The stock market game is fickle, so when a cheap stock comes along looking like a bargain, buying it seems like a no-brainer. Only that’s not always the case.
Cheap stocks are often value traps, trading at low multiples because, frankly, they deserve to. Such stocks are banished to underperformance hell, and are definitely not stocks to invest in.
If you want to find cheap stocks to buy that will actually pay off, don’t look at the trading price — look for catalysts generating interest in the business, management that is willing to be seen and heard, meaningful value and growth potential.
Using those metrics, let’s take a look at three of the best cheap stocks to buy for 2015.
3 Cheap Stocks to Buy in 2015: Hewlett-Packard Company (HPQ)
In a bid to bring growth back to the Hewlett-Packard Company (NASDAQ:HPQ), HPQ recently announced its largest acquisition in years by agreeing to buy wireless network infrastructure provider Aruba Networks, Inc. (NASDAQ:ARUN) for $2.7 billion.
HPQ is set to split its business in two, and buying ARUN stock could be a hedge against shrinking profit forecasts and general weariness about HPQ’s position in the market. Because Aruba is a network infrastructure manufacturer, HPQ could target the emerging Chinese market for some sizable revenue gains.
In fact, Aruba already has customers in China, like Dalian Wanda Group Co., which uses ARUN Wi-Fi architecture in its chain of malls.
While the ARUN stock deal could vastly improve HPQ’s already impressive networking business, it’s Hewlett’s personal systems business that is HPQ’s most valuable stream of revenue, as well as the best-performing personal systems business in the industry.
CEO Meg Whitman remains a steady leader of HPQ, having this to say on HPQ’s most recent analyst conference call:
“In personal systems, the team is executing well. We out grew the market and gained share across all regions. We saw particular strength in notebooks where we regained our No. 1 share position worldwide. Commercial remains a key focus for us. [In] December we announced the industry’s thinnest and lightest business class notebook, enabling our customers to be more productive in more places.”
HPQ Stock Stats:
- HPQ has a trailing price-to-earnings ratio 12.6 and a forward P/E of 8.5, far below the market average of 18. This alone doesn’t qualify HPQ as a bargain stock to invest in, but it certainly doesn’t count it out.
- HPQ has a total cash per share of $7.05, meaning HPQ is financially healthy.
- HPQ stock is very liquid: outstanding shares exceed the market average of 623 million outstanding shares with 1.8 billion.
- To top it off, HPQ pays a quarterly dividend of 16 cents yielding 1.88% at a sustainable payout ratio of 23%.
- HPQ’s cash and short-term investment horde totals over $15 billion, shielding HPQ stock against several years of losses.
3 Cheap Stocks to Buy in 2015: American Eagle Outfitters (AEO)
Ah, fashion — things that were once cool quickly become uncool. But for investors, American Eagle Outfitters, Inc. (NYSE:AEO) is not only cooler than the other side of the pillow, but a cheap stock to buy for bargainers.
AEO stock’s bad days appear to be behind it, as the last three months saw AEO stock rise 40% while competitor Abercrombie & Fitch Co. (NYSE:ANF) fell 26%.
As ANF stock fell on disappointing earnings, AEO jumped on better-than-expected earnings.
AEO quarterly earnings grew by an astounding 486%, no doubt buoyed from a round-the-board increase in American Eagle’s quality, which appears to be resuscitating its image among teens by selling highly-appealing knit tops and blanket scarves.
Even AEO management is cool, as Jay Schottenstein, AEO interim CEO, reiterated AEO’s recent success with unwavering focus for driving momentum in 2015:
“AE saw improvement across the assortment driven by innovation, quality and better style. Aerie had a solid year from start to finish. They delivered greater assortment debt, new product lines and a multi campaign that truly resonated with our customers.”
AEO Stock Stats:
- AEO has a trailing P/E of 40.7, but shows potential in its forward P/E of 17.1, is well below the apparel store industry’s average of 25.
- Most importantly, AEO’s price-to-sales ratio of 1 makes it an attractive investment for value investors.
- AEO revenue growth is roughly 3%, and its EPS estimates for 2017 have risen steadily, from 83 cents a few months ago to 98 cents per share presently.
- AEO offers a dividend of 12 cents and yields 3%.
- AEO has a total cash per share of 2.1 and $428 million in cash and short-term investments to sustain its dividend through long-term losses.
3 Cheap Stocks to Buy in 2015: Kindred Healthcare, Inc. (KND)
Kindred Healthcare, Inc. (NYSE:KND) benefits from the healthcare industry as a whole — specifically from economic recovery, constant demand for medication and services, and an aging population poised to jump from 19% to 22% by 2020.
KND just closed a $1.8 billion deal for Gentiva Health Services, Inc. to make KND America’s most diversified home health and hospice business. As the Affordable Care Act, aka Obamacare coverage extends to more than 30 million people over the next two years, KND should have plenty of customers at its door.
No wonder KND has a high price target of $42 and a low of just $20, one point below its current number.
NKD Stock Stats:
- Analysts’ 2016 EPS trends rose steadily from $1.16 to $1.64 in the last 90 days.
- KND stock has a forward P/E of 12.7 and its five-year PEG ratio of 0.8 shows KND stock may be undervalued and is due for a stock price increase.
- KND has a P/S ratio of 0.3, giving credence to its position as a growth company that is a cheap stock to buy.
- KND stock also recently began offering a quarterly dividend of 12 cents, yielding 2.21%
- KND boasts a total cash per share of 3.8 and holds more than $264 million in cash and short-term investments.
As of this writing, John Kilhefner did not hold a position in any of the aforementioned securities.
