After an extended selloff in 2022, the S&P 500 index has entered bull market territory this year. Typically, if a broader index gains over 20% from its 52-week low, it is considered to be in a bull run.
But it is difficult to gauge if the ongoing bull market is sustainable, given several macro headwinds weighing heavily on investor sentiment, including inflation, higher interest rates, and the threat of an upcoming recession. Alternatively, investors should also understand it’s impossible to time the market, and they should keep investing in quality stocks at regular intervals, a strategy also known as dollar-cost averaging.
Keeping this in mind, if we are at the start of a new bull market, the time is ripe to buy undervalued stocks and benefit from outsized gains over time.
So, let’s see why you should invest in cheap stocks such as BlackRock (NYSE:BLK) and Goldman Sachs (NYSE:GS) right now.
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The bull case for BlackRock stock
Valued at a market cap of US$104 billion, BlackRock stock has surged 219% after adjusting for dividends in the last 10 years.
BlackRock is the largest asset manager globally, with US$9.4 trillion in assets under management (AUM). It acquired the iShares brand from Barclays 14 years back when it had just US$1.1 trillion in AUM.
This acquisition was a key driver for the asset management giant, as customers started investing heavily in passively managed funds with lower fees, moving away from active management of their portfolios.
Armed with 1,250 exchange-traded fund (ETF) products across asset classes, BlackRock also pays shareholders an annual dividend of US$20 per share, indicating a yield of 2.9%. These payouts have risen at an annual rate of 17.5% in the last two decades, which is quite exceptional.
Priced at 19.6 times forward earnings, BLK stock is trading at a discount of 15.7% to consensus price target estimates.
BlackRock recently applied to launch a spot Bitcoin ETF, which will drive its AUM significantly higher in the upcoming decade.
BlackRock continues to widen its portfolio of products and services, launching 85 new ETFs in 2022. Additionally, in the last five years, 81% of its active AUM has derived higher returns than the benchmark allowing BlackRock to enjoy net inflows of US$190 billion in the last two quarters.
The bull case for Goldman Sachs stock
A major player in the investment banking space, Goldman Sachs stock is down 16% from all-time highs. Investment banks are highly cyclical and crush broader market returns in a bull run. For instance, Goldman Sachs reported record sales in 2021 due to an uptick in mergers and acquisitions deals, equity-related offerings, and initial public offerings.
Goldman Sachs and its peers perform exceedingly well when the economy expands as they benefit from the increase in demand for financial services. Alternatively, when interest rates rose in 2022, GS stock fell close to 8% last year.
Priced at 13 times forward earnings, GS stock is quite cheap and pays shareholders a quarterly dividend of US$2.5 per share, indicating a yield of over 3%. Despite the cyclicality associated with the company, it has raised 12.2% annually since August 2003.
