In the world of investing, where the market is dominated by mega-caps and AI names, it's easy to overlook the value of solid, undervalued businesses. But that's exactly what Lorne Steinberg, Co-President of Lorne Steinberg Wealth Management, is doing. With over three decades of experience, Steinberg has made his fortune by finding great companies trading at cheap prices, and he believes that this is the kind of market where those stocks still exist, if you know what you're looking for.
Steinberg's definition of cheap is based on a simple principle: bonds yield 3 to 4 percent over time, and equities have to earn enough to justify the volatility. The long-term return of the S&P 500 has been roughly 10 percent a year, so he looks for stocks priced where he can reasonably expect that same 10 percent annualized return over the next five years. This, he says, will deliver a lot of wealth creation for investors over time.
But it's not just about the price. Steinberg also looks for quality, and his concept of quality revolves around free cash flow. The cash a business generates in excess of what it needs to reinvest is what management has to buy back shares, make acquisitions, and pay dividends. The trouble, he says, is that history is full of companies that wasted free cash flow on terrible acquisitions. So the bigger question is how the cash gets allocated, and whether that allocation will keep generating returns for shareholders over time.
With that framework in mind, Steinberg has identified eight stocks that he believes are undervalued and worth investing in. These stocks are not the ones generating the most excitement, but they are the ones quietly using their free cash flow to compound shareholder value year after year.
One of the stocks on Steinberg's list is Berkshire Hathaway (BRK.B). While the company has been under some pressure since Warren Buffett stepped down and Greg Abel took over, Steinberg believes that Abel is not Warren Buffett, but he was trained by the best and has had a spectacular track record. And Berkshire sits on roughly $400 billion in cash, which will shine when the market falls.
Another stock on Steinberg's list is McDonald's (MCD). The company has five times the number of quality control inspectors of its peers, and its obsession with consistency shows up in the financials. McDonald's continually generates cash flow and uses it well, and the stock is trading at one of its cheapest multiples in years because investors are focused on AI.
Cisco (CSCO) is also on Steinberg's list. The company is still number one in routers, but is increasingly an integrated software company. Steinberg points to its acquisition of cybersecurity company Splunk as an example of strong capital deployment, and the business is moving from mid-single digit revenue growth toward double digit growth.
Adobe (ADBE) is another stock on Steinberg's list. While the whole software sector has been under pressure from AI fears, Adobe's last quarter delivered double digit growth in earnings, revenue, and free cash flow. The stock trades at roughly 8 to 9 times free cash flow, and Steinberg's math is striking.
Microsoft (MSFT) is the one mega-cap AI name on Steinberg's list. With the stock having pulled back, he says investors have a chance to buy what may be the world's best technology company at a reasonable price. Microsoft sits at the nexus of software, cloud, and AI, and is the integrator for nearly every major company.
Allstate (ALL) is also on Steinberg's list. The company does nothing but sell home and car insurance, but it has done it better for shareholders than almost anyone. Over the past 20 years, Allstate has repurchased more than 60 percent of its shares outstanding, and over the past decade, about a third. In the same period, it has doubled its dividend and tripled its earnings.
Disney (DIS) is another stock on Steinberg's list. The company has three businesses, and Steinberg argues that investors are not paying for what they're getting. The theme parks generate the bulk of profits and remain a growth industry, and the stock trades at 14 times earnings, with double digit earnings growth ahead.
American Express (AXP) is the final stock on Steinberg's list. The company is a longtime Berkshire Hathaway holding, and it has a free cash flow machine with double digit earnings growth and roughly a 15 percent annualized return to shareholders over a long period. Steinberg does not see much competition for its core business.
What ties Steinberg's framework together is the discipline to require both things at once: quality AND price. Most investors lean on one or the other, but Steinberg believes that the opportunity lies in the companies that are quietly using their free cash flow to compound shareholder value year after year. In a market climbing on a narrow group of names, that is where Steinberg believes the opportunity lives.
