My personal real-money portfolio holds 32 different stocks. Most of them are high-flying growth stocks, but a few are deeply discounted value investments. It's hard to beat the bargain-bin valuation I see in Nokia (NOK -2.25%) and IBM (IBM 1.38%) -- two of the cheapest stocks I own.
Computing veteran IBM started an ambitious strategy change in 2012, and the stock has shown disappointing returns ever since. We Big Blue investors are not keeping up with the gains of the broader stock market.
At the same time, IBM's cash machine never really slowed down. The company's free cash flows clocked in at $14.5 billion over the last four quarters. As a result, IBM stock is trading at the red-tag valuation of 9.3 times free cash flows or 14 times forward earnings. Plug these figures into a discounted cash flow calculator and you'll find that the stock is trading more than 50% below its cash-based fair value.
The funny thing is, IBM is primed for market-beating business results over the next decade or more. The $34 billion Red Hat buyout was incredibly smart, and IBM is arguably turning itself into a larger version of that open-source software specialist with deeper pockets and a better global market reach.
Playing the long game can be frustrating at times, but there is no doubt in my mind that IBM is gearing up for fantastic returns. The company's focus on artificial intelligence, data security, and business services, all based on hybrid cloud services, will pay dividends in the post-pandemic era.
The spinoff of IBM's managed infrastructure services as Kyndryl later this year will give new investors a choice between higher growth rates in the remaining IBM company or ultra-stable cash generation from Kyndryl. I look forward to holding both of these stocks for many years to come.
Telecom infrastructure giant Nokia is affordable from many angles. The stock is trading at a 54% discount to its cash-based fair value, with the added distinction of trading hands for less than $6 per share. Just like IBM, I believe that Nokia is poised to crush the market for the foreseeable future as telecoms around the world build out their 5G wireless networks.
The Finnish company works in a cyclical market that depends on generational shifts in wireless communications standards. Nokia's 4G cycle was distorted by the fact that smartphones from Apple and Alphabet destroyed this company's market-leading position in simpler voice-plus-text handsets. This time, Nokia can put its back into the infrastructure market without worrying about the financial health of a larger and more important division.
Looking beyond the current upswing, Nokia is already busy defining the standards of the 6G platform. In other words, the 5G revolution is not the end of the road.
The low stock price led to Nokia's shares being swept up in the Reddit trading games of 2021. The stock has been volatile this year and could drop back down to roughly $4 per share at a moment's notice. If so, I'll be first in line at the buying window.
Don't let that stop you from starting a position in this healthy stock, though. Even without a return to last year's valuation ratios, Nokia is a low-priced ticker tied to a business with promising long-term growth prospects. You can't say that about most of its fellow meme stocks.