2022 has been a trying year for the financial markets thus far. Stocks have tanked, bond yields may keep rising, interest rates are soaring and the market fears of a recession keep mounting. However, long-term-oriented investors who have some cash on the side have many choices as high-quality stocks to buy trade at cheap valuations.
While it may be too early to call a bottom on the U.S. stock market at this time, it is also true that a market bottom is only observable after it has already happened. Opportunities to scoop cheap stocks to buy and hold can be easily missed.
Instead of trying to time the bottom in the volatile markets, investors may still do well buying and holding cheap stocks of companies with proven business models, profitable operating models, financially strong balance sheets, and a high likelihood of bouncing back from a recession.
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Some of the cheap stocks to buy on my list right now are recent purchases made by value investing legend Warren Buffett-led Berkshire Hathaway (NYSE:BRK-B). It is a good idea to trade alongside a value investing legend and his mentees anyway.
Let’s have a look at each of the cheap long-term stocks to buy at low valuations during a down market.
|
Ticker |
Company |
Price |
|
Ally Financial Inc. |
$33.28 |
|
|
Verizon Communications Inc. |
$50.42 |
|
|
KB Home |
$31.19 |
|
|
F.N.B Corporation |
$11.50 |
|
|
Markel Corporation |
$1,271.34 |
|
|
The Goodyear Tire & Rubber Company |
$11.77 |
|
|
FedEx Corporation |
$224.57 |
Stocks to Buy: Ally Financial (ALLY)
Source: Ally Invest
First on our list of seven cheap stocks to buy and hold is Ally Financial (NYSE:ALLY), a digital bank with no physical branches that is heavily invested in the auto-loans space. It offers bank accounts, mortgages, credit cards, point of sale lending, insurance, and online investing services through Ally Invest.
Ally Financial historically grew its annual revenue run rate on a trailing twelve months (TTM) basis by 27%, increased its TTM normalized diluted earnings per share (EPS) by 300%, and reduced the number of outstanding shares by 28.6% — all this and more during the past five short years! With an asset base of $184 billion and a strong member portfolio of 10.5 million customers, Ally Financial may grow earnings as interest rates rise.
Although ALLY stock generated 87% in total returns for investors during the past five years, it remains a cheap financial stock to buy and hold for more long-term investment gains.
Given a strong 38% EPS growth outlook over the next five years and a low forward price-to-earnings (P/E) multiple of 4.5 times, ALLY stock spots a significantly low price-to-earnings-to-growth (PEG) multiple of 0.1. Shares are severely undervalued given the financial services business’ long-term growth potential.
Investing legend Warren Buffett’s Berkshire Hathaway bought ALLY stock during the first quarter of this year.
Ally Financial executes significant share repurchases and it aggressively increased its quarterly dividend by 57.9% during the past twelve months. The current 30 cent per share quarterly dividend yields 3.49% annually.
Verizon Communications (VZ)
Source: Ken Wolter / Shutterstock.com
Verizon Communications (NYSE:VZ) is a cheap value stock that investors could buy and hold in an attempt to preserve investing capital. Now that value stocks are gaining popularity again, VZ stock could outperform the broader stock market if value stocks come back with a bang over the next couple of years.
Sadly, VZ stock trades below its pandemic lows of 2020. However, according to Wall Street projections, the recession-resilient telecom services business may generate $20.6 billion in free cash flow in 2023. Verizon produced $17.8 billion in free cash flow in 2019.
Most noteworthy, Verizon stock touts a 5% dividend yield. The company could announce its 16th consecutive annual dividend increase as it reports third-quarter earnings later this year.
Although Verizon is a mature business with slow, low single-digit revenue growth potential, the company managed to consistently expand its normalized net income margins from 12.1% in 2017 to 16.8% by 2021. The company’s single dollar of revenue is now worth more to equity investors than it was three to five years ago. But given a 2% gain over three years, VZ stock hasn’t gone anywhere during the past three years.
As of now, Verizon stock trades at a low forward P/E multiple of 9.2 times and a historical P/E of 9.9 times, which is far cheaper than an industry average trailing P/E of 16.1. Analysts project a 3.6% earnings growth rate for VZ over the next five years. The company is financially stable, cash flow positive, and generates resilient operating earnings.
Verizon is a cheap defensive stock to buy and hold for capital protection during turbulent times. VZ stock has outperformed the broader market so far this year. Shares have returned 0.4% year-to-date while the S&P 500 is down more than 19% so far this year.
Under Warren Buffett’s leadership, Berkshire Hathaway holds a position in VZ stock.
Stocks to Buy: KB Home (KBH)
Source: Sundry Photography / Shutterstock
KB Home (NYSE:KBH) is one of the largest homebuilders in the U.S. In a recent earnings report released on Jun. 22, the company grew its quarterly revenue by 19% year-over-year to $1.72 billion during the quarter that ended in May. EPS was 55% higher year-over-year.
However, KBH stock has declined by 37% year-to-date as the near-term outlook for effective housing demand weakens. Understandably, the company faces weaker demand as home buyers process the impact of higher mortgage interest rates and inflationary pressures.
That said, KBH has a strong order backlog today. Its ending backlog value grew 43% year-over-year to $6.12 billion by the end of May 2022 to mark the highest second-quarter level in the company’s entire history. Most noteworthy, the company owns or controls all the lots it needs to support delivery targets through 2024. Management enjoys ample flexibility to recalibrate land investments as the housing market evolves in the medium term.
In the long term, a growing population, rising household formations, and immigration should support a strong U.S. housing market. This means KB Home should continue to thrive, generate profits and execute its shareholder-friendly capital return programs — notably share repurchases and dividend increases. KB Home increased its dividend by 500% over the past five years. The current payout yields 2.1% annually.
KBH stock is one of the cheapest stocks to buy and hold for the long term. Despite healthy operating profit margins and a growing balance sheet, shares have a low forward P/E and a PEG ratio of 0.1, which implies shares are severely undervalued relative to the company’s 18.5% five-year earnings growth potential.
F.N.B. Corporation (FNB)
Source: JHVEPhoto / Shutterstock
F.N.B. Corporation (NYSE:FNB) is a financial services firm that has been growing through accretive acquisitions. A recently announced $117 million all-stock acquisition of UB Bancorp (OTCMKTS:UBNC) will expand the bank’s reach in North Carolina. More importantly, it will increase its depositor base — an important source of cheap, low-cost trading capital. The Union Bank deal follows another similarly accretive acquisition of Howard Bancorp in 2021.
Although F.N.B. Corp generates earnings from community banking, wealth management, and insurance commissions, the majority of its profits are from net-interest income. The bank should earn more as it grows its low-interest deposits base during a period of rising interest rates and widening net interest income spreads.
FNB stock has successfully recovered from four U.S. recessions since going public in 1986. Although management never raised the bank’s quarterly dividend since the great recession of 2008, shares have returned about 180% in total shareholder returns since 2010.
The bank stock’s price-to-book value multiple has contracted by 32% over the past decade to 0.7 times. Shares trade at a discount to book value today. Most noteworthy, its price-to-tangible book value multiple of 1.4 times is less than half the industry average multiple of 3.1 times.
FNB stock is undervalued relative to industry peers and is modestly priced relative to its long-term earnings growth potential. A forward P/E multiple of 7.3 and a five-year earnings growth estimate of 10% per annum by analysts gives FNB stock a PEG ratio of under 0.9 to confirm its undervaluation.
Investors buying FNB stock today may lock in a 4.35% dividend yield.
Stocks to Buy: Markel Corporation (MKL)
Markel Corporation (NYSE:MKL) is an insurance giant with some profitable and growing businesses on the side. Markel’s primary business is property and casualty insurance. Like Berkshire Hathaway, Markel uses excess funds from its insurance premium collections to fund a growing investment portfolio and to acquire and build a smorgasbord of diversified businesses.
The company has three powerful cash flow engines that should power significant growth and create positive shareholder returns over a long holding period. These include the insurance business, a robust investments portfolio, and Markel Ventures — a portfolio of acquired subsidiaries with diverse business lines.
The insurance business grows with the economy and it earns positive interest spreads. Although investment assets may underperform this year as the market finds a bottom, diversified equity-funded businesses under Markel Ventures may help Markel absorb economic shocks and turbulence.
Book value is an important valuation metric for the holding company. This is where things get very interesting. Markel has grown its book value per share by more than 700% over the past 20 years. Its price-to-book multiple of 1.3 times is lower than an industry average of 1.4. What’s more, MKL stock’s price-to-book value multiple hasn’t fully recovered from a steep Covid-19 contraction.
Most noteworthy is Markel’s Forward P/E multiple of 14.9 times and Wall Street’s five-year earnings growth estimate of 46.9% results in a PEG ratio as low as 0.3 for MKL stock. Shares could be a steal at today’s valuation.
MKL stock’s near 5% return year-to-date outperformed the broad market indices by wide margins so far this year.
Goodyear TIre & Rubber (GT)
Source: Roman Tiraspolsky / Shutterstock.com
The Goodyear Tire & Rubber Company (NASDAQ:GT) is a leader in the tire manufacturing industry. Demand for replacement tires has rebounded from a Covid-19 stumble, but shares trade at the low end of their five-year P/E multiple ranges.
Goodyear proudly grew U.S. sales by 60% year-over-year during the first quarter of 2022. Although its 2021 acquisition of Cooper Tire was a key growth driver, organic sales grew 20%. Sales volumes increased by 25% in its Europe, Middle East, and Africa segments. Overall revenue per tire increased by 17% year-over-year.
A potential recession may still hurt sales in the near term, but Goodyear’s market may remain strong as long as moving vehicles require rubber tires, while tire replacements remain a necessary safety requirement for cars, buses, and trucks on our roads.
Although GT stock has lost investors’ money over the past five years, past performance may not predict future shareholder returns. The company is back to profitability growth. It experienced a profit margin expansion during the first quarter and is improving its product mix after its Cooper acquisition.
GT stock’s price-to-book value multiple of 0.6 means shares trade at a discount. Further, shares trade at a P/E multiple of 3.7, close to the lowest earnings multiple seen on GT stock during the past five years of 3.4 times. A forward P/E multiple of 4.2 and a five-year earnings growth outlook of 9.1% result in a forward PEG ratio of 0.7.
Shares appear undervalued given Goodyear’s future stable growth potential.
Stocks to Buy: FedEx Corporation (FDX)
Source: Antonio Gravante / Shutterstock.com
The FedEx Corporation (NYSE:FDX) is an integrated freight and logistics company that has been around since 1973 and delivered 29,400% in total shareholder returns since going public in 1978. Although past performance doesn’t predict future returns, FDX stock trades cheaply today and shares could still offer decent shareholder returns over the next decade.
As a publicly-traded stock, FedEx has lived through six U.S. recessions and came out stronger to give long-term investors positive holding period returns. The company is cash-flow positive and profitable. It recently tweaked its corporate governance processes to introduce shareholder-friendly capital return policies.
Thanks to activist investor D.E. Shaw’s influence, FedEx made board changes and increased its quarterly dividend by 53% to $1.15 per share in June. The new payout yields 2% annually. The company also updated its executive compensation program to include FDX stock’s total shareholder return relative to the broad market as a performance metric.
Undoubtedly, FedEx’s latest policy changes enhance the alignment of management’s interests with investors’ interests. Aided by a sustained capital return policy through share buybacks, FDX stock could produce significant upside for long-term investors.
FedEx reported a record quarterly revenue of $24.4 billion in the May quarter. Although it processed a lower volume of shipments due to slower economic growth, supply chain challenges, and higher transportation and wage rates during the most recent quarter that ended in May, operating margins sequentially improved.
After a 45% decline in 2022, FDX stock has a forward P/E multiple of 4.4 times. Considering a five-year earnings growth estimate of 9.1%, FedEx stock’s PEG of 0.7 implies shares are undervalued relative to the company’s long-term earnings growth potential.
In a recent strategy update on Jun 29, FedEx executives believe they can engineer an adjusted EPS compound annual growth rate of between 14% and 19% over the next three years and they are “targeting [18% through] 22% annualized Total Shareholder Return (TSR) through fiscal 2025.”
$10,000 invested in FDX stock back in 1978 would have grown to a staggering $2.95 million today, with dividends fully reinvested.
On the date of publication, Brian Paradza did not hold (either directly or indirectly) any positions in any securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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