3 Value Stocks to Buy in 2022 and Hold Forever - Motley Fool

Returns as of 02/28/2022
Returns as of 02/28/2022
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When stock displays are awash in a sea of red, it can be easy to feel helpless and throw in the towel. But long-term investors know that strong businesses tend to make it through the tough times. Those strong businesses include Royal Gold ( RGLD 0.63% ), Ford Motor ( F -1.51% ), and Hexcel ( HXL 1.62% ).
You may not recognize every company, but they all have reasonable valuations and strong fundamentals — which is vital in today’s environment of rising interest rates. Here’s a breakdown of each business, and reasons that all three value stocks could be worth buying now.
Image source: Ford Motor Company.
Scott Levine (Royal Gold): With the S&P 500 down more than 8% so far in 2022, now’s a great time to start combing through the discount rack for quality stocks — those that can fortify a portfolio for the long term. One name that fits this criterion well is Royal Gold. Unlike electric vehicle (EV) and metaverse stocks, gold stocks aren’t among the most popular buys these days. But Royal Gold is no ordinary yellow-metal stock.
A royalty and streaming company, Royal Gold doesn’t operate the metal-producing assets. Instead, it acts as a specialized broker, providing capital to mining companies in exchange for the right to purchase the mined metal at a preset price, or to receive a percentage of the metal that’s produced.
Also, it’s important to recognize that Royal Gold is more than just an investment in gold — it’s far from synonymous with merely buying gold bullion, which only grows in value when the market price of gold rises. Consider the stock’s performance over the past 10 years, compared to the price of gold:
Gold Price in US Dollars Chart
Gold Price in US Dollars data by YCharts.
Investors who have held Royal Gold in their portfolios for the past 10 years have seen a considerably better return than they would have by buying gold coins — or gold mining stocks, whose movements are highly correlated with the price of gold. Unlike many gold stocks, Royal Gold rewards shareholders with a dividend, which currently offers a 1.2% forward yield.
How alluring is the stock’s price tag at the moment? Currently, shares of Royal Gold are trading at 29.4 times trailing earnings. This might seem pricey, but consider the fact that its five-year average earnings ratio is 73. The stock’s valuation in terms of operating cash flow also seems attractive: Shares are trading hands at 17.6 times operating cash flow, representing a discount to their five-year average multiple of 21.1.
Daniel Foelber (Ford): On Friday, Ford stock popped 3% despite a down day in the broader stock market, after CEO Jim Farley entertained plans to spin off Ford’s electric vehicle (EV) business from its internal combustion engine (ICE) business. Interestingly, the announcement comes just weeks after Ford management was berated for its unwillingness to separately manage the two different businesses on its Q4 2021 conference call.
For now, the news is just speculation. And whether Ford splits its businesses or not, it can be a useful exercise to look at how the business is performing now and where it could be headed. What impresses me the most about Ford is that it’s able to maintain high profitability despite ramping up EV spending.
Ford expects its earnings before interest and taxes (EBIT) margin to be 10% in North America in 2022, which is a goal it originally set for 2023. North American EBIT margin was 7.1% in 2021, compared to the overall company’s 4.7% EBIT margin. North American production accounts for about half of Ford’s total production, but it made up nearly all of Ford’s EBIT. North America and Ford’s International Markets Group (IMG) were the company’s only positive EBIT segments; Ford lost money in South America, Europe, and China in 2021.
Ford is guiding for 2022 adjusted EBIT between $11.5 billion and $12.5 billion, which would be an increase of 15% to 25% compared to 2021. It would also give Ford a price-to-EBIT ratio of just 5.98, giving Ford an inexpensive valuation, especially considering its growth rate. Ford’s net income — which is a generally accepted accounting principle (GAAP) metric — includes its stake in Rivian Automotive. The value of this stake has swung by hundreds of millions of dollars, or even more than $1 billion, in a single day. Therefore, investors are probably better off tracking EBIT than net income for 2022.
Throw in a 2.3% dividend yield, and there’s a case for Ford being the best all-around EV stock to buy and hold for decades.
Lee Samaha (Hexcel): Charged with suggesting a “buy and hold forever” stock, I thought I’d take the less-beaten path and suggest advanced-composites company Hexcel.
The company specializes in advanced carbon-fiber composites that offer a weight and strength advantage over aluminum. Around half of its sales currently go to the commercial aerospace market, with a third going to space and defense and 17% to general industrial markets, including automotive and wind energy.
The key to its growth prospects lies in commercial aviation, and it’s one of the best stocks to buy to play an aviation recovery. With composites, Boeing and Airbus can reduce the weight of planes, making them more economical to run and therefore reducing waste. In addition, composites add strength. So there’s a general trend toward newer planes using more composites and thus generating more revenue for Hexcel in the process, notably on wide-body aircraft where weight is more of an issue. I’d expect that trend to continue in the future and Hexcel’s sales to make a multiyear recovery as aircraft production ramps up.
Turning to the “value” bit, let’s look back at Hexcel’s earnings before the pandemic began. In the three years to 2019, Hexcel generated an average free cash flow (FCF) of $225 million. If the aviation industry takes a couple more years to get back to 2019 levels (Boeing and Airbus are ramping up production), then you can pencil in at least $225 million for FCF for Hexcel, putting it at 21 times the current market cap in 2024.
That’s an excellent value for a company with such strong growth prospects. Given that aircraft manufacturers will be producing more aircraft with greater amounts of advanced composites, I’d expect Hexcel to grow revenue for many years to come.

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