Just imagine if, instead of the depressing reading that accompanies a stock market crash, headlines read: “Sale! Cheap stocks!“
The stock market must be one of the only markets in the world where people cheer its offerings becoming more and more expensive. But as every savvy investor knows, as shares become more expensive, they become more a speculation and less an investment.
The truth is that cheaper stocks are fantastic news for every long-term investor. And even after the FTSE‘s recent gains, there are still bargains for sale.
Vodafone, one of those cheap stocks
Vodafone (LSE: VOD) is one of these bargains, I feel. It is also one of the largest providers of mobile and data services in the world. The stock lost 55% of its value over the last five years due to declining revenues and heavy losses, but the firm is maintaining its dominant market position.
Fortunately, the business fundamentals appear to be changing for the better. Vodafone is selling off its non-core assets to improve its margins, create better cash flow and reduce its debt pile. Furthermore, its strategy of additional cost-cutting measures and more investment in high-margin areas is producing results.
Vodafone reported growing revenues and a positive financial performance over the last six months. It’s improving cash flow gives the company the confidence to sustain its 5.5% dividend yield at a time when many other FTSE 100 firms are cutting theirs. In addition, the spin-off of its European Tower Co division, expected in 2021, will reduce leverage.
Currently trading around 136p, Vodafone shares are selling at an attractive valuation for expected improved future business fundamentals. In addition, the price-to-book ratio is hovering around 0.62, creating a solid investment.
Aviva
Aviva (LSE: AV), the insurer and savings products provider, is another one of these ‘cheap’ stocks. Currently trading around 275p, it’s down 50% from its 2015 peak.
I find the size of this drop surprising. Aviva surprised markets this year by posting a 6% increase in its 2019 operating profits. And this in a year when lower interest rates increased the firm’s liabilities by an estimated £3bn!
There are other positive signs too, such as an improvement in insurance sales and a 2% increase in customers. The £300m cost-savings programme is also going well and the balance sheet is strong. Moreover, Aviva improved its solvency ratio by 8% over the last six months, meaning cash flow is better covering its liabilities.
However, the coronavirus pandemic has produced an uncertainty that may impact the end-of-year results. In addition, the government-enforced restrictions have prevented many expected new business sales. This may hit the firm’s revenues and profits at the end of the year, but almost every other FTSE firm will be impacted too. So this must be viewed relatively.
Aviva cannot do much about the Bank of England’s monetary policy. But it can make assumptions and plan accordingly. Indeed, the company’s management appears to be doing just this and Aviva is demonstrating its operating resilience. Long may it continue.
I think the market has been too harsh on Aviva. In the future, its shares may be due for a correction. And as for Vodafone, the need for data is likely to increase. The firm is well-positioned to capitalise on it. I’d buy both these cheap stocks in the sale now.
