Over the past 15 years, investors have largely been rewarded by picking companies with the highest and most sustainable growth rates, and buying any dip that came along. Indeed, those who bought the pandemic dips on a number of large-cap tech stocks have been very well-rewarded, with valuations less of a concern than future growth.

Times have changed, with a number of prominent investors suggesting that assessing individual companies’ fundamentals is going to be more important than simply focusing solely on growth rates. I think taking a look at companies’ valuation ratios, their free cash flow growth, and liquidity and profit margins are going to become far more important as we enter the next phase of this cycle.

That’s because various recession signals are flashing red right now. Whether we’re talking about the inverted yield curve (which just dis-inverted), the Sahm rule, or various employment and spending reports which suggest the economy may be slowing down, it’s becoming increasingly clear that risks in the market are rising. Just look at the volatility index (VIX) and its recent massive spike higher.

For those looking to take a more defensive stance in their portfolios, finding stocks that are undervalued and buying over time may be a decent strategy. Here are three such stocks I think could fit in any investor portfolio right now.

Key Points About This Article:

• Valuations are starting to matter again, with many investors increasingly looking for companies with strong balance sheets and solid cash flow growth profiles.
• Here are three companies with very inexpensive valuations and strong fundamentals investors may want to take a closer look at.
• If you’re looking for some stocks with huge potential, make sure to grab a free copy of our brand-new “The Next NVIDIA” report. It features a software stock we’re confident has 10X potential.

Geo Group (GEO)

GEO Group (NYSE:GEO) is an oft-overlooked stock, outside of investors who follow Michael Burry. The former private prison operator has made a massive shift into becoming a diversified government services provider, with a particular focus on electronic monitoring and detention management. 

It’s a rather unsavory business for many investors, and there’s a reason why this stock is so often overlooked. But it’s also important to consider that this company has produced remarkable financial results in recent quarters. The company’s Q2 2024 earnings results highlighted impressive earnings per share of $0.23. This bottom-line number easily surpassed analyst estimates of $0.14. Revenue reached $607.19 million, exceediing the $606.77 million forecast as well.

Additionally, the company updated its 2024 guidance data, expecting full-year net income of $0.51 per share on a $2.44 billion revenue and a 24% tax rate. This also included debt of $82.4 million, and adjusted net income of $0.93 per share. Adjusted EBITDA is expected to range from $485 million to $505 million.

For the upcoming quarter, the company expects net income of $0.25 per share, a $616 million revenue, and adjusted EBITDA of $140 million. Q4 estimates came in $0.29 per share, $621 million revenue, and adjusted EBITDA of $138 million. So, as long as Geo Group can continue to blow away analyst expectations, this is a stock I think is worth buying on dips moving forward. 

Reality Income (O)

Realty Income (NYSE:O), a REIT with holding more than 15,450 properties and 272 million square feet of retail space, is a top option many income investors are already well aware of. Realty Income’s 5.3% annual dividend yield is paid in monthly installments to investors. So, for retirees or those looking for a steady passive income stream, this is a great option to consider. 

Importantly, Realty Income has maintained its dividend for 650 consecutive payouts, which include 126 increases since 1994. Rising interest rate cut bets have boosted its stock by 27% from recent lows, with a 5% year-to-date gain. Wall Street projected earnings growth of 8% this year and 21% next year to $1.65 per share. I think if rate cuts materialize as the market expects, this is a stock that could have even more upside from here. 

Realty Income’s second-quarter revenue rose 31% to $1.34 billion, driven by its Spirit Realty acquisition and new property investments. Same-store rental revenue grew 0.2%, with a 98.8% occupancy rate. Industrial properties saw a 2.1% increase in same-store rental growth, gaming properties rose by 1.7%, and data centers surged by 4.1%. However, retail same-store rental revenue, the company’s largest segment, declined by 0.3%. Realty Income’s diversification into gaming, data centers, and industrial properties through recent acquisitions showed positive results.

Realty Income’s dividend safety was strong, with an AFFO per share of $1.06 and a dividend payout of $0.777 per share, improving its AFFO payout ratio from 76.5% to 73.3%. This indicates sufficient cash flow to cover dividends and potential for future increases. Although the company has seen some pricing pressure when it comes to specific tenants, Realty Income’s solid payout ratio makes O stock one to consider on any additional dips.

Lockheed Martin (LMT)

Lockheed Martin (NYSE:LMT) remains a top defense contractor investors look to in times of turmoil. And with geopolitical risks rising, this is a stock that could certainly continue to see strong growth. 

The company is also increasingly viewed as a space play, though its core defense business remains the most important piece of the puzzle most investors scrutinize. Last quarter, space sales rose 10% by $310 million, and operating profit increased 16% by $45 million. However, the company’s biggest gains were in strategic and missile defense programs, up $140 million, and national security space programs, which added $115 million, driven by Transport Layer and GPS III programs. The growing geopolitical space race is expected to boost demand for Lockheed’s space revenues and profits.

The company’s space segment earned over $3.2 billion in Q2, representing 18% of revenue and 17% of operating profits with 11% margins. While Lockheed is mainly a military contractor, its space operations provide added value. Most of its revenue comes from government contracts, making it dependent on defense budgets. As a result of ongoing global conflicts and reduced U.S. munitions, Lockheed’s business remains stable, with stock down less than 1% amid the market downturn. With strong funding from the Defense Department and NASA, Lockheed is a solid space investment.

Recently, Lockheed Martin announced it acquire Terran Orbital for $0.25 per share and retire its debt, with the deal valued at $450 million. The purchase, closing in Q4, follows Lockheed’s previous investments and strategic partnership with Terran. Despite accounting for over 90% of Terran’s contracts, Lockheed plans to keep Terran as a commercial smallsat supplier.

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