The professional investing world is obsessed with what a stock might do over the short-term. Will we have a recession? What about the debt ceiling? Which company will outperform expectations next quarter?
However, long-term investors have an advantage when short-term worries persist. Currently, short-term worries are leading some to discount high-quality businesses with solid competitive advantages and long-term prospects.
Trading at bargain valuations, the following two stocks look like steals at today's prices.
Infrastructure stocks should benefit from legislation over the next few years. Image source: Getty Images.
This cheap stock has tailwinds from infrastructure, clean energy, chips
You might not have heard of Atkore (ATKR 0.37%), but odds are you've been in a building surrounded by its products. Atkore makes electrical conduit, cables, and installation accessories, as well as safety and infrastructure parts such as metal frames, mechanical pipe, perimeter security, and cable management.
Atkore currently trades at just 6.5 times earnings right now -- probably because investors fear an economic downturn, particularly in office building construction. Moreover, Atkore's revenue and margins are coming down at the moment, as the company's huge price increases during 2021 and 2022 are now reversing as inflation comes down.
Still, those concerns appear embedded in the current price, and then some. While some may fear an economic downturn, there are also huge secular trends at Atkore's back. The onshoring of manufacturing and the buildout of new infrastructure, including broadband, green energy, data centers, and other projects from the three recently passed federal bills all use Atkore's products. With those verticals nearly certain to garner lots of investment over the next few years, that should counteract any downturn in office or residential construction -- if we even have one.
Moreover, Atkore is spending its ample cash flow wisely on two things: tuck-in acquisitions of regional suppliers, and share buybacks . Keep in mind, while some may think Atkore's profits may revert back to 2019 levels as pricing normalizes, Atkore has made 12 tuck-in acquisitions since the beginning of 2019. So Atkore's revenue and earnings should base at a much higher level than pre-COVID. Moreover, Atkore has been able to reap ample synergies by folding these new regional players into its "Atkore Business System," which optimizes and improves the acquired businesses. And the synergy benefits aren't just on costs; thanks to its increasingly diverse product base, management has said Atkore is now participating in more large global "mega-projects" inside and outside the United States.
Meanwhile, while Atkore originally forecast its earnings to fall from its outsize profits last year, management has already raised its annual guidance twice in fiscal 2023. Management now expects earnings per share of roughly $18 in the fiscal year ending in September. And the company had already outlined a goal of $18 per share in fiscal 2025, even factoring in pricing normalization. So even if earnings stay flat, at today's stock price around $120 per share, that's a 16% earnings yield.
So while investors fear a near-term downturn, does that much matter to Atkore's intrinsic value? I think not.
The 5G leader is cheap and cranking up the buybacks
T-Mobile (TMUS 0.92%) has long been known as the "value" brand in telecommunications, but when it acquired fourth-place rival Sprint in 2020, T-Mobile acquired valuable midband 5G spectrum, giving it the most formidable network in the industry.
Midband spectrum is a nice happy medium between ultra-fast speed and coverage, and T-Mobile's coup left competitors AT&T (T 1.10%) and Verizon badly behind on midband, as the two incumbents initially focused on ultra-fast but limited-range millimeter-wave spectrum. That meant these companies had to pay a whopping $23 billion and $45 billion, respectively, for C-band spectrum in 2021 to catch up. That compares with the mere $26 billion T-Mobile paid for all of Sprint in 2020, which not only brought with it even better midband licenses but also lots of customer relationships and cost synergies.
Currently, T-Mobile covers 275 million Americans with midband 5G, which is more than AT&T and Verizon have said they would cover two years from now.
There is currently about 60% 5G penetration in the U.S., according to T-Mobile CFO Peter Osvaldik at a recent industry conference. As 5G eventually becomes fully penetrated, T-Mobile should continue to take market share as it has been in the last couple years. Not only that, but T-Mobile also recently launched a new premium tier called Go 5G Plus, which could spur its customer base to upgrade, lifting average revenue per user and company margins in the future. T-Mobile also just launched a new offer to pay off customer contracts with AT&T if users switch and join the new Go 5G plan.
The new plans and offers could accelerate switching in the quarters ahead. Meanwhile, T-Mobile should also begin to penetrate markets it couldn't before it had this 5G lead, including rural markets, enterprise 5G accounts, and wireless broadband, an offering that was just rolled out in late 2021 but has already yielded 3.2 million subscribers for the "Uncarrier."
T-Mobile projects it will make between $13.2 billion and $13.6 billion in adjusted free cash flow this year, compared with a market cap of just $165 billion. And since the company is largely done with its Sprint integration and 5G rollout, management is now rewarding shareholders with an aggressive share buyback program.
Even in a recession, most people wouldn't cut their wireless plan; therefore, not only is T-Mobile recession-resistant, it's also a dirt-cheap stock taking market share and leading its industry.
