The stock market has been incredibly volatile lately. Stocks plunged deeply, then rallied sharply, only to start tumbling again in recent weeks. Because of that, it's not clear if the market's next move is higher or lower.
While the current uncertainty can make it challenging to invest, it's important to keep the long-term view in mind. The stock prices of high quality companies that can consistently grow their earnings tend to go up over the long term, especially if you can buy shares at attractive valuations. Three high-quality companies currently trading at cheap values are Douglas Dynamics(NYSE: PLOW), Franco-Nevada(NYSE: FNV), and Kinder Morgan(NYSE: KMI). That makes them look like compelling value stocks to consider in these uncertain times.
Record sales and just a modest stock rebound
Reuben Gregg Brewer (Douglas Dynamics): Wall Street can be fickle and short sighted during turbulent times, which appears to be the case today with Douglas Dynamics. The stock, despite having bounced off its yearly lows, is still down some 20% or so from its 2022 highs. The industrial stock's yield is a generous 3.6%, which is still well above the five-year average yield of just under 3%. Douglas Dynamics looks like it is still sitting in the bargain bin despite the stock's recent recovery.
The commercial work truck attachment company reported record sales in the second quarter, with that figure increasing by 19% year over year. While the company's gross profit margin was impacted by inflation, it is working on that issue by raising the prices it charges for its plows and other services. Meanwhile, management reports that lingering supply chain bottlenecks are starting to ease.
This is the most important thing: CEO Bob McCormick explained that, "...demand signals remain strong in both segments today, with a strong pre-season sales period in Attachments and ongoing robust backlog for Solutions." In other words, Douglas Dynamics' underlying business remains on solid ground even in the face of some near-term headwinds.
Although the company is facing some uncertainty today, it looks like the long-term risk to the business is minimal. Investors who think in decades and not days may want to do a deep dive here while Wall Street is still taking a glass-half-empty view of things.
This stock is a gold mine
Neha Chamaria(Franco-Nevada): Franco-Nevada stock just hit 52-week lows. Gold prices are, of course, sinking -- they're at multiweek lows as of this writing -- and are being driven down by the Federal Reserve's aggressive interest rate increases to tame inflation. As a company that derives more than half its revenue from gold, falling gold prices don't bode well for Franco-Nevada. In fact, the company also dabbles in silver, iron ore, and oil and gas. Unfortunately, all of these commodities and fuels have come under selling pressure.
However, I don't see a reason why Franco-Nevada stock should languish. In fact, when a stock like this drops so much, whether in a bull or bear market, you'd want to pay attention.
You see, Franco-Nevada may be a gold stock, but it's a streaming and royalty company and not a miner. That means the company buys gold at low prices from third-party miners under contracts in return for upfront funding, and then sells that gold at spot prices.
Its purchase price, in fact, is often so low that Franco-Nevada can earn big margins even if gold prices fall. In its second quarter, Franco-Nevada generated record quarterly revenue and earned the highest margins ever. Yet the stock is currently trading significantly below its five-average price-to-sales ratio, thanks to its recent steep decline.
Economists now believe a recession is imminent in the U.S. Even if the economy falters a bit, gold prices -- and with them gold stocks -- could get a lift. Among gold stocks, though, Franco-Nevada should be a top choice as it has historically generated exceptional returns over long periods of time and has even increased dividends every year for the past 15 consecutive years.
A dirt cheap dividend stock
Matt DiLallo (Kinder Morgan): Kinder Morgan generates relatively steady cash flow regardless of market conditions. The natural gas pipeline giant is on pace to produce $4.7 billion of distributable cash flow this year, or about $2.17 per share. That's about 5% above its initial budget, thanks to stronger-than-expected conditions in the energy market. At the recent stock price of around $18 per share, Kinder Morgan trades at about eight times its cash flow. That's cheap for a company that generates a growing stream of steady cash flow in any market environment.
Kinder Morgan only uses about half its cash to support its dividend, which currently yields over 6% due to its dirt cheap valuation. That gives it a huge cushion to continue making dividend payments if market conditions head south. It also leaves the company with plenty of excess cash to repay debt, finance expansion projects, and repurchase its dirt cheap stock.
The company focuses on investing for the long term. It's expanding several natural gas pipelines, building a renewable natural gas platform, and constructing a few renewable fuel hubs. These investments are helping position the company to capitalize on the long-term energy transition to cleaner fuels. They'll also help grow the company's cash flow in the coming years. That should enable Kinder Morgan to continue increasing its dividend, which it has done for the last five years.
Kinder Morgan is a steady company, making it a solid investment regardless of market conditions. It generates lots of cash, giving it the funds to pay a hefty dividend and continue expanding, which should create value for shareholders over the long term. With its stock cheap right now, it's a solid option for investors uncertain about the market's direction.
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Matthew DiLallo has positions in Kinder Morgan. Neha Chamaria has no position in any of the stocks mentioned. Reuben Gregg Brewer has positions in Franco-Nevada. The Motley Fool has positions in and recommends Kinder Morgan. The Motley Fool has a disclosure policy.
