Are you in a sound financial position where you're able to stay on top of your bills while also maintaining a solid emergency fund? If you are, you may want to consider investing the latest stimulus payment, if you received one. At the end of 2020, the government passed another pandemic relief bill that included sending checks of up to $600 to individuals, depending on their income levels. Many people are already receiving their stimulus checks.
On its face, $600 may not seem like a lot of money, but over the years it can grow significantly -- particularly when invested in undervalued stocks. Two stocks that are trading at modest earnings multiples are Merck (MRK 0.82%) and eBay (EBAY +1.18%). Together, they can be the building blocks of your portfolio for many years. And in addition to being cheap buys, they also pay dividends and can deliver recurring income to your portfolio.
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1. Merck
Healthcare company Merck struggled in 2020, with its stock falling more than 10% while the S&P 500 rose 16%. Although the company's performance during COVID-19 hasn't been awful, the results also haven't been good enough to get the stock rallying, either.
On Oct. 27, the New Jersey-based company released its third-quarter results for the period ending Sept. 30, and sales of $12.6 billion were up just 1% year over year. Its flagship cancer-fighting drug Keytruda remained a source of strong growth for the company, rising by 21%. However, sales from Gardasil, its human papillomavirus vaccine, were down 10% as the company blamed lower demand due to the pandemic. In total, management expects that COVID-19 will negatively impact its top line by approximately $2.35 billion for the full fiscal year, which is higher than the $1.95 billion it projected earlier in the year.
But some good news came from its animal health segment, which grew at a rate of 9% year over year. With pet ownership on the rise in 2020, this tailwind will likely endure.
With certain segments still generating growth despite the headwinds from the pandemic, there's reason to be optimistic that the stock could turn things around as early as this year. And over the long term, its sales could climb even higher. In November, Merck acquired biotech company VelosBio for $2.75 billion to expand its oncology portfolio. VelosBio owns VLS-101, an early-stage drug targeted to treat mantle cell lymphoma that has received orphan drug and fast track designation from the Food and Drug Administration.
Today, the stock trades at a price-to-earnings (P/E) ratio of 18. That's cheap given that investors are paying 27 times earnings for the average stock on the S&P 500.
For value investors, this healthcare stock could be a great buy due to its value and its potential to bounce back this year. Getting it at this cheap of a price can help position you for some great returns over the long run. And with a dividend yield of 3.2% (the S&P 500 average is roughly 1.6%), it can pad your returns even further.
2. eBay
E-commerce stock eBay is coming off a decent year in 2020, rising 39% in value as the pandemic led to a surge in online shopping. And that's a trend that isn't necessarily slowing down. When the California-based company released its third-quarter earnings on Oct. 28, it reported annual active buyers of 183 million for the period ending Sept. 30 -- up 5% from 174 million reported in March.
Its net revenue through the first nine months of the year totaled $7.4 billion, growing at a rate of 15.7% from the prior-year period. And those strong top-line results trickled down through to earnings where eBay reported a year-to-date operating income of $2 billion -- up 47.5% from the same period a year ago. Even with the sale of its classified business and StubHub, the company is still generating solid growth numbers from its core business -- its online marketplace.
But despite the company's strong performance recently and its rise in value, it's still a cheap stock to own. At a P/E of 15, it's even cheaper than Merck. And it looks like an even better bargain when compared to other e-commerce stocks. Shopify barely makes a profit and has a P/E of more than 700 while Etsy trades at close to 100 times its earnings.
Although the pandemic definitely gave online shopping a boost in 2020, it's not a trend that's likely to go anywhere but up over the long term. According to research from eMarketer, retail e-commerce sales in the U.S. are expected to rise to more than $1.2 trillion by 2024, up from $795 billion in 2020. By then, they'll make up more than 19% of all retail sales compared to over 14% this past year. eBay is proving that it still plays a key role in that growth and can benefit from those buying habits, making it an excellent investment that can generate strong returns for your portfolio for many years to come. As a bow on top, the stock also pays a dividend that currently yields 1.3%.
