Sometimes, stocks can fall so far out of favor that the market overlooks the obvious opportunity to profit from them. This is part of the natural market cycle, and for long-term investors, these situations present opportunities to buy great businesses at bargain-basement prices.
Right now, three stocks that I think are very cheap are Disney (DIS -0.04%), MGM Resorts (MGM -2.58%), and NextEra Energy (NEE -1.36%). All have real potential to grow long-term. Here's why these three bargain-basement stocks are buy-and-hold candidates.
Image source: Getty Images.
1. The Disney magic is gone ... for now
Much ink has been spilled about the decline in Disney's business over the last few years. The company pressed too hard into streaming, created too many Star Wars and Marvel movies, and its television network and cable business is eroding faster than expected.
But this is still one of the best media businesses in the world, and it has a catalog of intellectual property that's the envy of every other studio. The fixes for its content and streaming woes seem pretty straightforward. Disney will produce less content, increase quality, and charge higher prices for its streaming subscriptions.
Its linear TV issues will be harder to fix; I suspect Disney will likely sell some assets, including the ABC television network and even its various ESPN cable channels.
What investors should really be watching is the parks business, which generates nearly $10 billion per year in operating income and will see $60 billion of investment over the next 10 years. This is now the stable cash-flow engine of Disney, and the upside is the company figuring out a way to create a content bundle on its own with Disney+, Hulu, and ESPN+. I think Disney will be a media winner long term, and while the current period has produced some painful results, that's why the stock is a bargain.
2. MGM Resorts: The cash register in the desert
MGM Resorts runs nearly half of the resorts on the Las Vegas Strip, has two casinos in Macao, and is building a property in Japan that could become the most profitable casino in the world when it's complete. This company is a cash-flow machine, and I think that's an attribute that is being overlooked by the market.
You can see in the chart below that MGM now generates over $1 billion in free cash flow, and that doesn't include a full year of normal operations from Macao -- that market only really started recovering from China's COVID-19 lockdowns about six months ago. And management has been using its free cash flow to buy back stock like crazy.
MGM Free Cash Flow data by YCharts.
As people resume spending more time and money traveling to visit friends and colleagues, central meeting locations like Las Vegas and Macao have become even more valuable. I think that bodes well for MGM's long-term growth. The stock trades at a forward enterprise-value-to-EBITDA ratio of just 8.6, making it an overlooked investment on sale at a great price.
3. NextEra Energy: We need more electricity
The last few weeks have been brutal for utility stocks, and with good reason. Higher interest rates make utility stocks, which are often valued on the dividends they pay, less attractive. And for NextEra Energy, there are additional questions about how quickly its NextEra Energy Partners subsidiary can grow.
But take a step back and think about this utility company's business. It runs the largest regulated utility in the U.S. in a growing market, and it's a major renewable energy developer and asset owner. The business is on solid footing, even if it does have $72 billion in debt on the balance sheet -- a drag on its finances that is even more concerning now than it was a few months ago.
Analysts expect revenue to grow by 6% next year and 8% in 2025, with earnings per share expected to rise by 9.2% and 7.8% in those years, respectively. I think utility stocks are undervalued at the moment, and buying one of the country's best for 12.4 times trailing earnings with a 3.7% dividend yield is a great deal for long-term investors.
Hidden in plain sight
None of these stocks are hiding from investors. They're well-known companies, but investors have bailed on them because of debt concerns or uncertainty about the future. But over the long term, these entertainment and utility businesses are ones I want to own, and they would be great stocks to buy now and hold forever.
