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Pessimists always find a reason why the market is about to crash. But that doesn't mean it will happen – or that the market won't hit new highs over time, as it always has.
If you're worried about the valuations of many top stocks, you can still find some bargains. If you look closely, you can still find strong companies with low valuations in many sectors. Right now, financials Discover Financial Services (WKN: A0MUES ), tech giant Micron Technology (WKN: 869020 ) and U.S. cannabis company Ayr Wellness (WKN: A2QPFE ) seem to fit the bill.
One of the cheapest dividend stocks around
Credit card giant Discover Financial is up an impressive 33% for the year. Despite this, the stock is still one of the cheapest in the financial sector, which is also one of the lowest valued sectors around. Thanks to government stimulus and higher-than-expected loss rates due to the pandemic, Discover has liquidated much of the additional loan reserves it took on in the first two quarters of 2020. That has driven up earnings this year and lowered the P/E ratio to just 7.7. Yet the stock still trades at less than 10 times the average estimate for 2022, which doesn't include extraordinary benefits.
Why so cheap? Well, investors are always skeptical of unsecured credit card loans, and that's exactly how Discover makes most of its profits. The company's other loan products are student loans and unsecured personal loans. Discover also has its own credit card network, of course, but its payments business yields little operating profit.
The flip side of this risk, however, is that Discover can charge high credit card interest rates, giving it a net interest margin of more than 10%, much higher than other banks. And Discover has a history of managing risk very well. The company's operating income was remarkably stable in the five years prior to the COVID-19 pandemic, and its return on equity was consistently in the low to mid-20% range. Earnings and dividends per share increased every year with the help of generous share buybacks.
Now these share buybacks are resuming, with management recently launching a new share buyback program worth. US dollar approved. That represents 7% of Discover's market capitalization. Add to that a 14% dividend increase, and at today's share price, that's a 1.7% yield. Discover is also back on track for growth after the company streamlined last year. CEO Roger Hochschild said on conference call with analysts that new account growth was up 26% in 2019.
While the delta variant could slow the recovery, economic growth is still expected to be strong in 2021. Consumer balance sheets are also in good shape. That means financial companies like Discover should do well, and those benefits should be passed on to shareholders as well.
Micron to resume dividend payout
Micron to pay dividend for first time in 25 years. This is perhaps surprising because the stock is down 22% from recent highs and is trading at only 7 times next year's estimated earnings.
There is no doubt that Micron's business can be very cyclical and that we are currently in a period of upswing in memory prices. Therefore, investors seem to be thinking ahead and anticipating the next downturn, which is why stocks have lagged recently.
Micron, however, is a constantly improving company that should be less cyclical for several reasons. First, the DRAM industry, where Micron generates about two-thirds of its revenue, has consolidated to just three major suppliers. These three are now practicing disciplined supply growth, which is a difference from the past. In addition, it's getting harder and harder to continue scaling DRAM, which means increasing supply will become increasingly difficult. At the same time, DRAM demand is strong and broad, encompassing artificial intelligence servers, cloud growth, 5G cell phones, more powerful laptops and more computerized cars. Finally, Micron has been catching up to competitors in cutting-edge technology lately and has focused its portfolio on higher-value solutions.
All of this has led to profit margins getting higher and lower over the cycles. In the early 2000s, Micron's adjusted EBITDA margins became negative in cyclical troughs. However, EBITDA margins hit a low of about 40% in the last downturn and continue to rise.
Combined with a strong balance sheet with more cash than debt, Micron is one of the cheapest stocks in the otherwise expensive technology sector. I expect the shares to rise again in due course. Meanwhile, investors even get a dividend.
Ayr Wellness buys back shares
Despite good financial results, cannabis stocks have fallen rapidly since March. The reason? Hard to say, but no legalization has gone forward at the U.S. federal level. U.S. pot stocks can only be traded on Canadian exchanges or over-the-counter because of it.
Emerging cannabis company Ayr Wellness was already one of the cheapest stocks in the sector, and the sector's recent slide has made it even more of a bargain. The slide doesn't have much to do with earnings results, as Ayr just reported heady revenue growth of 222% in its latest quarter while raising its 2022 guidance to 800 million. U.S. dollar revenue and 300 million. U.S. dollar adjusted EBITDA to. That means the company's stock, with a market cap of just under 1.5 billion. US dollar trades at a forward enterprise value/EBITDA multiple of only 5.
This is a really favorable valuation for a high-growth company. In fact, it is so favorable that Ayr management has just initiated a buyback program for up to 5% of outstanding Ayr shares over the next twelve months. With so many growth opportunities, using cash to buy back shares says something about what management thinks of the current share price.
U.S. cannabis legalization may not have come as quickly as many had hoped, but it's still in play. The deadline for submitting comments that will be included in the final Senate cannabis legalization bill, co-introduced by Majority Leader Chuck Schumer, Senate Finance Committee Chairman Ron Wyden and Senator Cory Booker, has just passed. Perhaps legislative progress at the U.S. federal level this fall will lift this cheap cannabis stock out of its recent malaise.
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Billy Duberstein owns shares in Ayr Wellness, Discover Financial Services and Micron Technology. The Motley Fool owns and recommends shares of Ayr Wellness and recommends Discover Financial Services. This article appeared on 13.9.2021 on Fool.com and has been translated for our German readers.