2 blue chip stocks to buy in October
Value stocks are stocks of companies that trade at relatively low multiples of their earnings and growth potential. They are a great way for investors to minimize risk by betting on mature, profitable companies. General dollar (NYSE: DG) and Electronic arts (NASDAQ: EA) are two value stocks that would make great buys in October – they feature modest valuations and their business models perform well in this difficult economic environment.
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Dollar General: a defensive choice in this struggling economy
Dollar General is a discount retailer that focuses on low-cost, basic consumer products. With a P / E multiple of 23, the stock has a modest valuation compared to the S&P 500 average of 29. And it seems poised to continue its success due to its recession-proof business model and expansion into higher margin products like housewares and self-distributed fresh foods.
According to the National Bureau of Economic Research, the United States entered a recession in February. Today, six months later, the country is still grappling with a 7.9% unemployment rate, which can affect the amount of money some families have to spend on necessities. As a discount retailer, Dollar General can perform well in this difficult economic environment due to its affordable prices.
Second-quarter net sales jumped 24.4% to $ 8.68 billion. According to CEO Todd Vasos, this growth reflects the continuation of coronavirus-related trends that began in the first quarter – when revenue also rose 27.6% from the previous year period. It is not clear whether Dollar General will maintain its high rate of revenue growth once the crisis is over, but management aims to continue delivering value to investors with new strategic initiatives.
In its “DG Fresh” program, the company will distribute its own perishables to reduce the costs of intermediaries and potentially offer lower prices to consumers. Dollar General also aims to stock a wider range of higher margin “non-consumable” household items in its stores. Both strategies can help increase business results, even if revenue growth slows after the pandemic.
Electronic Arts: multiple growth catalysts
With a PE of just 19, Electronic Arts enjoys an attractive valuation, especially compared to comparable video game companies like Activision Blizzard, which trades at 34 times earnings. Electronic Arts will likely benefit from the high demand for home entertainment amid the coronavirus pandemic, as well as its partnership with Valve to publish titles on the Steam PC Games Marketplace.
According to industry monitoring company NPD Group, consumer spending on video games rose 37% year-on-year in August to $ 3.3 billion. Electronic Arts is behind much of this expansion with its Madden NFL 21 and UFC Sport 4 – the two most profitable titles of the period. Electronic arts plans to continue growing by hosting its games on Steam, the world’s largest PC game distribution platform.
Electronic Arts added 30 titles to Steam in the first quarter. And the distribution deal may help drive sales growth in the PC market due to Steam’s extended reach (MAU 90 million in 2018). Electronic Arts also synergizes Steam with its existing Origin distribution platform by allowing players from both networks to play together.
Electronic Arts net sales jumped 20.7% to $ 1.46 billion in the first fiscal quarter. And management is forecasting annual revenue of $ 5.63 billion, a 1.6 percent gain from the prior year period. Electronic Arts is mature and investors shouldn’t expect skyrocketing revenue growth in the future. But the company’s consistent profits and low valuation make it a great way to bet on a strong industry at an affordable price.
Two big bets in this uncertain economic context
The recent recession and the ongoing coronavirus pandemic are two of the biggest challenges facing the economy right now, and investors should bet on companies that can weather the storm.
Dollar General targets low-income customers, so its business model is perfect for times of high unemployment. Electronic Arts, on the other hand, can protect your wallet from a worsening coronavirus pandemic – as social distancing behaviors tend to drive demand for home entertainment. Both companies are trading at attractive valuations relative to their exceptional potential.
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 motley! 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.
