Investment professionals teach that you should buy stocks, and sectors, when they are cheap and out of favor.
Even with the market near all-time highs, there are still such sectors, and such stocks, around. These are serious companies with solid earnings, many of which pay dividends. These cheap stocks are out of favor as investors chase growth, but tastes change.
Don’t put all your eggs in one basket, the pros caution. Investing fashions will change. Companies will rise and fall in the estimation of the market. Buy those strong companies and vital sectors that are weak now, instead of those that are strong, and in the long run everything will adjust. Your returns will average out.
This is the difference between investing and gambling with your money. An investor will spread their bets, buying what’s cheap and selling what’s dear. A gambler will buy what’s hot, and then be shocked when it falls, as hot stocks inevitably do.
Diversification and sector rotation are the short odds. Even in today’s market, there are stocks you can buy now, cheap, and guarantee yourself a return in terms of dividends.
When tastes do change you will be very glad to have these cheap stocks in your portfolio. Even if the stocks stay cheap, buying them now gives you dividends, income you can either live on or reinvest.
Cheap Stocks to Buy: General Motors Company (NYSE:GM)
Dividend Yield: 4.9%
Despite the rise of Tesla Motors Inc. (NASDAQ:TSLA) — or maybe because of it — autos are currently the least-favored sector of the market.
No company better illustrates this than General Motors Company (NYSE:GM). For the three months ended in June, it had revenues of over $42 billion, and net income of $2.9 billion. Yet its market cap is just $49 billion. Tesla, with sales of $4 billion for all of 2015, is worth $33 billion.
GM stock is building electric cars, it has plans to add autonomous driving features and it has invested in Lyft, preparing for the day when cars are rented by the trip instead of being bought outright. GM has a global footprint and will build nearly 1 million cars each month next year. That’s twice what Tesla expects to make for all of 2018.
Yet GM stock can get no respect from the market. Right now, you can buy this stock for less than 4 times its last 12 months’ earnings. You will earn a dividend yielding a fat 4.9% at a time when the U.S. 30-year bond will yield you just 2.3%.
Investors have many excuses for this. They say GM could lose money quickly if the global economy goes into recession. They question its high labor costs, and note the government had to bail it out in 2009. But there are plenty of cheap auto stocks. The whole sector is on sale. Ford Motor Co. (NYSE:F), which did not take the bailout, costs 5.8 times earnings and yields 4.9% in dividends.
Even Toyota Motor Corp. (ADR) (NYSE:TM), the Japanese auto giant, can be had for less than 9 times earnings and earn you a dividend of 3.1%.
Auto stocks are a bargain.
Cheap Stocks to Buy: Delta Air Lines, Inc. (NYSE: DAL)
Yield: 2.2%
Airline stocks today are almost as cheap as auto stocks. Consider the case of the largest U.S. carrier, Delta Air Lines, Inc. (NYSE:DAL)
As this was written, Delta was selling at a P/E below 6. The stock has actually lost as much as 28% of its value in the last year, despite posting solid results highlighted by a June quarter where operating margins approached that of Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG), 25%. Delta also has something Alphabet lacks — a 20-cent-per-share quarterly dividend (covered over 10 times by earnings) that currently yields 2.2%.
Why are airlines so out of favor? Fears of terrorism are one reason, with every headline making people more anxious to stay home. The past is another reason — most airlines (including Delta) filed for bankruptcy reorganization during the last decade.
But all airlines? Delta’s chief rival in the space, Southwest Air Co (NYSE:LUV) is selling right now for less than 10 times earnings. American Airlines Group Inc. (NASDAQ:AAL) sells for about 3 times earnings.
If you are thinking of moving packages, you will pay far more for the earnings. FedEx Corp. (NYSE:FDX) shares go for near 25 times earnings, and those of United Parcel Service Inc. (NYSE:UPS) sell for nearly 20.
The air carriers learned hard lessons during the hard times. Planes are now usually packed, with an average “load factor” of 80%. Price wars are a thing of the past, as anyone who has priced a trip recently will tell you. Jet fuel prices remain low, but even if they do rise, most airlines are hedged against them – Delta even bought a refinery to assure low-cost supplies.
Delta is a well-run company in an increasingly well-run segment, but it gets no respect from investors … which makes it a bargain for you.
Cheap Stocks to Buy: JPMorgan Chase & Co. (NYSE:JPM)
Yield: 2.9%
JPMorgan Chase & Co. (NYSE:JPM) is the biggest bank in the U.S. by assets, and one of the strongest banks in the world. Its CEO, Jamie Dimon, is treated like a rock star.
And right now you can buy this bank for about 11 times earnings.
This is a bank that made $6.2 billion last quarter. That’s twice as much as Microsoft Corporation (NASDAQ:MSFT), and enough to cover the JPM dividend of 48 cents per share three times. There is less than $300 billion in long-term debt on nearly $2.5 billion in assets. It’s a very safe place to put your money, and a very good place to make money. You’ll presently earn about 2.9% of your investment in dividends each year, and that’s twice as much as you’ll get from a 10-year government bond.
Yet the stock, and its sector, are just not wanted right now. JPM’s price-to-book ratio, 1.05, means it’s barely worth its break-up value, let alone its intrinsic value as a business. This is about midway among its big-bank brethren. Citigroup Inc (NYSE:C) and Bank of America Corp. (NYSE:BAC) sell at big discounts to book value, while Wells Fargo & Co. (NYSE:WFC) sails well above it. What this means to me is that JPM represents a good balance of risk and value.
All big banks — in fact, most banks — are still unloved by investors, and there are reasons. Interest rates near zero make it hard to sell money for much more than it costs. The bailouts of the last decade are still fresh in the mind. But conditions do change, and if you invest ahead of those changes, you are going to make more money than those investors who follow the herd.
Taking a long-term view, there are few safer places you can put money to work today and get a good return than a nice, big bank. The bankers in “Mary Poppins” knew what they were singing about.
Cheap Stocks to Buy: Target Corporation (NYSE:TGT)
Yield: 3.2%
Retailers are very much out of fashion in today’s market. Everyone is frightened to death of Amazon.Com Inc. (NASDAQ:AMZN) and its moves into areas like clothing.
Yet few retailers are more assured of a future in an Amazon world than Target Corporation (NYSE:TGT). Under CEO Brian Cornell, its web operation is much-improved, with sales up 34% last year.
Target is one of a handful of brick-and-mortar retailers taking advantage of the underlying trend in retailing. People no longer go to the store to shop, they go there to buy. They go with a list, and they don’t leave the store until they get what is on the list. They are less interested in the price of a specific item than the feeling they’re getting a good deal.
Target does this, yet it still gets a lower-than-market P/E of less than 14 from investors. That is less than other companies in this category, like Wal-Mart Stores, Inc. (NYSE:WMT) and Costco Wholesale Corporation (NASDAQ:COST). It’s actually closer to the department stores it no longer truly resembles, like Macy’s Inc (NYSE:M), which is valued at just 11 times earnings, or Gap Inc., (NYSE:GPS), another store people shop at rather than buy at.
You don’t go to Target for growth, because sales have been level there for years. You go there for stability, and for yield. You can currently get a 3.2% yield on this stock. This is true for many other stocks in this group by the way. Gap is yielding 3.6%, Walmart is yielding 2.7%, and Macy’s, 4.4%.
This is something you’ll see in an under-invested sector — a number of dividend stocks selling at super-low prices. Target is in the middle of this pack, and to me offers its best risk for the reward.
Cheap Stocks to Buy: Apple Inc. (NASDAQ:AAPL)
Yield: 2.1%
There are tech stocks and there are tech stocks.
Some tech stocks are growth-oriented darlings, like Amazon.com and the artists formerly known as Google. Some stocks are speculative, like Palo Alto Networks Inc (NYSE:PANW) or Red Hat Inc (NYSE:RHT).
Then there is what I call mature tech — companies like International Business Machines Corp. (NYSE:IBM), HP Inc (NYSE:HPQ) and Advanced Micro Devices, Inc. (NYSE:AMD), which sell at a big discount to the market. Of those, the best name to buy is Apple Inc. (NASDAQ:AAPL).
Yes, Apple is on sale. It has been practically since it began offering a dividend in 2012. In early May, you could even get it near the price it was at in 2014 when it split 7:1. Even after a recent run-up following what was considered a solid earnings report, you can still get it for 12.6 times earnings, with a yield of 2.1% from dividends.
Think about it. This is a company with oodles of cash and investments, with a market cap of $576 billion. Apple brings almost $1 of every $4 in sales down to the net income line. During its last quarter, it generated over $10 billion in positive cash flow from operations, while proving that it can make a profit in cloud.
There are arguments against Apple. Sales for the second quarter of 2016 were down nearly 20% from a year earlier. The Macintosh and iPad lines are fading, the iPod is dead, and the iPhone is almost a decade old. The Apple Watch looks to have been a dud, Apple TV is not setting the world on fire and the company recently indicated it’s more interested in making software for cars than actual cars. This is, in short, a mature company in an industry where to say that is an insult.
But it’s dirt cheap. People used to talk about Apple “ex-cash,” meaning the value of the business when you take out its cash hoard. That’s about $375 billion, for a company that earned $53.4 billion last year, meaning a P/E of just over 7, similar to Toyota.
Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AAPL, GOOGL, WFC, DAL and MSFT.
