I own a lot of stocks that other investors believe are expensive. But given enough time, companies can grow their businesses enough to justify their high price tags. And I fully intend to give these high-growth companies in my portfolio plenty of time to reach their potential. I have around 30 years before reaching retirement age, so I'm patiently holding for the long term.
But I don't only invest in expensive stocks. I own cheap stocks too if I believe those companies can generate a good return on my investment. Two of the cheapest stocks I own are Lowe's (LOW 0.92%) and Kellogg (K +0.00%).
Here's why I own these two specific stocks and why I'm optimistic they can deliver positive returns over the long haul.
Image source: Getty Images.
1. Lowes: A forever stock
A bet on Lowe's is a bet on the stability and longevity of the home-improvement space. In reality, I think stock in both Lowe's and its larger rival Home Depot can be bought and held forever -- it's hard to imagine one doing well and not the other. Take 2020 as an example. Comparable sales for Lowe's increased 26% from 2019. Comparable sales for Home Depot were up 20% -- less than Lowe's but still enough to suggest both companies were benefiting from general consumer trends and not from unique operational decisions.
Typically, we don't consider traditional retail sales as a recurring revenue opportunity. But if you think about it, we simply can't avoid ongoing spending for home maintenance and improvement. For example, landlords tend to budget at least 1% of a home's value annually for maintenance expenses. Major repairs like a new roof or water heater are another line item on the budget. By selling items for any do-it-yourselfer or professional, Lowe's and Home Depot should benefit forever from our universal need for housing. It's as close to recurring revenue as you'll see in brick-and-mortar retail.
I bought Lowe's for my portfolio over Home Depot for two reasons. First, it's cheaper by standard valuation metrics. Looking at the price-to-earnings (P/E) ratio, Lowe's trades at a P/E of 21 whereas Home Depot trades at a P/E of 23. But more importantly, Lowe's has never captured the pro customer like Home Depot has. More recently it's been a focal point for Lowe's management, and winning with pro customers could give Lowe's stock more upside than Home Depot.
It's hard to gauge Lowe's progress with its pro customers. But results in the first quarter of 2021 were promising. Comparable sales from DIY customers outpaced comparable sales from professionals in 2020. But in Q1, pro customer comps were up over 30% year over year, outperforming DIY sales. It might be an easy year-over-year comparison -- perhaps there wasn't much work for pros in the first quarter last year. Then again, it's a promising start to what I hope will become a trend for Lowe's going forward.
Image source: Getty Images.
2. Kellogg: A stable stalwart with future optionality
Most people associate Kellogg with breakfast cereals and Pop-Tarts. Trivia lovers might know the company also owns Pringles. However, Kellogg has a large portfolio of food items, including some with great growth prospects. For example, many brands like Pringles and Cheez-It are just starting to expand internationally in important markets like Australia and South America, providing top-line growth for these established product lines.
By diversifying from cereal to a variety of food items, Kellogg has optionality. For example, its Morningstar Farm brand is a leading plant-based meat line of products. In the first quarter of 2021, management shared that this is now a business with $400 million in sales and has grown at a 17% two-year compound annual growth rate. For perspective, plant-based meat pure-play Beyond Meat generated $407 million in 2020 sales, growing almost 37% from 2019 sales.
Investors should be careful drawing too many conclusions from Beyond Meat comparisons since Kellogg doesn't break out the unit economics of Morningstar Farms. But this is nevertheless a clear demonstration of how a mature company can leverage its optionality to build a meaningful presence in an emerging consumer trend, potentially providing some upside for investors.
Kellogg isn't a high-growth business overall. Management expects organic sales to be flat in 2021 compared to 2020. That said, it is profitable and trades at just 17 times trailing earnings. With its strong cash flow, it rewards shareholders via share repurchases and a fat dividend currently yielding 3.6%.
International growth, new faster-growing product lines, a high-yield dividend, and a cheap valuation are all reasons I think Kellogg stock will go up long term.
Investor takeaway
Lowe's and Kellogg stocks aren't necessarily among my best bets for beating the market going forward. But if you're searching for some quality value stocks to add to your portfolio, these two may be worth a closer look.
