It might be hard to appreciate right now, but we've had it pretty good as investors. Not since October of 2011 -- three years ago -- has the stock market seen a 10% correction. Usually, these occur about once per year. The recent market fall has lots of investors asking what the cheap stocks to buy now are.
But while many stocks have fallen hard over the last few weeks, that doesn't necessarily make them "cheap." It just makes them "cheaper than a few weeks ago." We should never anchor to all-time highs as a measure for whether or not it's time to buy a stock.
Instead, we should focus on fundamentals. And when we do, there are two well-known stocks that stick out as solid choices no matter if the market goes up or down -- as they both appear to be dirt cheap.
Food-maker falling on hard times
The novice investor may not be familiar with ConAgra Foods (CAG 0.72%), but they are no doubt familiar with the company's expansive line of foods offered at nearly every grocery store in America.
Some of ConAgra's most important brands. Source: ConAgra.
ConAgra has fallen on tough times because of two main culprits. First is the natural/organic food wave that has steadily been sweeping the country. Most of the food ConAgra offers would be considered neither fresh (as much of it is frozen or stuffed with preservatives) nor organic.
The second mark against the company came in the form of an ill-advised and poorly executed acquisition of Ralcorp last year. ConAgra decided to acquire the company to diversify its offerings to include private label brands.
Overall, that's not a bad idea. But the company is now saddled with debt, and the Ralcorp division saw profitability plunge as ConAgra struggled to integrate its new division in ways that created immediate cost savings.
So, what makes the company, and its hefty dividend, look so good now?
Many investors out there are proclaiming that ConAgra's dividend is unsustainable because it has such a high payout ratio. The problem is these folks are looking in the wrong place -- earnings -- when they should be looking at the company's free cash flow.
Earnings are fraught with accounting gimmicks, while free cash flow measures the actual amount of money a company is putting in its pockets every year.
In fact, if we focus on free cash flow instead of earnings for valuation -- as well as the company's dividend -- we see that ConAgra is also trading for a much lower multiple than some of its largest competitors, like Kellogg (K 0.10%) and Kraft (KRFT.DL).
While I can't argue that ConAgra is in a tough spot with consumer trends changing, the company is already starting to shift its product mix to match these shifting tastes. Recently, management announced that its Café Steamer line of Healthy Choice foods -- aimed at more health-conscious eaters -- was performing very well. I doubt Café Steamers will be the last of the company's product innovations.
And while the integration of Ralcorp has been botched thus far, a new executive team is now in the C-Suite, and I think investors can count on pricing synergies eventually coming to fruition.
The company's dividend may not take many big hikes in the near future since cash needs to be devoted to paying down debt. But with a 3% dividend yield today, investors will be rewarded for their patience.
Everyone's favorite wireless provider
The second cheap stock to buy that I'm introducing today is likely one you are very familiar with: Verizon (V 0.69%). Typically, huge telecoms like Verizon and rival AT&T (T 1.26%) have very comfortable positions within their field. It takes massive amounts of infrastructure -- think telephone lines, fiber optic lines, satellites, towers, and the like -- to run a telecom business, so the barriers to entry are therefore very high.
That alone makes Verizon an enticing purchase -- but there's something else afoot, too. Verizon Wireless used to be a joint venture owned by Verizon and Vodafone (VOD 0.99%) -- and wireless represents a massive growth opportunity. But over the past year, Verizon bought back the rest of the venture from Vodafone.
Some believe the company may have overpaid -- it handed out $130 billion to Vodafone in cash and shares. Because of that, Verizon has $108 billion in debt versus only $6.5 billion in cash. That may seem alarming, but that debt can be paid out over time, and Verizon has prodigious free cash flow to cover its obligations and continue paying its dividend.
What Verizon is left with is the only nationwide 4G LTE network -- something of incredible value, and that should help drive even stronger cash flow in the future.
Even though AT&T currently has a higher dividend yield than Verizon, 5.4% versus 4.6%, Verizon has both the stronger dividend and the cheaper stock based on free cash flow, as you can see below.
It's important to note that an investment in Verizon isn't without its own risks. Verizon is still saddled with a shrinking landline business, and its FiOS could face competition from Google (GOOG 1.49%) (GOOGL 1.56%) and its ambitious fiber network plans in the future.
That being said, the company's outsized dividend is a nice reward for investors who are willing to see how the wireless space plays out.
