According to the Shiller price-to-earnings ratio, also known as the cyclically adjusted P/E ratio, the stock market is near its most expensive valuation ever. Some investors have grown anxious about these rising valuations, particularly given the significant capital expenditures required to develop artificial intelligence (AI) infrastructure in the coming years.
Finding value stocks can be challenging in this market, but it's not impossible. You want to seek out companies with strong fundamentals, solid balance sheets, and healthy cash flows, at reasonable valuations. If this sounds appealing and you have $1,000 ready to invest, here are three cheap stocks to consider adding to your portfolio today.
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1. Berkshire Hathaway
Legendary investor Warren Buffett recently closed the chapter on his tenure as Berkshire Hathaway's (BRK.A 0.30%)(BRK.B 0.13%) chief executive officer after more than six decades. Buffett, alongside his right-hand man, the late Charlie Munger, built Berkshire Hathaway into a behemoth through a combination of publicly and privately owned businesses.
Buffett has handed the reins to Greg Abel, who was formerly the CEO of Berkshire Hathaway Energy. Abel has been the vice chairman of noninsurance operations at Berkshire since 2018. Abel is expected to uphold Berkshire's decentralized, long-term investment approach.
NYSE: BRK.B
Key Data Points
What makes Berkshire Hathaway appealing is its modest valuation, with a P/E ratio of 15.9, along with its huge cash stockpile. The conglomerate holds nearly $382 billion in cash and short-term Treasuries, earning interest on this stockpile while selling down positions and looking for attractive investment opportunities.
Not only that, but Berkshire's core operating businesses, including insurance, railroad, energy, manufacturing, and services, provide it with a steady stream of diversified cash flow, enabling the conglomerate to further build on its already substantial cash position. During the past 12 months, Berkshire has generated more than $19 billion in free cash flow.
For investors looking for quality at a good price, Berkshire Hathaway is an excellent option in today's pricey market.
2. ExxonMobil
ExxonMobil (XOM +1.85%) is an integrated oil and gas company that trades at 16.7 times forward earnings. The company is a cash flow machine, generating more than $23 billion in free cash flow during the past year, which supports its 3.4% dividend, share buybacks, and other investments in its core businesses.
What gives Exxon a moat is its high-quality assets across Guyana, the Permian Basin, and the liquified natural gas (LNG) value chain. These assets are long-lived, with decades of economically recoverable reserves and low break-even costs that sustain cash flow even through commodity market downturns.
NYSE: XOM
Key Data Points
One aspect of Exxon's business that could provide upside is its natural gas operations. Natural gas plays a growing role in today's energy landscape due to its versatility and status as a lower-carbon alternative to other fuels. When used for power generation, natural gas emits roughly half as much carbon dioxide as coal and produces much less particulates and sulfur emissions.
Exxon is investing heavily in LNG projects, shale gas, and midstream infrastructure to lower unit costs and improve reliability. This positions Exxon to increase cash flow across cycles and support further dividend payments and share buybacks. Against an evolving energy backdrop, Exxon's asset base and capital discipline make it an attractive long-term holding today.
3. Progressive
Progressive (PGR +1.59%) underwrites insurance policies, with a focus on automotive insurance. What makes it an intriguing stock today is its trailing 11.7 P/E ratio and long history of delivering for investors. During the past three decades, Progressive has been a compounding machine, delivering investors average annual returns of 16%.
NYSE: PGR
Key Data Points
What sets Progressive apart is its scale and best-in-class underwriting discipline. The company has committed to achieving a consistent underwriting profit of 4% annually.
Investors can see this in the combined ratio, which measures the ratio of expenses and claims paid out to total premiums earned. A ratio of 100% means a company is breaking even, and the lower the ratio, the better. Progressive has maintained its ratio below 96% for more than two decades.
The stock has taken a hit, down 11% during the past year, but Progressive continues to demonstrate exceptional underwriting. Through November, Progressive's combined ratio stood at an impressive 87.5%, demonstrating the company's continued growth through discipline. Given the sound business and continued performance, Progressive is another excellent stock to buy at a bargain today.
