Growth stocks are clearly losing popularity in the current economic climate. Instead, over the past year, defensive his options have produced above-market returns. And while many top-growth stocks have posted impressive year-to-date gains, most have fallen more significantly than defensive stocks.
So, with the Federal Reserve still hitting the macroeconomic brakes (at least one more rate hike is likely), there is reason for investors to remain cautious about capital allocation. By investing at least a portion of your portfolio in solid, cash-flow generating companies, you can at least get returns that more closely match those of the overall market.
That said, growth stocks have significantly outperformed value stocks over the past 15 years, making it wise for equity investors to own a mix of growth and defensive stocks.
With that in mind, I highlight two options that investors are currently looking for a solid mix of both. It’s trading at a level that I find incredibly cheap.
devon energy (DVN 4.39%) is an energy giant focused primarily on the exploration and development of oil, natural gas and liquefied natural gas. The company’s oil and gas assets are located in the Williston Basin, Anadarko Basin, Delaware Basin, Powder River Basin, and Eagle Ford.
Given the company’s overall exposure to energy prices, Devon’s stock has plummeted in recent years. On a year-to-date basis, the stock is down about 12% at the time of writing, more than double the declines seen in various ETFs tracking the oil sector. But oil prices have normalized over the past three years, and he’s more than tripled since early 2021, making the stock one of the biggest winners in the sector. The dividend yield (currently over 9% including volatility) offers a welcome capital return for long-term holders of this stock.
Devon’s variable dividend complements a fixed dividend by allowing 50% of the company’s cash flow to be paid to investors. As such, when times are good, Devon pays big. When oil prices fall, the company will hold on to cash to strengthen its balance sheet. This is the flexibility that long-term investors should prefer. Potential income investors should remember that $0.23 of the company’s $0.34 dividend this quarter was volatile, so this is an important factor investors should monitor closely.
While the stock has nearly doubled since Q3 2021, Devon’s price/earnings ratio has fallen at a relatively steady pace during this time. This suggests that investors are less bullish about the company’s future prospects and energy price outlook.
It is difficult for investors to pinpoint where future earnings will lie, as the direction oil prices will head depends on how global supply and demand conditions evolve. However, Devon’s debt level (current debt-to-EBITDA ratio of 0.65x, better than peers’ 73%) and return on equity of nearly 60% (outperformed peers’ 90%) ), this valuation multiple of less than 6x current earnings estimates certainly seems too low.
I don’t think investors can go wrong with owning this long-term cash flow machine at such a low multiple. Shareholders are likely to be paid to persevere regardless of where oil prices head. is a stock of
2022 Underperforming Social Media Giants meta platform (meta -0.32%) It has certainly recovered well this year. Year-to-date, Meta’s stock price is up more than 90% at the time of writing, so many investors may think this run is complete. Meta has changed very little since the beginning of the year, so that sentiment is fair.
Yes, the company has made some serious cost cuts, making 2023 the “Year of Efficiency.” This has led many to suggest that Meta is focusing on its core business.In many ways, it is. However, Meta is still heavily invested in betting that the Metaverse is the future. His Reality Labs division of the company continues to lose billions of dollars each quarter. The company still relies heavily on advertising revenue from Facebook and Instagram.
My take on Meta is that it is a very profitable, cash flow generating business that offers investors some choice. If the Metaverse business succeeds, Meta will gain a first-mover advantage in a potentially lucrative area, even if it’s not as over the top as company management expects.
But even if Meta’s ambitions don’t quite match reality, the Metaverse doesn’t work at all, and the Reality Labs division eventually collapses, the company can bear the loss. Resources can be devoted to more productive endeavors, and investors will buy into the story of this streamlined, focused tech giant.
I think this short-term period of pain will eventually end by itself. Longer term, Meta’s ability to generate cash flow growth in its core social media franchise is something that investors should really pay attention to. In this respect, I think the valuation of about 25x trading earnings on Meta is very attractive.
These hot stocks could rise further
Dividend-paying energy companies and social media giants couldn’t be more different, so investors buy these hot spots for very different reasons. But I think the combination of income and growth is what makes the portfolio great.
If this risk-on rally continues and tech stocks continue to surge, investors holding both stocks will benefit from holding meta. If inflation picks up and recession fears take hold, or investors choose to flee to safety, Devon could get more attention. In both cases, the investor wins.
I currently own shares in Meta, but not Devon, and am considering buying given the additional downward pressure from here. Both are very cheap stocks, but I don’t think they’re value traps at these levels right now.