That cheap stock might make you forget about AMC and GameStop

One of the biggest stories in financial markets this year has been the popularity of Reddit-fueled meme stocks. Thanks to the power of online communities, a large number of individual investors have come together to bet against the tide on heavily shorted stocks in speculative offers for quick profits. AMC and GameStop were among the most prominent examples of stocks benefiting from this wild trend.

But as a long-term strategy, trading stocks even will prove to be unsustainable. A better and safer investment strategy is to focus on quality companies. If you want to build real wealth, build a diversified portfolio out of these stocks and hold them for the long haul.

A cheap but solid stock that does the trick: Lowe’s (NYSE: LOW).

Image source: Getty Images.

A boon in sight

The second largest, home renovation retailer behind Home deposit (NYSE: HD), Lowe’s is currently trading at a futures price / earnings (P / E) ratio of just 18. This looks like a good deal compared to the S&P 500 market index‘s forward P / E of 22. And it’s hard to find good valuations like this in a stock market that has hit new all-time highs like clockwork for months.

What Makes Lowe’s a Good Company? Well, a lot of things. For starters, it has grown rapidly over the past couple of years. In his most recent quarter ended July 30, however, revenue was essentially flat and same-store sales were down from the same period a year earlier. But that went against the extremely difficult comparison to the second quarter of fiscal 2020, when pandemic-related restrictions led to a sharp increase in home renovation spending. About 75% of the chain’s activity comes from DIY enthusiasts.

Therefore, it is best to look at Lowe’s performance over the past two years. Compared to the second quarter of fiscal 2019, revenue increased 31.3%, U.S. compositions jumped 32%, and digital sales climbed 151% in the most recent quarter.

Adding to Lowe’s bullish situation is the fact that Lowe’s is benefiting greatly from the current real estate boom. Interest rates are still extremely low by historical standards, and data shows there is a huge housing shortage in the United States as demand is high. This has resulted in rapidly rising house prices, which is supporting demand for Lowe’s products due to the “wealth effect”. When homeowners know that the value of their property is appreciating dramatically, they are more likely to undertake renovation projects. Additionally, the growing trend towards telecommuting has caused people to re-evaluate their living conditions and adapt their spaces for remote working, thus spurring increased demand for what Lowe’s offers.

Another advantage of owning the stock is that Lowe’s has made a habit of rewarding its shareholders with dividends and share buybacks. During the second quarter of the fiscal year, the company paid $ 430 million in dividends and repurchased $ 3.1 billion of its shares.

Improved outlook

It’s also evident that consumers are starting to take on bigger and more complex projects that they delayed last year during the early stages of the pandemic. Comps for Lowe’s professional business, which sells to entrepreneurs, increased 21% in the quarter and 49% on a two-year basis. This segment now represents around a quarter of the company’s overall turnover. Home Depot, on the other hand, generates nearly half of its sales from this group of lucrative customers, so Lowe’s has a lot of catching up to do – and things are looking good so far.

Management is optimistic on the company’s trajectory and improved their outlook. For the year, the company is now targeting revenue of $ 92 billion (up from $ 86 billion previously) and an operating margin of 12.2% (up from 12%). And for the full year 2021, he expects to buy back $ 9 billion in shares.

Lowe’s stock has outperformed its biggest rival over the past five years, rising 166% from Home Depot’s 142% gain. Yet Lowe’s still looks like a bargain today. This is a company with a strong brand, advantages of scale and a considerable opportunity to continue to grow. There is no reason that it is trading at a multiple cheaper than the S&P 500.

Potential investors would be well advised to ignore the meme stock craze and grab shares of this leading retailer. This is the safest bet.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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