Solid long-term investing should be a little more boring that it usually is for the average investor. Trying to get cute and buy dirt-cheap stocks without catalysts can often end up costing investors hard-earned money. Finding blue chip companies whose shares are beaten down and undervalued is a less exciting strategy than buying dirt-cheap asset plays with a catalyst, however sticking with the big and boring companies pays dividends over the years if you stick to your discipline and realize that the greatest bull markets usually are, well, kind of boring.
Look at gold: Its rise has been pretty meteoric, yet gold bulls still get looked at funny at investment conferences and certainly would garner little respect for their incredibly boring yet incredibly brilliant investment at the Berkshire Hathaway (BRK.A) annual meetings. That said, a boring investment in a dull yellow metal has outperformed just about all other investment classes over the past five years.
Here are 8 dirt-cheap stocks to consider. Some of them may be too boring to diligently research for many of you, but I would counter that during today's financial engineering armageddon, it's far better to invest like an 80-year-old than to invest like a 20-year-old. In fact, go ahead and sell call options against your stock in these names if, like me, you think the overall markets may have a bit more downside left before finding a permanent low.
Teradyne (TER) is a cheap Magic Fomula stock that keeps getting cheaper. If metrics like a 6.60X P/E ratio, a 2.77X EV/EBITDA Ratio, an 8X forward estimate, and a 32% return on equity don't get you out of bed early in the morning, I don't know what will. TER lost a good deal of money a couple of years ago, but is slowly making its way back. Because of the losses in recent years, Graham would probably avoid this name at this point in time, but that doesn't mean the shares aren't a bargain at current levels.
SanDisk (SNDK), another Magic Formula name, has rallied a bit higher over the past few trading sessions, but shares are still relatively undervalued at current levels. Brian Pampcara at the Motley Fool did a good job of explaining that Sandisk is really in the Flash business more than anything else, and described why Flash was in a long-term bull market, because tablets like the iPad depend on Flash memory versus hard drives. With a trailing P/E ratio of just 7X, Sandisk shares appear to be a good bargain at these levels. SNDK has a forward P/E of 8.33X with a price-to-book ratio of 1.45X and an EV/EBITDA of only 4.65X.
Intel (INTC) trades for just 8.88X earnings and a forward P/E of around 7.5X. Intel has confounded traders and analysts alike, because the stock looks dirt-cheap and has good growth but many feel that the company's growth is cyclical and could revert to a lower volume of business in the future -- i.e., earnings may actually fall. In my view, the best way to play INTC is to buy the stock and sell an October $20 call option against your position. If you start investing in the name right now and start small, if the stock goes lower, you can add to your position at a higher dividend yield and will collect the call option premium that you wrote on your first block of shares in the company. Dollar-cost averaging and selling covered calls are the two best ways I can think of to take advantage of a high VIX and the pockets of opportunity that exist in today's stock market.
Microsoft (MSFT): While many of you are already feeling drowsy after the Intel run-down, MSFT will certainly work on you like Tylenol PM. But that's good, because with the banking sector heading into a severe bear market, we want to own things that put most investors to sleep. One of the best expamples of boring being beautiful is Microsoft, which trades for only 8.2X forward earnings and 9.5X trailing earnings. The stock is dirt-cheap here, but investors looking to add some downside protection could sell call options against the name for a safer way to collect dividend payments. The $26 MSFT Octbober call options are selling for $1.06 a contract, and with MSFT shares trading at $25.74 I think Microsoft investors should be adding to the name and selling calls against their stock for a 5% maximum return between now and October expiration.
Audiovoxx (VOXX) shares are down, but the company is by no means out. After their acquisition of Klipsch, investors are still waiting to know more about what the financial impact will be to the combined company's business fundamentals. Normally, I am against cheap stocks buying other businesses, and many times I am even against undervalued companies selling divisions for less than their market value, because they begin to "believe" the market value placed on shares by Mr. Market. In any event, Voxx is a "net net" (current assets minus total liabilities is greater than the company's market cap) so any further acquisitions by the company would be viewed with skepticism by us.
Johnson & Johnson (JNJ) is a stalwart investment with a wide economic moat and a strong balance sheet as well as a consistent earnings, free cash flow, and dividend record over the long term. JNJ is relatively cheap at current levels of 15X trailing earnings and 12.6X analyst forward earnings estimates. JNJ's competitive advantages in staple goods like Band-Aids and shampoo make this stock much less economically sensitive than many of those listed in the S&P 500. While JNJ looks cheap, investors can buy a longer-dated in-the-money JNJ call option and sell a front-month JNJ at-the-money call option for a bull calendar spread to lower risk. Personally, I think JNJ is solid enough at current prices to buy the stock and sell at-the-money call options against your position in an equal amount.
Petrobras (PBR) is trading for 6.3X earnings and a 10% discount to book value. This company trades at a large discount to the overall equity market from a valuation perspective, and posseses vast quantities of crude oil in the ground as well as cash flow and earnings power that should grow over time. Many view the deal with the Brazillian government as bad for the shareholders, but I think the deal gives investors a larger margin of safety from an asset play perspective. In other words, PBR's assets are likely worth much more net of its debt than the current market cap would suggest.
Hess (HES) is another dirt-cheap oil producer which also trades for a discount to tangible book value. Although price to book is not as widely followed as it used to be by value investors, it is still the best numerical approximation of intrinsic value around. HES shares also trade for around 6X earnings, which makes this discounted cash flow king a bargain at current levels, especially after the stock dropped from $85 to $55 in about two months. Always play defense, and stay diversified when making below-book-value investments, and consider selling a call option against your long position for a hedge.