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2 Ultra-Cheap Stocks Trading Below Their Book Values

By David Jagielski – Oct 7, 2021 at 8:15AM

Key Points

  • Viatris and Kraft Heinz are two underperforming stocks that have strong futures ahead.
  • Both stocks trade at price-to-book multiples below one, which could make them attractive bargain buys.
  • The companies also pay investors more than 3% in recurring dividends.

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And these stocks also pay relatively high dividends.

When a company's shares are trading below book value, that can be a sign that the stock is significantly undervalued. That's not always a guarantee because sometimes investors simply aren't willing to pay for a company's stated value if there is some serious risk facing the business. Also, they may believe the company's assets are overvalued.

But two businesses that seem to have solid potential and could be incredible bargains right now are Viatris (VTRS -2.24%) and Kraft Heinz (KHC -0.53%)

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1. Viatris

Healthcare company Viatris only began trading on the Nasdaq last year after it spun off from industry giant and COVID-19 vaccine maker Pfizer. The spin-off has allowed Pfizer to focus more on innovative medicine by allowing Viatris to stand on its own with the off-patent and generic brands. But investors haven't been bullish on the stock, as shares of Viatris are down more than 28% in 2021 (the S&P 500 is up 14%.) The stock is so deeply discounted that it is trading at a price-to-book multiple of just 0.77 -- nowhere near its stated value (i.e. assets minus liabilities.)

One of the reasons investors likely aren't buying up the stock: Viatris is incurring losses. For three straight quarters, the company has reported a net loss and two of those times it was more than $900 million. But investors need to be patient with the business as better times are ahead for the company. Viatris anticipates that it will achieve cost synergies of approximately $500 million this year. And by 2023, that number will double to over $1 billion, positioning it for a much better line item in the near future. The company hopes to achieve these cost savings through restructuring efforts, which include the consolidation of manufacturing sites and the creation of "centers of excellence" that will drive efficiency.

Viatris makes for a solid long-term hold as its business is still in its early stages and the future looks bright. Sales of $4.6 billion for the period ending June 30 were flat on an adjusted basis but that doesn't mean there isn't growth ahead. The company forecasts that this year it will have $690 million in new product revenue while still working on its pipeline to add more products into the mix (including insulin drug Semglee, which recently received approval from the Food and Drug Administration.) By adding revenue while also achieving cost synergies, profitability could be on the horizon for Viatris sooner rather than later. This promising stock also pays a dividend yield of 3.3%, which is above the S&P 500 average of just 1.3%.

2. Kraft Heinz

Another stock that looks undervalued right now is food company Kraft Heinz, known for its popular brands, including Kool-Aid and Oscar Mayer. Its shares are up a modest 7% year to date. And up until recently (perhaps due to the rise in COVID-19 cases and concerns relating to inflation) it was outperforming the S&P 500. At 0.9 times book value, it isn't as discounted as Viatris is but there's still plenty of good value here.

There will certainly be challenges ahead for Kraft as inflation due to the pandemic (e.g. increase in shipping costs and plant shutdowns) weighs down its profitability, but for long-term investors that shouldn't be a significant concern. That's why now may be an opportune time to invest in Kraft. Through the first six months of 2021, sales of more than $13 billion were up 1.6% from the same period last year. Profits of $543 million during the period also were a huge improvement from the $1.3 million loss the company incurred a year ago. Kraft is optimistic for next year, anticipating that consumption levels will be high compared to pre-pandemic levels, and it believes that with its strong margins, it will continue to deliver improved results.

Kraft isn't in as horrible of a position as its low price-to-book multiple suggests. Its food products are staples not just in restaurants but also in homes all over the world. And that can make the stock an ideal investment, regardless of the outlook for the pandemic. Plus, with a top-yielding dividend that pays 4.4%, there's plenty of incentive here for investors to just buy and hold.

Although the company cut its dividend in 2019, Kraft is in a stronger position now. Its free cash flow over the past 12 months has totaled just under $4 billion -- more than 40% higher than the $2.8 billion it generated back then. The dividend today looks much more sustainable and can be an excellent source of income for long-term investors.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends Viatris Inc. The Motley Fool has a disclosure policy.

Stocks Mentioned

Viatris Stock Quote
$10.92 (-2.24%) $0.25
Pfizer Stock Quote
$50.73 (-0.35%) $0.18
Kraft Heinz Stock Quote
Kraft Heinz
$39.62 (-0.53%) $0.21

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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