While the stock market has soared since bottoming out in March amid the worst of the COVID-19 pandemic, pushing valuations of some prominent stocks to record highs, there are still some cheap, high-quality stocks available. Economic uncertainty and a possible second wave of the virus could introduce some volatility in the coming months, but that doesn't really matter for long-term investors.
Two cheap stocks that investors should consider are International Business Machines (IBM 0.17%) and Intel (INTC -0.80%). Both are facing major challenges, but rock-bottom valuations and key competitive advantages make both stocks worth buying.
International Business Machines
Shares of IBM have not really participated in the tech rally that has played out over the past few months. IBM stock has rebounded from its pandemic low, but it remains down more than 10% this year.
Given the extreme economic uncertainty, it's no surprise that IBM has seen some of its customers pull back on spending. Management talked about a pause in large purchases and discretionary spending from clients in its second-quarter earnings call, particularly in perpetual software licenses and project-oriented services. Total revenue was down 5.4% in the second quarter.
While IBM will feel some pain for a while, investors shouldn't ignore the company's competitive advantages. The company has relationships with some of its large customers that span decades, and the acquisition of Red Hat gives IBM the ability to deepen those relationships by pitching Red Hat's platforms. The mainframe business, while certainly not a growth business, is extremely sticky and reliable.
Those longtime relationships with customers give IBM an edge as it continues to invest in cloud computing, artificial intelligence, and other growth areas. IBM CEO Arvind Krishna, who took over in April, was previously in charge of the cloud and cognitive software segment.
While IBM's earnings are hard to predict in the short term, the stock trades for just 9 times the adjusted earnings produced in 2019. Tech stocks in general have become expensive, but IBM is one of the few genuine values available. The company certainly faces challenges as it navigates the pandemic economy, but for investors willing to hold the stock for years, there's a lot to like.
Intel stock is down this year as well, although for non-pandemic-related reasons. The company has allowed rival Advanced Micro Devices (AMD -0.19%) to largely catch up in terms of performance in the PC and server chip markets. AMD has put out good products, but Intel squandered its lead and has struggled with manufacturing issues. Intel's 10nm manufacturing process was badly delayed, and the company announced in July that it was delaying its 7nm process as well.
AMD uses third-party foundry Taiwan Semiconductor Manufacturing for its chips. The company's Ryzen PC chips and EPYC server chips are currently built on TSMC's 7nm process, advanced enough to have mostly closed the performance gap with Intel's products. AMD now holds nearly 20% of the PC chip market and close to 6% of the server chip market. Both numbers are up substantially over the past few years.
While AMD is a real threat, Intel still makes good products. The company's latest Tiger Lake laptop chips, for example, perform well against AMD's latest laptop chips and feature greatly improved integrated graphics that minimize one of AMD's key advantages.
Intel also still makes a lot of money and has been growing revenue during the pandemic. Second-quarter revenue was up 20%, largely due to data center growth, while earnings per share jumped 29%. The company expects to produce adjusted earnings per share of $4.85 this year, which puts the price-to-earnings ratio at just about 10.
Intel certainly faces threats, from AMD as well as from graphics chip company NVIDIA following its announced acquisition of ARM Holdings. But the stock is cheap, and Intel's products are still competitive. The company has suffered multiple missteps, but that doesn't mean it can't recover in the long run.