With the S&P 500 hitting an all-time high above 4,100 this week, stock valuations across the board look rather expensive. The large-cap index is up over 50% in the past 12 months, even with the pandemic-induced recession still ongoing. Many stocks are at or close to all-time highs, with earnings and cash flow multiples above 30 or higher in some cases.
This presents a problem for value investors looking to buy good businesses at a discounted valuation. However, that doesn't mean every stock is expensive right now. Verizon Communications (NYSE: VZ), Nintendo (OTC: NTDOY), and Altria Group (NYSE: MO) are three value stocks that look absurdly cheap. Here's why.
Verizon, along with AT&T (NYSE: T) and T-Mobile (NASDAQ: TMUS), is one of the three large telecommunications companies in the United States. It offers wireless communication services for internet-connected devices, mainly through smartphones. It also owns and operates the Verizon Fios broadband service.
In 2020, Verizon generated $23.6 billion in free cash flow. With a current market cap of $241 billion, that means the stock is trading at a price-to-free-cash-flow (P/FCF) of 10.2. Verizon also has a dividend yield of 4.3%, which is more than double what the average S&P 500 index fund yields.
Critics of Verizon might argue that it doesn't have the growth potential of other technology companies, and that's why it deserves such a dirt cheap valuation. But with the growth of 5G across the U.S, Verizon still has a lot of growth ahead of it. Plus, with such large barriers to entry and only two true competitors in the wireless communications industry, it is tough to see how Verizon doesn't at least sustain this level of cash generation over the next decade.
Nintendo is the Japanese company behind the beloved Mario, Zelda, and Donkey Kong franchises, plus many other hit video games like Animal Crossing. It has the number-one selling gaming console of the last two years in the Nintendo Switch, which has led its stock to soar more than 300% in the last three years alone. But with the stock trading at a market cap ex-cash of $55 billion, Nintendo trades at a price-to-earnings ratio (P/E) of only 13.
So what gives? Why is the market discounting Nintendo if the Switch is doing so well? Well, the main reason is that Nintendo's last successful console, the Wii, went through a rapid boom-and-bust cycle when it came on the scene a little over a decade ago. This means that most investors don't think the profits generated by the Switch and associated games are sustainable. However, if you believe Nintendo can keep up or grow its profits over the next few years, there's no reason this high-quality business should trade for 13 times earnings.
Altria Group is a sin conglomerate, with the majority of its revenue coming from Phillip Morris, the largest cigarette company in the U.S, so if you are not comfortable investing in a tobacco company, go ahead and skip this one. However, if you do dive into the sin stock world, Altria is one of the cheapest stocks out there. Even with shares up over 25% in the past three months, its dividend yield still sits at a whopping 6.72%, which is more than four times larger than the average S&P 500 index fund. Plus, with a market cap of $95 billion and $8.1 billion in annual free cash flow, Altria trades at a P/FCF of 11.7.
The market as a whole may look pricey at the moment. However, if you invest in individual stocks, there are pockets in certain unloved industries where bargain-hunting investors can get stakes in quality companies at a huge discount. Verizon Communications, Nintendo, and Altria Group are three stocks that fit these criteria.
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