Making good long-term investments requires finding great companies that have the products, business models, and leadership to succeed over the long run. But investors also need to consider the valuation of these companies. A great stock trading at an inexpensive valuation offers more downside protection, as well as more room for potential upside, than a great stock already trading at sky-high valuations.
Fortunately for investors, there are some great stocks in the financials sector that are currently trading at strikingly cheap valuations despite having compelling stories and business models. These two dirt-cheap financial stocks look like solid buy-and-hold investments to bolster your portfolio for the next decade.
Ally Financial: The Main Street mainstay
It doesn't get much cheaper than Ally Financial (ALLY 1.91%), which currently trades at just 4.3 times earnings. Furthermore, shares trade below book value, which means that investors are valuing the company at less than it would be potentially worth if the company's assets were to be liquidated. This gives investors a margin of safety when starting a position in Ally.
In addition to its favorable valuation, Ally is also committed to creating and increasing shareholder value via returns to shareholders. The company pays out a dividend that currently yields an attractive 3.45%. But where Ally really shines is with share buybacks. Ally has been consistently repurchasing its own shares over the past six years, and the board recently enacted a $2 billion share-repurchase authorization for 2022, which means that it could buy back almost a fifth of its current market cap.
While Ally is over 100 years old, don't mistake it for a stodgy, old-fashioned bank -- Ally was a leader in online banking before it became widely adopted and maintains a large online presence. Ally has taken advantage of its online-centric, asset-light model to produce higher returns on equity than competitors with large brick-and-mortar footprints. Ally is one of the largest auto lenders in the United States (it started out as the financing segment of General Motors), but it has also expanded into personal banking, investing and retirement, credit cards, mortgages, and more. Ally even had its own island in the popular Animal Crossing video game, showing that this century-old bank still has its finger on the pulse of younger consumers.
Goldman Sachs: The Wall Street blue chip
Moving from Main Street to Wall Street, let's take a look at Goldman Sachs (GS 1.11%). While not quite as cheap as Ally, Goldman Sachs is also remarkably inexpensive right now. Shares of the New York City-based investment bank are trading at just under 6 times earnings and right at price-to-book value. Goldman also offers a solid dividend yield of 2.7%.
The 153-year-old firm has a rich history in banking and is arguably the world's highest-profile and most prestigious investment bank. IPOs have cooled down so far in 2022 because of an uncertain market environment, which is likely part of the reason shares of Goldman Sachs are cheap right now. But the IPO market will eventually come back, and the company has earned its reputation as a blue-chip investment for over a century and a half.
While Goldman Sachs will benefit from an eventual comeback in IPOs and mergers and acquisitions (M&A) activity, it should also be noted that the company has diversified by expanding into other lucrative business segments over the last few years. For example, Marcus by Goldman Sachs brings the Wall Street bank into online consumer banking with products like high-yield savings accounts, automated investment portfolios, and loans. Marcus has also gained traction in credit cards, partnering with prominent companies like Apple (NASDAQ: AAPL) and GM (NYSE: GM) to offer branded cards. CEO David Solomon has said that he expects Goldman's consumer business to grow from a $1.5 billion business into a $4 billion business over the next two years.
Lastly, Goldman has also made some waves for increasing the pay of its associates, which I view as a positive in an environment in which companies are facing new challenges in terms of attracting and retaining talent. The move should help Goldman attract and keep top talent, which is something that I want to see one of my investments doing.
In order to enjoy solid long-term returns, it's essential to look for attractive valuations in addition to great companies. Ally Financial and Goldman Sachs tick both boxes and are potential investments that will bolster your portfolio over the next decade.