Forget Black Friday: Buy These Two Cheap Stocks

Nick Lanyi's picture

Wednesday, November 25, 2015 - 12:30pm

by Nick Lanyi

As we roll through Thanksgiving and into the holiday season, investors can look ahead with some trepidation about turmoil in the Middle East, slowing growth in China and rising interest rates here at home. But there are plenty of reasons to be thankful, as well.

For one, U.S. stocks have remained in an extended bull market for many years. The S&P 500 has a five-year annualized return of 14.2%, a tremendous run that has helped millions of Americans recover from the losses of the financial crisis. And while stocks have taken a relative breather this year, they remain in an uptrend that could well continue given the U.S. economy's resilience.

Earlier this week, the Commerce Department revised upward its estimate for third quarter U.S. GDP growth to a 2.1% annual pace -- not gangbusters, but quite healthy given the strong dollar, which hurts U.S. exports, and the ongoing woes in the energy sector.

Two more positive reports came Wednesday morning: new jobless claims fell more than expected, and durable goods orders rose more than expected. So despite the headwinds, the U.S. economy keeps chugging along. We're enjoying a long period of moderate growth. That's less thrilling than a short period of strong growth but certainly preferable to a recession. Even if the expansion is in the late innings, as some economists insist, it shows no signs of ending soon.

Meanwhile, there are plenty of attractive stocks that remain reasonably valued, or even undervalued, despite the extended bull market. Here are two that still have room to grow:

Mondelez International (Nasdaq: MDLZ) is one of the largest snack makers in the world, formed when Kraft Foods (Nasdaq: KRFT) split up in 2011. Its iconic global brands include Oreo, Chips Ahoy!, Triscuit, Ritz, Cadbury, Trident, Halls, Toblerone and many more.

While its products are sold in 165 countries around the world, Mondelez generates roughly two-thirds of its revenue in North America and Europe, making it less dependent on China and other weaker-than-expected emerging markets than many other global food giants. That's a plus, as is its emphasis on relatively low-priced products that remain popular among consumers regardless of the economic climate.

Mondelez is subject to fluctuating commodity prices for the ingredients it uses in its products, but some of that risk was mitigated this year by the spinoff of its coffee products into a new company, Jacobs Douwe Egberts, which is the leading coffee seller in 18 countries; Mondelez owns 44% of the business.

The company has moderate debt, strong cash flow and a history of rewarding shareholders through share repurchases, which boost per-share earnings and book value. Run by Kraft and Pepsi veteran Irene Rosenfeld, an admired business leader, Mondelez has adjusted to slowing emerging market growth by cutting costs and raising profit margins. The company is expected to grow its revenue 1% to 2% in the next couple of years but earnings per share could rise in double digits thanks to continued margin improvement and share buybacks.

Mondelez shares trade at around 22 times analysts' expected earnings for 2016, a modest multiple for such a high-quality company.

Capital One Financial (NYSE: COF) is one of the country's leading consumer lending institutions, with leading positions in both credit cards and consumer banking. Capital One has been one of the fastest-growing consumer finance companies of the past two decades, and while the financial crisis tainted the reputation of consumer lenders in general, Capital One has continued to thrive -- and is well-positioned to continue with unemployment now at 5% and the U.S. economy still expanding.

Once known primarily as a credit card issuer, Capital One has expanded into consumer banking and now has banking branches in New York, New Jersey, Texas, Louisiana, Maryland, Virginia and Washington, D.C. -- with room to grow further in the years to come. Its auto-lending business has grown impressively, from $8 billion in loan originations in 2010 to $21 billion in 2014. And the company has increased its commercial lending operations considerably, to about $51 billion in outstanding loans in 2014. Its core credit card business remains strong, with balances up 13% year over year in October.

Capital One is considered an innovative lender, with successful bonus programs for credit cards and an appreciation that consumers are increasingly using mobile online shopping methods. Analysts look for earnings to rise about 6% a year over the next two years. The stock trades at only 10.1 times analysts' consensus estimate for 2016 earnings, below the average for high-quality banking stocks.

Risks To Consider: Mondelez has been subject to rumblings from activist investors who want the company to boost growth through more aggressive restructuring. Capital One could be hurt by a weaker-than-expected U.S. economy in the next 12-24 months that lowers consumer spending and increases defaults.
    
Action To Take: Buy Mondelez below $46.50 and Capital One below $81.

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Nick Lanyi does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.