Great investments don't come along every day, but there are some clear market-leading companies today that are cheap by historic valuation metrics.
I think Alphabet (GOOG 9.96%) (GOOGL 10.22%), AT&T (T 1.02%), Disney (DIS -0.04%), and Ford Motor Company (F -1.92%) all look absurdly cheap in today's market.
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1. Alphabet: A tech leader on sale
Alphabet has one of the largest moats in the world in search, and that's ultimately what drives the company's business. Nearly all the revenue growth and earnings that you see in the chart are because of search. But that's not why I think the stock is cheap at 23 times forward earnings estimates.
GOOG Revenue (TTM) data by YCharts
I think artificial intelligence is going to be a boon for the company's cloud business because Alphabet is one of the few companies that has a viable AI chip today. Its cloud business is now profitable as well, so it could start to meaningfully contribute to the business in the next few years.
On top of that, Alphabet has upside in autonomous driving with its subsidiary Waymo. Alphabet stock could be considered a value with search alone, but add up all the other parts of the business, and this is a stock too cheap to pass up.
2. AT&T: A cheap telecom giant
Telecom stocks have been decimated in 2023, in large part because rising interest rates make their dividend yields less attractive. In the case of AT&T, the yield is now up to 7.7%, and that alone would be enough to own the stock.
What's being overlooked is the company's improving cash flow and extremely low price-to-free cash flow multiple. Despite pricing pressure and the relatively weak growth in wireless revenue, AT&T is still a cash flow machine, and that's not likely to slow anytime soon.
T Free Cash Flow data by YCharts
The drop in shares is understandable in many ways. Investors are looking for options with better yields and lower debt, but at some point a stock is too cheap to pass up. For AT&T, I think that time is now.
3. Disney: Recovery is in sight
Almost everything that could have gone wrong for Disney in the last five years, has. The parks were shut down for a long period during the pandemic, the cable business is losing subscribers, and streaming is losing money like crazy.
However, the stock continues to trend down as some of the business segments improve. Parks are now generating record revenue and operating income, and the streaming business will likely be operating income positive within a year. Cable's decline continues, but that's a cash flow positive business for Disney.
While a turnaround will be difficult, Disney is an iconic brand with great franchises and a No. 2 market position in the growing streaming business. Investors with an eye on the long-term strategy of the company could be getting a market leader at a value that's absurdly cheap.
4. Ford: Legacy position is a strength
The demise of Detroit has been overstated, and manufacturers like Ford Motor Company have raked in billions in cash over the last five years, which will likely continue when the UAW strike ends. Ford's trucks and SUVs are providing most of the company's cash, and there's no indication that buyers of these vehicles are going to stop.
You can see in the chart that Ford's price-to-free cash flow is now just 9 times, and that could improve if free cash flow gets back to historical levels.
F Free Cash Flow data by YCharts
There are a couple of reasons to think that finances will be on the mend. First, the company's electric vehicle efforts are losing about $1 billion per quarter, and that will ultimately turn around as volume increases. Second, we are still seeing volume pick up coming out of the pandemic.
Ford may not be an exciting growth stock, but it's a solid company with good cash flow, and in the auto industry, that's a great position to be in.
Cheap stocks to buy and hold long term
These stocks are trading at a discount for a reason, but I think the upside is being ignored by the market. As they show more cash flow and businesses grow, Alphabet, AT&T, Disney, and Ford could all outperform the market.
