Over the past year, the market has been on a solid upward trend, reaching new all-time highs multiple times over the past several months and confirming the bull market, which began in October 2022. But even as the S&P 500 hits new highs, value-focused investors still have several opportunities to find deals on individual stocks that have yet to fully recover.
Investing in these dirt-cheap stocks provides stock buyers with some margin of safety and an opportunity to play the upside in the rebound. Despite running up alongside the market, these three stocks still have incredibly cheap valuations and look ripe for the picking.
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1. Citigroup
Citigroup(NYSE: C) is the fourth-largest bank in the U.S. but has struggled over the years with its sprawling business, making it difficult for the bank to manage risk. As a result, Citigroup has underperformed banking peers like Bank of America, Wells Fargo, and JPMorgan Chase on key profitability metrics. Citigroup finds its stock priced at a 28% discount to its tangible book value.
Over the past decade, Citigroup's return on equity (ROE) has been around 6.3%, well below its peers. The company was also hit with regulatory actions and fines for several long-standing deficiencies in 2020.
CEO Jane Fraser is on a mission to improve Citigroup's profitability and has taken steps to boost the bank's efficiency. To accomplish this, the bank has reduced its workforce and flattened its management structure.
It has also begun winding down and selling its consumer franchises, and nine of its 14 franchises have been sold or wound down since March. Citigroup is also on track to spin off its profitable Mexican consumer business through an initial public offering (IPO) in 2025.
The CEO said she wants to get Citi's ROE to 11% to 12%, which would align more with its peers and could catalyze a significant move higher in the stock. Considering its peers trade between a 59% to 133% premium to tangible book value, Citigroup has excellent upside potential as it progresses on its long-term goals.
2. Lincoln National
Lincoln National(NYSE: LNC) provides life insurance and retirement planning but has had a rough go of it over the past few years. In 2020, the pandemic wreaked havoc on the world, and life insurers struggled with soaring claims payouts. The unfortunate events led to life insurers seeing claims payouts surge 15% year over year, the most significant increase since the 1918 influenza epidemic, according to the American Council of Life Insurers.
In addition, Lincoln National made some significant changes in assumptions on its guaranteed universal life insurance policies. In the third quarter of 2022, it reported a $2.6 billion net loss, and its risk-based capital (RBC) ratio dropped below management's preferred level. In response, management suspended share buybacks, raised equity capital, and cut expenses.
The insurer is in the early stages of its turnaround. It's taken steps to reduce costs and is shifting its business mix to focus on more profitable areas.
Investing in the life insurer has another added benefit: higher interest rates. Analysts at Jefferies Financial are optimistic about life insurers, specifically the annuity segment. That's because annuities provide a steady income stream, which can be attractive to retirees if interest rates remain elevated compared to recent history. According to the Life Insurance Marketing and Research Association, annuity sales set a record in 2023 for the second consecutive year.
Lincoln National is priced at 4.5 times earnings, the cheapest it has been over the past decade. With its turnaround in progress and potential longer-term tailwinds from its annuity business, Lincoln looks like a compelling deep-value stock to buy today.
3. LendingClub
LendingClub(NYSE: LC) reinvented itself over the past several years, going from a peer-to-peer lending platform to a personal lender backed by a banking charter after acquiring Radius Bancorp in 2021.
The stock took off in the months following the acquisition, enabling the company to hold loans on its books and collect interest income. However, the higher interest rate environment stifled consumer demand for personal loans, and LendingClub's performance has been lackluster in recent years.
While business has slowed, investors have a reason for optimism. LendingClub stands to benefit from a potentially "historic refinance opportunity" from credit card borrowers. With credit card debt at all-time high levels and ultra-high interest rates on those debts, consumers could turn to personal loans to help consolidate their debts.
To prepare for this, LendingClub is developing tools to help customers monitor and manage their debt. It's also creating products that allow members to sweep credit card balances into payment plans, making it easy for members to maintain a single payment on their consolidated debt.
Today, the stock is valued at a price-to-earnings (P/E) ratio of 24.5, making it look expensive on the surface. However, it is priced at a 22% discount to its tangible book value. With earnings growth expected to pick up, the stock is priced at 12.8 times its one-year forward earnings and looks ripe for the picking for patient investors.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Citigroup is an advertising partner of The Ascent, a Motley Fool company. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Courtney Carlsen has positions in LendingClub. The Motley Fool has positions in and recommends Bank of America and JPMorgan Chase. The Motley Fool has a disclosure policy.
