Written by Brenda Nakalema

10 cheap stocks for volatile markets

Value investing is making a solid comeback and could remain a winning strategy, especially as markets experience volatility. The fact …

Value investing is making a solid comeback and could remain a winning strategy, especially as markets experience volatility. The fact that low valuations can possibly offer investors a margin of safety adds to the attractiveness of the strategy.

The easiest way to search for bargains is by comparing price-to-earnings ratios for companies. An analysis of the S&P 500 index using FactSet revealed the ten cheapest stocks on 2022 price-to-earnings ratios, which included the covid vaccine maker, Modern (ticker: MRNA), home builders Lennar (ticker: LEN), and PulteGroup (ticker: PHM), steel industry leader Nucor (ticker: NUE), fertilizer producer Mosaic (ticker: MOS), and energy companies APA (ticker: APA), formerly Apache and Coterra Energy (ticker: CTRA). Rounding out the list are companies such as drugmakers Viatris (ticker: VTRS), Organon (ticker: OGN) and life insurer Lincoln National (ticker: LNC)

All ten are currently trading for six times earnings or less, and the majority have above-market dividends- Organan and Viatris yield over 3%.

A few of the companies are in economically sensitive businesses; however, the hit to earnings has been factored into their stocks given their depressed P/E ratios.

Company / TickerRecent Price2022E P/EDividend Yield
Viatris / VTRS$14.073.83.3%
Nucor / NUE90.744.82.2
Organon / OGN29.884.93.6
Mosaic / MOS38.325.01.1
APA / APA29.025.11.7
Moderna / MRNA148.555.2None
Coterra Energy / CTRA19.285.22.6%
PulteGroup / PHM53.055.61.2
Lincoln National / LNC64.425.92.7
Lennar / LEN94.795.91.6

E = estimate

Source: FactSet

Nucor, whose shares have slipped from a recent $120 to $90 along with other steel stocks, is currently trading for roughly five times the projected 2022 earnings and has over 2% yields. Benchmark hot-rolled steel prices have fallen from a high of $1,900 in 2021 a short ton to about $1,400, and it’s anticipated by futures prices that they will fall to a further $900 a ton by mid-year.

This prospect might dampen Nucor’s earnings, but nonetheless, the company will likely remain profitable. Management thinks the stock is cheap, owning to the stock buyback that was equal to more than 10% of its current market value in 2021. The shares yield over 2%.

Moderna is down 70% from its all-time peak position of almost $500 to its current price of around $148- it trades for five times projected 2022 earnings. Investors appear to be worried, especially after the vaccine sales hit their peak; there is concern about the strength of Moderna’s drug pipeline. However, it is estimated that covid revenues could hold strong well into 2023 and 2024.

Moderna has a current market value of $60 billion and is expected to have more than $20 billion of net cash and investments on its balance sheet at the close of 2022. This means investors are currently underpaying for its powerful messenger RNA franchise. If the stock doesn’t soon rally, the company might have to fight off some takeover bids.

For the home-building industry, stocks faced it rough with investors worrying that the recent rise in 30- year mortgage rates from 3% to 3.5% will hurt sales. The impact from higher rates is yet to be felt; however, the industry is currently benefiting from favourable demographics and affordability- this could spell robust sales for years.

Lennar, at $95, trades for roughly six times projected earnings of $16 a share in its fiscal year, ending in November.

The company recently increased its stock buybacks, highlighting the industry’s strength. Investors can buy the company’s class B stock at roughly $80, a 15% discount from the liquid A shares. According to Stephen Kim, an analyst at Evercore ISI, the stock could benefit from the planned 2022 spinoff of non-core multifamily and single-family rental businesses. He set the price target at $179.

Pulte is another cheap stock whose shares currently trade at roughly $53. The stock is currently trading for under six times its projected 2022 earnings. The company has utilized its cash flow to repurchase 5% of its stock in the first nine months of 2021. Kim anticipates higher margins and sales in 2022. He set the stock target at $86.

The exploration and production company, APA, has announced its commitment to returning ample cash to shareholders. APA, whose shares currently trade at around $28, plans to give out up to 60% of its 2022 cash flow to shareholders in buybacks and dividends.

Arun Jayaram, a J.P Morgan analyst, anticipates APA generating over $2 billion of free cash flow in 2022, roughly 20% of free cash flow yield.

Viatris and Organon are spinoffs; Viatris was spun off by Pfizer, while Merck hived Organon.

Both stocks are currently in the slump since becoming independent and are thereby trading cheaply. Viatris is currently valued at less than four times its projected 2022 earnings, the lowest P/E in the S&P 500. On the other hand, Organon is trading for about five times its estimated 2022 earnings. Both companies have huge debt, a factor contributing to their low valuations.

Lincoln National, a provider of annuities, life insurance and other financial products, currently trades at $64 with a 2.7% yield. While Mosaic, a phosphate and potash fertilizer producer, goes for about $38 and trades for five times estimated 2022 earnings.