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2 of the Cheapest Stocks I Own

Motley Fool - Tue Jul 25, 2023

I own more than 40 different stocks, funds, and cryptocurrencies. Since I am always on the hunt for market-beating growth stocks, many of them are quite expensive by traditional valuation metrics.

But there are exceptions to every rule. A handful of my stocks would look right at home in a value investor's portfolio. At the same time, they come with serious growth-stock credentials as well. They are just waiting for the inflation-flavored economic downturn to end so they can get back to their old revenue-boosting, profit-seeking ways.

So let me show you a couple of these best-of-both-worlds companies, whose stocks trade at rock-bottom valuation ratios despite their bright business prospects. Both of these firms are household names from the tech sector, though neither one is headquartered in Silicon Valley.

Big Blue sports a red price tag

The former one-stop IT shop known as International Business Machines(NYSE: IBM) has retooled itself into a specialist in enterprise software and services. The company still sells some hardware, but the business plan is all about hybrid cloud computing and artificial intelligence (AI) nowadays.

This strategy shift was more than a decade in the making, starting with ex-CEO Ginni Rometty's sharp overhaul in 2012. Now, the company has fully integrated the $34 billion buyout of open-source software expert Red Hat and the whole venture is managed by former artificial intelligence (AI) and cloud computing chief Arvind Krishna.

And who could ask for a more perfect fit between IBM's harrowing game plan renovation and a suddenly red-hot AI market? Big Blue doesn't serve consumer interests the way OpenAI's headline-making ChatGPT tool does, but its Watson-branded AI tools are poised to strike deep into the enterprise-grade services industry. The ChatGPT-powered AI interest surge was the final push IBM's machine learning tools and services needed.

IBM's management is still setting modest expectations in the near term, expecting 3% year-over-year revenue growth and about $10.5 billion of free cash flow in 2023 as a whole. After all, the infrastructure department's sales are swooning due to a downturn in the two-year cycle of mainframe server sales.

"In the second quarter, we wrapped on the z16 introduction in a seasonally strong quarter," CFO Jim Kavanaugh said in last week's second-quarter earnings call. "For the year, as you expect, 2023 infrastructure revenue will decline, impacting IBM's overall revenue growth by over a point."

Under those circumstances, even a flattish top-line trend looks impressive.

So IBM stands ready to benefit from a marketwide AI boom, finally reaping the rewards of a long and painful strategy change. Meanwhile, the stock has traded sideways in 2023 while the S&P 500 index gained 19%. As a result, you can pick up IBM shares at the highly affordable valuation of 14 times forward earnings and 12 times the expected free cash flows of 2023. That's a steal in my book.

Nokia: Should soon connect people again

With Nokia(NYSE: NOK), it's easier to start with the valuation ratios. The Finnish telecom infrastructure giant has taken a 15% price cut in 2023, dropping down to 8 times forward earnings and 0.8 times trailing sales. The company has delivered disappointing results in the last two quarters, so I can't blame the market makers for driving Nokia's stock price lower.

But I still see two great reasons to buy Nokia shares on the dip.

  • Nokia's telecom customers are holding back their mobile network upgrade and expansion plans due to economic pressure. That's especially true in the all-important North American market. Still, the planned network buildouts and 5G conversions are not going away -- they have just been delayed. So American telecoms are burning through their existing equipment inventories while waiting for a more favorable economy and lower interest rates on network-building debt papers. Nokia will be ready to deliver the goods when the orders start flowing again.
  • The bears took Nokia's sell-off too far, treating a temporary slowdown more like a permanently flawed business model. This stock could double in price and still look undervalued.

Looking past the ongoing economic challenges, Nokia's management expects to nearly double the company's operating margin from 8% to 14%, grow its top-line sales "faster than the market," and convert more than half of the resulting operating profits into free cash flow. Management projections don't always come true, of course, and Nokia has plenty of work to do in order to reach these ambitious targets.

But the financial goals look quite reasonable if the 5G buildout boom continues after the inflation-based downturn. And with Nokia shares trading somewhere below Wall Street's bargain basement, I think it's hard to go wrong with a modest Nokia investment right now.

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Anders Bylund has positions in International Business Machines and Nokia Oyj. The Motley Fool recommends International Business Machines. The Motley Fool has a disclosure policy.

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