Stocks have been in rally mode over the past several months. Because of that, there aren't quite as many bargains around.
However, a few compelling opportunities remain. Brookfield Infrastructure Partners (BIP -0.80%), Devon Energy (DVN 0.19%), and Energy Transfer (ET 0.12%) are still incredibly cheap. Here's why bargain-hunting investors will want to take advantage of these spectacular buying opportunities.
Growth on sale
Brookfield Infrastructure Partners has been a growth machine over the past decade. The global infrastructure operator has grown its funds from operations (FFO) per unit at an 11% annual rate while increasing its dividend by 9% per year. The company expects FFO to grow by more than 10% again this year, pushing it up to around $3 per unit.
Fast-growing companies like Brookfield usually trade at a premium valuation. However, that's not the case here. Units currently sell for less than $36 apiece.
That gives it a valuation multiple of 12x forward earnings, which is dirt cheap, compared to the broader market. The S&P 500 currently trades at a forward price-to-earnings ratio (P/E) of more than 20x, while the Nasdaq 100 is approaching 29x.
Brookfield Infrastructure Partners is also cheaper than its corporate twin. The economically equivalent Brookfield Infrastructure Corporation's (BIPC -1.04%) share price is above $46, giving it a valuation of more than 15x FFO. While that's still cheap relative to the broader market, it's not as low as the partnership units.
That lower valuation is why the partnership offers a higher dividend yield than its corporate twin (4.2%, versus 3.3%) and the broader market (the S&P 500's dividend yield is 1.5%). This payout gives investors a nice base return to go with outsized upside potential.
An oil-fueled catalyst on the horizon
Shares of Devon Energy have fallen along with oil prices over the past year:
WTI Crude Oil Spot Price data by YCharts.
However, the company still produces a lot of cash. At $70 a barrel (slightly below the recent price), it can produce over $2 billion in free cash flow. That gives it a free-cash-flow yield of around 8%, which is attractive since most companies trade at a much lower free-cash-flow yield.
Devon certainly believes its shares are a great buying opportunity. The company repurchased $692 million of its stock during the first quarter. It also boosted its share repurchase plan by 50%, to $3 billion.
Meanwhile, the company isn't the only one buying shares. CEO Rick Muncrief stated on the first-quarter call, "In addition to our corporate buyback activity, multiple members of our management team, myself included, have also demonstrated their conviction in Devon's value proposition by purchasing stock in the open market over the past few months."
Devon will be even cheaper if oil prices rise, which could be on the horizon. OPEC has been working to hold back supplies in an effort to boost prices.
That could start working later this year, given the forecast that demand should outpace supply in the second half. Higher prices would enable Devon to produce more cash, which it could use to repurchase more of its attractively priced shares.
Low valuation = high yield
Midstream giant Energy Transfer expects to produce $13.1 billion to $13.5 billion of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) this year. With an enterprise value (EV) of $96.6 billion, it trades at a little more than 7x EV to EBITDA.
That's incredibly cheap for a well-oiled machine like Energy Transfer. That dirt cheap valuation is why the master limited partnership currently yields 9.4%.
The company trades as if it will never grow again, which isn't the case. It expects to invest $2 billion into high-return expansion projects that will grow its cash flow in the coming quarters. Meanwhile, it recently acquired Lotus Midstream in a $1.45 billion deal, which will boost its cash flow.
It has ample financial flexibility to fund growth-related investments. Energy Transfer produced $965 million in excess free cash after paying distributions during the first quarter. Meanwhile, it expects its leverage ratio to be at the lower end of its 4x-4.5x target range in the future. The company's growing cash flow and strong financial profile support its plan to increase its already high-yielding distribution by 3% to 5% per year.
Too cheap to ignore
Brookfield Infrastructure Partners, Devon Energy, and Energy Transfer trade at ridiculously low prices these days and there's no justifiable reason for their cheap prices. They generate lots of cash and have strong financial profiles. Because of that, they look like incredible bargain buys right now.
