Volatility, shmolatility. For long-term investors, buying stocks during times of market upheaval can pay off nicely over time.
We asked five Motley Fool.com contributors about their top stocks to buy in February. Here's why they picked Cleveland-Cliffs (CLF -0.10%), Ford Motor (F 0.66%), Roblox (RBLX -0.59%), Roku (ROKU -3.05%), and Vertex Pharmaceuticals (VRTX 0.20%).
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Too cheap to ignore
Tyler Crowe (Cleveland-Cliffs): Yes, I'm fully aware that I'm recommending an iron ore and steelmaking company with steel prices touching all-time highs. The cyclical nature of the steel industry says this is as good as it gets for steel manufacturers, and now is a bad time to add money to a steelmaker.
Here's why I'm going against that logic.
For one, Cleveland-Cliffs is completely unrecognizable compared to what it was a few years ago. I say that as a compliment to management's prudent oversight of the balance sheet, timely acquisitions, and forward-thinking investments. The company has transformed from a debt-laden diversified miner to an integrated steelmaking powerhouse that has a much more manageable balance sheet and improving credit ratings. Management noted on its most recent conference call that it generated $500 million in free cash flow in the three weeks after the end of the third quarter and that all of that excess cash went to debt repayment.
Even if we were to see a significant decline in steel and iron ore prices from here, there is still a lot of value in Cleveland-Cliffs' stock. If it can use this period of high steel prices to knock down its debt load to an investment-grade credit rating, then it's reasonable to think that management will reinstate its dividend and buy back more stock.
Cleveland-Cliff's stock trades at a price-to-earnings (P/E) ratio of 4.4 and at only 2.2 times 2022 earnings estimates. Even if steel prices were to decline from here, it appears that there is a considerable margin of safety baked into the price of this stock.
Electrify your portfolio
Dan Caplinger (Ford Motor): It wasn't that long ago that most investors had given up on Ford Motor. The legacy automaker seemed to have missed out on the electric vehicle (EV) revolution, and its stock floundered even as innovative rivals like Tesla came onto the scene with huge success in the EV market.
Over the past couple of years, though, Ford has been among the best-performing stocks in the stock market, and its work to catch up on the EV front is largely responsible. The automaker came out with its Mustang Mach-E SUV to huge success last year, establishing itself as a serious player in the electric market.
What really has investors excited, though, is the pending release of the electric F-150 Lightning pickup truck. Already, Ford has doubled its planned Lightning production to 150,000 electric trucks per year. More broadly, the company hopes to boost its capacity for battery production in order to make 600,000 electric vehicles annually.
Even after rising to its best level since the early 2000s, Ford stock still carries a reasonable valuation and pays a 2% dividend yield. Add to that the sizable stake it has retained in EV specialist Rivian Automotive -- with its own $50 billion market capitalization -- and Ford definitely has come out of its slump and is hitting the gas in 2022.
Metaverse Building Blox
Adam Levy (Roblox): Shares of Roblox have fallen sharply amid news of rising inflation and planned rate increases from the Fed. With shares trading hands at more than 55% off their all-time high, right now is a good opportunity for investors interested in snatching up shares of the metaverse stock.
The company continues to see strong growth in gross bookings, which were up more than 20% in November after registering triple-digit growth the year before. Bookings growth is a leading indicator of revenue growth since Roblox defers revenue over the useful life of durable virtual items (23 months), which account for the vast majority of in-game purchases. As such, during periods of high growth, there's a significant gap between bookings and revenue, and bookings is a better metric with which to value the stock.
At its current share price, Roblox trades for around 13 times bookings. That's more than a reasonable valuation for a company with Roblox's growth potential.
It ended November with just 49.4 million active users. The most popular games and platforms have hundreds of millions of players around the world. And Roblox's ambitions extend beyond gaming, viewing itself as more of a social network than just a gaming platform. As it scales, it should see leverage on its operating expenses, resulting in strong earnings growth.
Roku means "six" in Japanese and "buy" in my dictionary
Anders Bylund (Roku): I love it when a company is set up for long-term success while its stock hangs out in Wall Street's bargain bin. These value-building mismatches typically appear when the company runs into short-term issues that bearish investors misinterpret as deal-breaking flaws in the business model itself.
That's where you'll find media-streaming technology developer Roku these days. Roku shares have taken a 67% haircut over the last 6 months, including a 36% drop in the last month alone. Most of this investor pain flowed in from the marketwide rejection of high-priced growth stocks. Roku itself is not really doing anything wrong.
The strongest bearish argument I've seen in this period is that Roku's share of the digital media market may be skinnier than expected, but the company keeps proving that hypothesis wrong in every earnings report. Roku has consistently smashed analysts' consensus earnings targets in each of the last six quarters, typically paired with a resounding revenue surprise to the upside.
Roku has also successfully renegotiated its distribution contract with Alphabet's Google TV platform, launched its own original content production effort, and walked away from a high-profile patent infringement case largely unscathed. And in the long run, the global market for connected media devices has a long runway of high-octane growth ahead of it. All of this is good for Roku and its shareholders.
Long story short, Roku's business was impressive a year ago and is improving by leaps and bounds today -- and the stock is on fire sale for all the wrong reasons. That's a fantastic buying opportunity in my book.
A juggernaut with big opportunities on the way
Keith Speights (Vertex Pharmaceuticals): Many biotech stocks are off to a dismal start in 2022. But not Vertex. Its shares are up around 10% year to date. I think this is just the beginning of a great run for the stock.
Vertex is already a juggernaut in cystic fibrosis (CF). It expects that sales of its CF products, led by Trikafta/Kaftrio, will jump close to 12% in 2022. However, even bigger opportunities are likely on the way.
The company expects to advance VX-147 into late-stage testing within the next couple of months in treating APOL1-mediated kidney disease. The genetic disease represents a larger potential global market than CF. Vertex is also moving forward with clinical studies of other pipeline candidates, including a potential cure for type 1 diabetes.
Vertex and its partner, CRISPR Therapeutics, plan to file for regulatory approvals of CTX001 in treating sickle cell disease and beta-thalassemia later this year. I look for the gene-editing therapy to win approvals and become another blockbuster for Vertex.
Thanks to the continued strength of its CF franchise and these additional promising candidates, Vertex's price/earnings-to-growth (PEG) ratio currently stands at a super-low 0.35. This big biotech stock could look like a steal at its current valuation within the next few years if Vertex successfully expands beyond CF.
