Markets turned volatile again last week, sending the VIX (a measure of volatility) above 40 yet again. This is the second article in a continuing series on finding cheap stocks with strong earnings in volatile markets. Last week we explored the attractiveness of Exxon Mobil (XOM) and Microsoft (MSFT).
This week's volatility uncovered two more large-caps with strong earnings trading at bargain basement prices. To be sure, bargains can get cheaper, but I feel it's time to start building positions in your low-price picks. Here are this week's cheap stocks.
Chevron (CVX)
Oil prices could easily fall more on global recession fears. However, oil is certainly going to be in high demand for a long time to come. Patient investors can ride out the volatility in the oil markets in large producers such as Chevron. Chevron's strong 3.5% yield can help provide a smoother ride. In last week's article, I included Exxon Mobil. It is appropriate to compare the two companies. Chevron has higher growth rates in earnings and cash flow at an annualized 7.7% and 10% over the last five years, respectively. Chevron also has a more attractive dividend yield than Exxon Mobil, almost 1% higher.
Chevron trades at less than eight times earnings and has a forward P/E of 6.88. The company pays out only 27% of cash in dividends and has increased its dividend at an annualized rate of 10.2% over the last five years. Chevron is downright cheap and is an attractive stock at these levels.
click on images to enlarge
AT&T (T)
Telecom stocks can be an excellent place to park money during volatile markets. Often their dividend yields are high enough to provide a floor to the price of a stock. Investors must be careful when selecting telecom companies since some are notorious for cutting dividends. AT&T isn't likely to do that. Despite Department of Justice problems with its proposed buyout of T-Mobile USA (DTEGF.PK), AT&T is a solid earner.
AT&T has grown revenue at an annualized rate of 23.2% over the last five years. Earnings have grown 17.8% annually over the same period. The stock trades at just 8.5 times earnings and yields 6.18%. The dividend is very safe. AT&T pays out 50% of cash in the form of dividends. It has increased its dividend at an annualized rate of 5.4% over the last five years.
Both Chevron and AT&T are solid companies with strong earnings and trade at very reasonable prices. Both pay good dividends, excellent in the case of AT&T. These two stocks could help smooth out volatility for investors as their dividend yields have made them extremely attractive.
As you can tell by my recent articles, I have taken a very defensive investing stance. The likelihood that we are entering another recession has increased dramatically. That is a risk, even for solid companies like these. Another recession would likely decrease oil prices significantly in the short-term, hurting margins for Chevron.
Continued high unemployment causes customers to cancel land-line phones and search for cheaper wireless service. Despite these risks, these stocks are already pricing in a lot of negativity. With solid dividends, these companies are likely to outperform the broad market in a recession.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in T over the next 72 hours.
