Over the long term, stocks earn their value based on the money the underlying company is expected to generate over time. On a day-by-day basis, however, the emotions of fear and greed may dominate stock prices, leading to wild price swings.
That conflict between long-term value and near-term prices will occasionally create a situation where ordinary investors can benefit. Sometimes, the market’s short-term fear will drive an individual company’s share price below its long-term value, allowing investors to buy at a bargain price. When that happens, all you need to do is hold on and wait for the future to play itself out. If those decent prospects turn out to be true, you can profit as the market recognizes its mistake and reprices the company’s shares.
With that in mind, here are three bargain stocks that you can buy today and may end up worthy of holding on to forever.
1. An insurance titan that just survived a major rough patch
Prudential Financial (NYSE: PRU) sits atop my list as a top value stock to buy right now. Prudential Financial is an insurance company that cares so much about being financially rock-solid that it uses an actual rock — the Rock of Gibraltar — as its corporate logo.
Most of the time, that’s an awesome place to be, but it caused the company major pains over the past few years as interest rates rose. To support its rock-solid reputation, Prudential Financial carries over $300 billion in bonds on its balance sheet. While those bonds provide higher certainty of cash flows than stocks, they also tend to see their market values drop as interest rates rise.
Now that the Federal Reserve has indicated that its rate rising campaign is likely over — and indeed, that future rate cuts are probably on the horizon — that rough patch is likely behind Prudential Financial. With its shares trading at around 8 times its projected earnings and those earnings expected to grow by 10.5% annualized over the next five years, the company’s shares certainly look to be bargain priced.
Add a solid 4.8% dividend yield to its value price, and Prudential Financial starts to look like a bargain-priced stock that will pay you a decent amount to wait for its shares to climb.
2. A spirits company that’s a bit down on its luck at the moment
Diageo (NYSE: DEO) is the British company behind such world-famous alcohol brands as Guinness, Johnnie Walker, Baileys, and Smirnoff. Unlike many companies, Diageo’s shares are actually down in 2023, and it’s that decline that makes it potentially interesting to value investors today.
Diageo’s shares command a reasonable 17.5 price-to-earnings ratio, and the company’s earnings are expected to increase by about 5.6% annualized over the next five years. While not the cheapest stock on the market, the company’s price does appear decently valued for investors with a long-term time frame who are interested in a solid business with decent prospects for the future.
In addition to the reasonable valuation, what makes Diageo an attractive potential investment is the fact that the alcohol business tends to be recession resistant. Sure, when money is tight, people may shift from drinking in bars to drinking at home, but they’ll still drink. As the alcohol manufacturer — not the bar — Diageo will get paid no matter where that drinking takes place.
Add a decent 2.7% yield on top of that reasonable valuation and recession-resistant business model, and Diageo shows up as an interesting company to consider for investors with a long-term time horizon.
3. A leader in digital payments, available at a surprisingly cheap price
PayPal (NASDAQ: PYPL) is well known as a digital payments processor, with a substantial part of its business focused on online purchases. It makes most of its money from transaction fees — and the more transactions move online, the more of those fees it can capture.
PayPal currently trades at around 11 times its anticipated forward earnings, and those earnings are expected to grow by more than 16% annualized over the next five years. Unlike the other two companies on this list, PayPal doesn’t currently pay a dividend, but its faster growth and still-reasonable valuation make it pop as a potentially bargain-priced business.
Of course, PayPal’s success does depend on purchases continuing to move online. As long as that trend remains intact, PayPal looks to be value priced for a business with such solid potential growth ahead of it.
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Whether or not you think Prudential Financial, Diageo, or PayPal might deserve a spot in your portfolio, the reality is that bargains rarely last long in the market. As a result, when you find a business you like trading at a legitimate value price, it’s generally a decent idea to make your initial investing decision fairly quickly.
If you don’t want to go all-in on your investment, it’s perfectly fine to only put part of your available money to work while you continue to look into the business. If its shares go up, you’ll at least have something invested in a winning decision. But if they go down, you’d still have capital available, should you decide that the lower price just made that bargain business even cheaper.
No matter how you go about it, though, today is a great day to go hunting for bargain stocks.
Should you invest $1,000 in Prudential Financial right now?
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Chuck Saletta has positions in Prudential Financial and has the following options: long January 2024 $110 calls on Prudential Financial, short January 2024 $115 calls on Prudential Financial, short January 2026 $82.50 puts on Prudential Financial, and short January 2026 $95 puts on Prudential Financial. The Motley Fool has positions in and recommends PayPal. The Motley Fool recommends Diageo Plc and recommends the following options: short December 2023 $67.50 puts on PayPal. The Motley Fool has a disclosure policy.
3 Bargain Stocks You Can Buy Today and Hold Forever was originally published by The Motley Fool