The CBOE Volatility Index, known as VIX and a measure of the market's expectation of volatility over the coming month, spiked to its highest level in years early in August and, to a lesser extent, again at the start of September. Investors often turn to time-tested strategies like value investing in increased volatility. This methodology, popularized by Warren Buffett, aims to identify companies with stellar fundamentals that are presently undervalued in the market with the expectation that an eventual price correction will lead to an increase in share value.
Key metrics that investors use to identify value stocks include the price-to-earnings (P/E) ratio and the price-to-book (P/B) ratio, as well as free cash flow, debt-to-equity ratio, and similar measures of a company's financial well-being. A combination of undervaluation compared to earnings and assets, prospects for future top-line growth, and a history of paying out dividends at competitive yields marks a value stock as an attractive prospect. Name recognition and stability may also be important factors for investors looking to buy and hold.
Delta Air Lines: Value Despite Size
With a market capitalization of over $27 billion, it may come as a surprise that Delta Air Lines Inc. (NYSE: DAL) remains among the most undervalued airline stocks by some measures. The company's forward P/E ratio of 7.2 is far ahead of competitors like Southwest Airlines Co. (NYSE: LUV), at 128.3, and American Airlines Group Inc. (NASDAQ: AAL), at 11.1. Delta shares rose to nearly $53 each earlier this year but have declined for most of the summer.
To be sure, the airline industry and Delta, in particular, have faced challenges, including recent fatal accidents. But Delta has continued to grow its revenue nonetheless: in the latest quarter it reported record adjusted operating revenue of over $15 billion, an improvement of more than 5% over the prior-year quarter. It has done this while maintaining a competitive double-digit operating margin.
What's more, Delta is among the most popular and widely-known airlines in the world and has consistently been ranked as the top airline by J.D. Power, Skytrax awards, and other industry judges. This may indicate its stability for a buy-and-hold investor.
Ally Financial: Dividend and Digital Leadership
Ally Financial Inc. (NYSE: ALLY) stands out in the financials sector as one of the early leaders of the now-popular digital-first approach to financial services. It has a forward P/E ratio of 11.7, well below the average for the sector. It also has a relatively manageable debt load, with a debt-to-equity ratio of 1.4.
Two aspects of Ally in particular may appeal to investors looking for a stock to hold for an extended time. First, the company has a dividend yield—a measure of how much it pays out in dividends per year relative to its stock price—of 2.93%, also healthy for the industry. This indicates that Ally offers investors a compelling dividend prospect for passive income or reinvestment purposes.
Second, Ally is well-positioned to continue to lead in the digital banking space. With a range of services including auto loans, personal banking, and more, it provides a comparable suite of products to consumers as compared with traditional, brick-and-mortar banks, while maintaining lower costs than competitors as well.
T-Mobile: A Value Megacap?
With returns of 44% in the last year and a market capitalization of over $231 billion, megacap communications giant T-Mobile US Inc. (NASDAQ: TMUS) may not be the first company investors would expect to see in a list of value stocks. Nonetheless, the key metric of PEG, or price/earnings-to-growth ratio, suggests that the company may still be undervalued.
PEG factors in both a company's P/E ratio and its expected rate of earnings growth into the future to provide a holistic view of that firm's valuation and growth potential. A PEG ratio of under 1.0 is generally seen as indicative of an undervalued company: T-Mobile's PEG ratio is 0.74.
As one of the major wireless carriers in the U.S. and a leader in the 5G space, T-Mobile has posted better-than-expected top and bottom-line results on multiple recent occasions.
Buy and Hold Through the Ups and Downs
A key to the approach of many value investors is holding on to stocks through inevitable ups and downs over time. With strong fundamentals, though, an undervalued stock may provide solid returns for an investor willing to avoid the temptation to sell.
