Regardless of whether you're a new or tenured investor, it's been a challenging time to have your money invested on Wall Street. Since the benchmark S&P 500 and iconic Dow Jones Industrial Average hit their record highs in early January, both indexes have entered correction territory (i.e., a decline of at least 10%).
Things are even worse for the predominantly growth-focused Nasdaq Composite (^IXIC 2.96%). Since hitting its all-time high in November, the widely followed index has gone on to lose as much as 22% of its value. This squarely put the Nasdaq in a bear market.
Although the velocity of downside moves in bear markets can, at times, be scary, history has shown time and again that putting your money to work during these downturns is a smart move. After all, every notable decline throughout history in the major indexes, including the Nasdaq Composite, has eventually been wiped away by a bull market rally.
With equities getting throttled recently, a number of great deals have emerged. What follows are three ultra-cheap, high-yield stocks that are just begging to be bought by patient investors.
Walgreens Boots Alliance: 4.2% yield
First up is pharmacy chain Walgreens Boots Alliance (WBA -0.83%), which investors can buy for approximately 9 times Wall Street's forecast earnings for 2022 and 2023.
Whereas most healthcare stocks bounced ferociously following the March 2020 pandemic lows, Walgreens and its pharmacy peers were left out. Even though healthcare stocks are highly defensive -- i.e., we can't control when we get sick or what ailment(s) we develop -- Walgreens is reliant on foot traffic to drive front-end retail sales and clinic revenue. With the pandemic slowing foot traffic significantly, the company's operating results suffered.
However, this near-term pain can be value investors' gain. That's because Walgreens has instituted a number of measures designed to boost its operating margins, improve its organic growth rate, and foster customer engagement at the grassroots level.
As I recently pointed out, Walgreens have been pulling cost levers and opening spigots at the same time. The company reduced its annual operating expenses by more than $2 billion a full year ahead of schedule. Yet it's also investing heavily in a variety of digitization initiatives designed to grow direct-to-consumer (DTC) and drive-thru pick-up sales. Even though its brick-and-mortar locations will remain its bread and butter, DTC sales are a no-brainer organic growth opportunity.
What's really exciting for Walgreens is the company's partnership with VillageMD. This duo has already opened more than 100 co-located full-service clinics, with the goal being to have more than 600 open in over 30 U.S. markets by the end of 2025. The differentiator here is these are physician-staffed clinics, meaning they're geared for repeat visitors and can more easily funnel patients to Walgreens' higher-margin pharmacy.
Walgreens Boots Alliance won't drop any jaws with its sales growth. But with a 4.2% yield and single-digit price-to-earnings ratio, it checks all the appropriate boxes to be deemed a screaming bargain.
American Eagle Outfitters: 4.7% yield
Another ultra-cheap, high-yield stock that's begging to be bought by patient investors is specialty retailer American Eagle Outfitters (AEO 2.32%). Get this: American Eagle shares ended last week at a multiple of just 6 times Wall Street's consensus earnings forecast for the following year.
Perhaps the biggest concern for this company is the growing possibility of a recession caused by some combination of high inflation rates and the Federal Reserve aggressively pumping the brakes by raising interest rates. Secondarily, American Eagle Outfitters has also contended with supply chain issues that are resulting in higher freights costs and lower margins. Keep in mind that this latter issue is short-term in nature and has nothing to do with consumer demand for American Eagle's products.
Two of the smartest reasons to buy into the American Eagle Outfitters growth story are price and inventory. In terms of the former, American Eagle offers teens and young adults brand-name merchandise that's priced attractively. Whereas Abercrombie & Fitch can break budgets and Aeropostale's deep discounts have the potential to cheapen its brand, American Eagle's price point is affordable, yet offers brand-name appeal.
As for inventory, this company's management team has a rich history of moving unwanted merchandise quickly in order to recognize more higher-margin, full-price sales.
The company is also benefiting from the exceptional growth of Aerie, its intimate apparel brand. Aerie's revenue grew 72% in 2021 over its 2019 (pre-pandemic) base, which has encouraged management to open dozens of new Aerie locations moving forward.
With a smart management team, time-tested operating model, and 4.7% dividend yield, American Eagle Outfitters looks like an ideal buy for income and value investors.
AGNC Investment Corp.: 12.4% yield
The third and final ultra-cheap, high-yield stock that's begging to be bought during the Nasdaq bear market swoon is mortgage real estate investment trust (REIT) AGNC Investment Corp. (AGNC -0.32%). AGNC can be purchased for a little over 5 times Wall Street's forecast earnings for 2023, and is trading at just 74% of its tangible net book value, as of Dec. 31, 2021.
Although mortgage REITs purchase complex assets, their operating model is pretty easy to grasp. Companies like AGNC are looking to borrow money at low short-term rates, then use this capital to purchase higher-yielding long-term assets, such as mortgage-backed securities (MBS). The wider the gap (known as "net interest margin") between the average yield received minus the average borrowing rate, often the more profitable the mortgage REIT.
It could be argued that no industry is more universally disliked by Wall Street at the moment than mortgage REITs. That's because higher interest rates will increase short-term borrowing costs. At the same time, the Treasury yield curve has flattened, which tends to shrink the net interest margin recognized by mortgage REITs.
On the flipside, higher interest rates should provide a lift to the MBSs AGNC is buying over time. Translation: Patience should allow the company's net interest margin to expand.
What's more, $79.7 billion of the company's $82 billion investment portfolio as of the end of 2021 was comprised of agency securities. These are assets backed by the federal government in the unlikely event of a default. The key point being that this added protection allows AGNC to use leverage to its advantage to increase its profits.
Considering that most mortgage REITs trade close to their respective book values, a 26% discount to tangible net book value is a bargain for AGNC. The cherry on top is that it also parses out a monthly dividend that equates to a 12.4% annual yield.