KEY POINTS
- The banking industry is highly cyclical but also dependably bounces back from headwinds bigger and better than ever.
- U.S. consumers and corporations are too addicted to mobile communications to stop paying for them.
The highest-quality stocks don't always sport the highest prices.
In theory, the absolute price of a stock shouldn't matter. It's purely a function of the number of shares a company has issued compared to how investors feel about that organization's earnings prospects. A stock's price can be adjusted lower by a stock split or pushed higher by a reverse stock split. Compare it to holding two $10 bills instead of one $20 bill, or vice versa.
In reality, however, a stock's absolute price can impact the market's perception of that company. A handful of corporations even seem to make a point of maintaining an inflated stock price to suggest something of an elite status, while other companies prefer to keep their stocks' prices relatively modest so more small, would-be shareholders feel comfortable stepping into a position.
With that as the backdrop, here's a closer look at two sub-$100 stocks that can still be considered elite holdings. They're such solid organizations, in fact, that these tickers could be seen as true "forever" holdings.
1. Citigroup $Citigroup(C)$
If you think banking giant Citigroup is recession-proof, think again. Indeed, it and other banks may well be the proverbial poster children for recessions, doubly trapped by economic weakness and interest rate volatility that tends to materialize when the economy is hitting a wall. That's because borrowers often remain on the sidelines in uncertain environments.
It's certainly been the case this time around. Even before the Federal Reserve imposed a 75 basis-point increase in the Fed Funds rate this week, the Mortgage Bankers Association was reporting that demand for mortgage loans is now roughly half of what it was a year ago, falling back to late-2018 levels. That's a clear problem for banks, and it's one of the key reasons Citi share prices now sit 40% under their mid-2021 highs when the banking business was riding the wave of the post-pandemic recovery.
What all of this selling looks past, however, is the predictably cyclical nature of the banking business.
Yes, 2022 is going to be a tough year for banks (and not just for their lending arms). Demand for corporate fundraising is also poised to contract after a record-breaking 2021, saw $360 billion raised via 1,800 initial public offerings. If the economy weakens, the stock market will too, undermining investors' interest in actively trading equities.
This stock's slide over the course of the past 12 months, though, arguably already reflects the bulk of the company's potential -- and temporary -- downside. Priced at just under $48 per share, C shares are trading at only seven times this year's expected earnings, and only 6.6 times next year's expected bottom line. That's dirt cheap even by bank stock standards. In the meantime, newcomers will be plugging into anabove-average dividendyield of 4.4%.
2. Verizon $Verizon(VZ)$
In the same sense, consumers and companies will forever need banks, now that we've become accustomed to having them, the world is also going to perpetually need a means of communicating via mobile devices. Verizon Communications is the top low-cost way to tap into this dynamic.
If you're looking for double-digit percentage growth, look elsewhere -- you're not going to get it with this stock. This year's anticipated 2.3% revenue growth is pretty typical, and much of that improvement can be attributed to price increases rather than market-share growth. Verizon's earnings are growing just as tepidly. That's because the market itself is very nearly saturated. Pew Research reports that 85% of Americans already own a smartphone, while a whopping 97% of people in the United States own a mobile phone of some sort. Some of these consumers will try out a new carrier from time to time, but we're nearing the point where mobile services like Verizon, AT&T, and T-Mobile are merely swapping customers with one another from one quarter to the next instead of creating outright new ones.
Both the top and bottom lines are growing reliably though. The $134.3 billion worth of revenue the company has driven over the course of the past four quarters is 6% better than its top line from five years back and nearly 20% better than annualized sales a decade ago. Per-share profits are on an even steeper long-term growth trajectory, and with the company working on platforms like private wireless networks and custom-built edge-computing offerings, the telecom giant's clearly got a plan to sustain that fiscal progress even after the consumer wireless market peaks.
Perhaps the even-better bullish argument for stepping into Verizon, however, is how well this cash cow is able to support its dividend. While the trailing-12-month dividend total of $2.56 per share translates into an impressive yield of 5.2% compared to the stock's present price of $49.30, that's still less than half the per-share earnings of $5.44 Verizon produced during this time. Talk about a fiscal cushion!
source: James Brumley
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