Value stocks are shares of companies trading for low prices relative to their earnings and growth potential. They can be an excellent way for investors to minimize risk in the stock market, while also being rewarded with perks like dividends and buybacks. Let's discuss why Alphabet (GOOGL 10.22%) and Phillip Morris International (PM -1.11%) fit into this category and could make great bets for value-conscious investors.
Alphabet
Cutting-edge technology companies are not usually the first place investors look for value, but Alphabet is an exception. The search giant faces challenges from an undiversified business model and possible moat erosion by generative AI platforms like ChatGPT. But with a rock-bottom valuation and an exciting growth strategy, shares look like a good deal.
With a market share of 83% in desktop search, Alphabet's Google dominates its industry. But in some ways, the company has become a victim of its own success. In the second quarter, Google advertising (including YouTube ads) was 81% of total revenue, while other businesses, such as cloud computing and hardware, represented the remainder. The lack of diversification may contribute to Google's low valuation by making it vulnerable to threats like ChatGPT, which can conversationally answer user questions.
However, Google's ubiquitous internet presence gives it a competitive moat. To take advantage of this, the company has added optional AI-powered search results to its regular platform, eliminating the need for current users to seek alternatives. AI could also boost Google's cloud computing segment, where its machine learning and other tools can help enterprises create computationally complex applications.
With a forward price-to-earnings (P/E) of 20, Alphabet's stock is significantly cheaper than the S&P 500 average of 25. And shares look like a steal compared to shares of AI-focused rivals like Nvidia or Amazon, which boast P/E multiples of 44 and 42, respectively.
Phillip Morris International
The tobacco industry is a favorite for value investors because its customers tend to stick around in good or bad economies. Phillip Morris International has the added advantage of a diversified and evolving business model. Its low valuation and big dividend are the icing on the cake.
Phillip Morris is leading the transition from traditional cigarettes to reduced-risk tobacco products such as heated tobacco units (HTUs), a system that releases nicotine by heating instead of burning, releasing less harmful chemicals. So far the strategy is working. HTU shipments jumped by a whopping 26.6% year over year to 31.4 million units in the second quarter, helping make up for flat traditional cigarette sales.
Smoke-free products (which include vaporizers and oral tobacco) are now 35% of Phillip Morris's total revenue. The company plans to increase this number to 50% by mid-decade. While the new safer products may cannibalize Phillip Morris's traditional cigarette sales, they can help future-proof the company's revenue as consumers become increasingly health-conscious about the risks of smoking.
Image source: Getty Images.
With a price-to-earnings (P/E) of just 14, Phillip Morris' valuation is well below the market average. And the company sweetens the deal with an annual dividend yield of 5.45%.
Which stock is better for you?
While Alphabet and Phillip Morris International are excellent value stocks, they serve different investment strategies. Alphabet is more expensive. But this makes sense considering its growth potential in the red-hot AI opportunity. Phillip Morris will likely experience slower growth in the mature tobacco industry. But its stock is ideal for investors prioritizing stable dividend payouts over top-line growth.
