After the global financial crisis of 2007-09, share prices surged as investor confidence returned. But for the next 12 years, it was tough being an old-school value investor like me. That’s because investors poured trillions of dollars into go-go growth stocks that they saw as the recovering market’s next big winners. Meanwhile, for around a dozen years, the cheap stocks I prefer to own hugely underperformed the wider market.
Cheap stocks are back in fashion
At the bottom of the 2007-2009 bear (falling) market, the US S&P 500 index crashed to 666 points on 6 March 2009. I recall this ‘omen’ — the biblical Number of the Beast — rather amused me at the time. But then the blue-chip index set off on one of the strongest and longest bull (rising) markets of the modern era.
At its peak on 3 January 2022, the S&P 500 hit an all-time high of 4,818.62 points. From peak to trough, this produced a 623.5% return, excluding cash dividends. At this time, I grumbled that I might never find cheap US stocks again. How things have changed in just five months…
Falling prices mean better bargains
As I’ve written countless times in 2021/22, I don’t fear falling stock prices. That’s because my value-seeking instincts tell me that lower prices often mean bigger bargains (all else being equal). And, thanks to the S&P 500 falling 13.6% from its record high, I’m finding more cheap stocks in the US lately.
For example, here are two cheap stocks in strong, established US companies that look too low-priced to me currently:
| Company | Sector | Stock price | 12-month change | Market value | P/E | Earnings yield | Dividend yield | Dividend cover |
| Ford Motor Company | Automotive | $13.58 | -14.5% | $54.6bn | 4.8 | 21.0% | 3.0% | 7.1 |
| American International Group | Financial | $58.77 | 10.7% | $46.6bn | 5.1 | 19.7% | 2.2% | 9.0 |
Obviously, Ford Motor Company is a household name. Founded in Detroit by Henry Ford in 1903, the group sold almost 4m cars worldwide in 2021, while employing 183,000 workers. But it’s not the group’s storied history and brand that attract me. This is the first of my cheap stocks simply because Ford shares offer a market-thrashing earnings yield of 21% and a dividend yield of 3% a year. In other words, Ford’s cash payouts are covered over seven times by its earnings. So, even though US cars sales are falling this year and fears are growing of a US recession, Ford’s decent dividend yield looks super-safe to me.
The second of my cheap stocks is American International Group (AIG), a leading US insurance and finance company. Alas, in September 2008, AIG stood on the brink of failure, before a massive $182bn bailout prevented its collapse. Today, this 102-year-old institution is in far better shape. Yet its shares currently offer a near-20% earnings yield and a dividend yield of 2.2% a year, covered nine times by earnings.
To sum up, I don’t own these two cheap stocks right now, but I’d gladly buy and hold both today. Though I’m anxious about slowing economic growth, red-hot inflation, rising interest rates, and war in Ukraine, I think most of these anxieties are already priced into these two lowly rated shares!
