Living through bear markets sure can be tough. Such environments can create a lot of emotional turmoil, heartache and painful losses. But on the positive side, bear markets also create some monstrous opportunities for investors. When a massive decline wreaks havoc on the overall market, cheap stocks abound for investors to buy.
But it’s not just cheap stocks that we’re after. Like the saying often goes, many “cheap stocks are cheap for a reason.”
Thus, stocks that exemplify value in this environment is what investors should be after. Many hardware stocks and energy companies carry a low valuation by nature. So, when a bear market comes storming by, many of these names get even cheaper, even if these companies’ cash flows continue to pour in and the dividends continue to pour out.
With that in mind, let’s filter down the enormous market of stocks and look for companies with strong cash flows, fat dividend yields and low valuations.
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I want to start with Broadcom (NASDAQ:AVGO), a name I stumbled upon when I was looking for undervalued semiconductor stocks. Let’s get the little details out of the way, first.
Broadcom generated $9.2 billion in free cash flow (or FCF) in 2019, $11.59 billion in 2020, $13.3 billion in 2021 and $15.3 billion over the trailing 12 months.
Given its $185 billion market capitalization, that’s pretty impressive. That’s more than $40 billion in FCF in just three years. Currently, this stock also provides a dividend yield of 3.6% and a forward price-earnings ratio of less than 12-times.
What a low valuation for a profitable firm with strong free cash flows.
So what’s the catch? Many investors would assume the company has little to no growth, but that’s not the case. Analysts expect revenue to grow 21% this year and for earnings to climb 33.5%. In 2023, estimates are for growth of 6% and 8.6% growth, respectively.
Cheap Stocks to Buy: AbbVie (ABBV)
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The first thing that sticks out to me with AbbVie (NYSE:ABBV) is this company’s low valuation and big dividend yield. The stock pays out a 4.2% dividend yield, which is attractive enough on its own. That’s particularly true as bonds are rallying (and thus bond yields are falling).
When investors look at AbbVie’s valuation, shares trade at just 11-times forward earnings. That’s even after its 3% rally on Oct. 3.
Analysts expect revenue to grow 5% this year and for earnings to burst higher by 17% in 2022. While analysts do expect a modest slowdown in growth in FY 2023, at what point is that accounted for with the company’s yield and the valuation?
When we talk about this company’s free cash flow, it’s pretty robust. AbbVie has a trailing FCF of $22.2 billion and generated $21.9 billion in FCF in 2021. Given its $244 billion market cap, we’re talking about some serious free cash flow yield for this mega cap stock.
Exxon Mobil (XOM)
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Rounding out the list with Exxon Mobil (NYSE:XOM), we’re looking at the largest US company in the energy space. Exxon Mobil has a market cap of $383 billion and it’s the largest position in the Energy Select Sector SPDR ETF (NYSEARCA:XLE).
The one caveat about Exxon Mobil — or any energy firm for that matter — is the boom-bust nature of the energy space. We’re in the midst of a boom in energy prices right now. The way central bankers are focused on killing inflation, even if it causes a recession, there’s a concern that this will also crush the energy sector.
If that happens, Exxon Mobil stock and others will pay the price. But right now they are rolling in the dough.
Exxon Mobil has trailing 12-month FCF of almost $50 billion. That’s as analysts expect 64% revenue growth this year and earnings to explode by more than 135%. Currently, consensus estimates call for a 14% dip in earnings and a 4% decline in revenue. Yet, even if this comes to fruition, Exxon’s earnings per share in 2023 would be more than double its 2021 results.
On top of all of that, Exxon Mobil pays a 4% dividend yield, and it’s one stock I’d put in the “cheap” bucket too. Shares trade at just over 8-times forward earnings expectations.
On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in the 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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