bit of its own niche by targeting health enthusiasts and diet-specific consumers. Since these customers are often focused more on quality than price, they’re typically willing to pay slightly higher prices in exchange for locally sourced and organic food. 

As its name entails, Sprouts’ stores are designed to invoke the feeling of attending a traditional farmers’ market. The company helps cultivate this atmosphere by putting its fresh produce at the center of the store and having an open format with low-shelf displays. Additionally, Sprouts’ stores are much smaller than competitors’, which helps the company spend less on leases. The company’s average store size ranges from 28,000 to 30,000 square feet, with its newer stores expected to be between 21,000 and 25,000 square feet. For comparison, Kroger and Walmart average well above 60,000 square feet per store.

Thanks to these smaller store sizes and higher-value customers, Sprouts generates greater profit margins than nearly all of its peers.

Data source: Listed companies. Calculations by author.

Over the last 24 months alone, Sprouts has generated roughly $526 million in free cash flow and used that cash to make several improvements to its operations. For example, during the most recent quarter, Sprouts built out two new distribution centers in Colorado and Florida, which will help improve the overall quality and freshness of its produce at the surrounding stores. Sprouts has also reduced its outstanding long-term debt by more than 50% over that same 24-month span. With this improved balance sheet, Sprouts’ management team stated that the company is in a great position to start adding new store locations, and in 2022 Sprouts is planning to begin growing its store count by 10% per year. 

But despite Sprouts’ expected store growth and better profit margins than that of competitors, the company trades at a dirt-cheap valuation. At its current market cap to operating income ratio of roughly seven times, Sprouts trades at a significant discount compared to peers like Kroger and Walmart, which trade at 12 and 14 times, respectively. 

Nelnet

Nelnet is a Lincoln, Nebraska-based conglomerate that…