Investors have had a bit of a rude awakening over the past two-plus weeks. Amid the longest economic expansion in U.S. history and a more than decade-long bull market, they've been reminded that the stock market can, and will, swing in both directions.
Over a 10-session stretch, the 123-year-old Dow Jones Industrial Average logged its two largest single-day point gains in history, as well as five of its 10 biggest single-session point declines of all-time. This volatility is being caused by the global spread of coronavirus disease 2019 (COVID-2019) and the subsequent uncertainty that COVID-19 could have on global supply chains. The clear indication from the market over the past two-plus weeks is there's real concern about a global and/or U.S. recession.
But as the stock market has "plunged," so have the valuations of a number of brand-name companies. It didn't take me long at all to locate four well-known stocks that are currently cheaper than they've been at any point over the past 10 years. Keep in mind that "value" can be interpreted a lot of ways, with everything from book value and cash flow, to more traditional metrics like forward price-to-earnings ratio, taken into account.
When it comes to cheap banking stocks, money-center giant Wells Fargo (NYSE:WFC) probably leads the list. As of this past weekend, Wells Fargo was valued at just 92% of its book value and a little more than 9 times its forward earnings per share estimate from Wall Street. The book value figure is at least a decade low, with the forward P/E figure an eight-year low.
Much of this underperformance in Wells Fargo is its own doing. For those who may not recall, Wells Fargo employees wound up opening 3.5 million fake accounts as part of an aggressive product cross-selling campaign at the branch level. When announced in 2016, it completely wrecked management's reputation, with Wells Fargo now on its third CEO since the scandal was made public.
However, the company agreed to pay $3 billion to settle criminal and civil litigation tied to these fake accounts last month. This isn't to say that Wells Fargo will immediately rebuild the trust it had with consumers, but it's feasible to assume that the negative overhang of this debacle will slowly but surely fade away. That makes Wells Fargo and its 5.2% dividend yield a potentially attractive stock to consider for investors with a long-term mindset.
American Airlines Group
If there's one industry that's been absolutely clobbered by the spread of the COVID-19 illness, it's the airline industry. Airlines require a lot of capital to operate, and they historically perform very poorly when hit with recessions or exogenous shocks.
American Airlines Group (NASDAQ:AAL) is the perfect case in point. American Airlines has lost practically half its value over the past four weeks, with its stock now valued at just 1.9 times its cash flow and a little over 3 times next year's earnings per share (EPS). The forward EPS figure is at least a decade low, while the valuation to cash flow is the lowest it's been since American was working through bankruptcy proceedings in 2012.
However, a low share price doesn't always mean a well-known stock is a buy. While an argument can rightly be made that investors have overreacted to the COVID-19 scare, American Airlines is also the most indebted of all major airlines. The company's push to modernize its fleet has ballooned its debt beyond $33 billion, and pushed its net debt to nearly $30 billion. In short, American Airlines is ill-prepared if this drop-off in travel extends for months to come.
Another industry that's fallen out of favor with most investors is tobacco. Altria Group (NYSE:MO) has lost in the neighborhood of 45% of its value in less than three years, primarily due to U.S. adult smoking rates pushing to an all-time low. As education surrounding the dangers of smoking tobacco has improved, Altria has seen its cigarette shipment volume tail off.
Following the last two weeks of heightened volatility in the stock market, Altria's forward P/E and price-to-cash-flow have declined to 9.6 and 10, respectively. Both are low-water marks dating back to at least 2010, if not well before. Not to mention, Altria's sought-after dividend is now up to a whopping 7.7%.
For those of you who avoid vice stocks, there's nothing to see here. But if vice stocks aren't a turnoff, Altria Group may be worth a closer look. It's had some miscues of late, with its investment in Juul being written down on two separate occasions, and its $1.8 billion equity stake in Canadian pot stock Cronos Group also underwater. However, Altria has incredible pricing power on its tobacco products, and the company has historically not been shy about repurchasing its own stock to create shareholder value.
Circling back to the banking industry once more, U.S. Bancorp (NYSE:USB), the namesake behind U.S. Bank branches, is pushing into rarely chartered territory on the valuation front. Since mid-December, U.S. Bancorp has shed roughly 30% of its value, all while seeing its forward P/E and price-to-book value decline to 9.8 and 1.41, respectively. Both figures are the lowest they've been since at least 2010.
The big concern of late is that the Federal Reserve may have to get even more aggressive with its monetary playbook, including further easing of the federal funds rate, to keep the U.S. economy out of recession. As interest rates fall, banks will likely see their net interest margin shrink. Banks are a cyclical industry, meaning any hiccups in the U.S. economy would likely result in profits declining.
But even if such a scenario comes to fruition, U.S. Bancorp has proven itself to be a high-quality financial institution. Management avoided the risky derivatives that sank many of its peers during the financial crisis, with U.S. Bancorp predominantly focused on growing its deposits and loans, and shrinking noninterest expenses. Having consistently produced one of the highest return on assets in the banking industry, U.S. Bancorp may offer real value here.