Everyone likes Facebook Inc (FB) and Amazon.com, Inc. (AMZN), but when you are making an investment, stock performance doesn’t matter. What matters is how it will perform in the future.
That said, how much upside is left in stocks like FB or AMZN?
Could they trade higher by another 30%, and if so, how long could that take? These are already stretched stocks, so adding another $100 billion in market capitalization does not seem realistic.
Meanwhile, there are a number of stocks in the market that could jump 30% right now, and even then they would still be dirt cheap.
These are the investments to chase, so let’s look at nine of these stocks, from largest to smallest in market capitalization.
Cheap Hot Stocks: Apple Inc. (AAPL)
Market Cap: $530B
Forward P/E: 10.2 (6 minus cash)
If we remove the cash pile from Apple’s (AAPL) valuation, and assume that it will earn $9.15 per share in fiscal 2017, then shares trade at just six times forward earnings.
That is ridiculously cheap! So cheap, that even if Apple stock were to trade higher by another 30%, it would still be cheaper than most Big Tech companies at eight times forward earnings, minus cash.
All things considered, AAPL is not going to stay this cheap forever. Yes, the sales decline looks bad, but keep in mind the comps from last year when the company grew revenue nearly 30%. This is an “s” year for Apple, more or less a software refresh. The iPhone 7 will be a big deal, just like the 6, 6 Plus, and 5 before it. And when the iPhone 7 launches, it will have very comparable comps to once more produce double digit top-line growth.
In other words, expect multiple appreciation in AAPL stock.
Cheap Hot Stocks: AT&T Inc. (T)
Market Cap: $241B
Forward P/E: 12.8
Telecom has been one of the best performing sectors of the market, but what investors fail to realize is just how cheap this space was to start with.
Currently, AT&T (T) is trading at just 13 times FY2017 earnings, a huge discount to the 20 times multiples seen in other “safe, high yield” stocks. Even if shares were to jump 30%, T stock would still be cheap, with a higher dividend that the consumer stocks that investors are piling into.
Furthermore, AT&T has growth. This AT&T will grow 12%, and if the company can capture market share in Mexico and Latin America (and make a move into India), then it could end up growing far faster than the 2.5% that analysts expect in 2017.
Regardless, AT&T is a superior value, high-yield stock, even with gains of 30% from $39.
Cheap Hot Stocks: General Motors Inc (GM)
Market Cap: $47B
Forward P/E: 5.2
Up until recently, the auto industry has been the brightest spot of the U.S. economy. Nowadays, total shipments seemed to have peaked, but that’s because the industry is becoming more services focused, with ride-sharing, renting or leasing, and owning.
General Motors (GM) is involved in all of these new services, all of which command much larger valuation multiples than the traditional sale and leasing of vehicles. Looking ahead, there are not many investments in the market better than GM.
Even if the stock were to soar 30% from $30.75, it would trade with a price-earnings ratio of just six! So clearly, there is loads of value in GM as the company moves forward with big initiatives to bring self-driving technology to the roads, launch larger ride-sharing programs with Lyft and enter the rental car space to compete with the likes of Hertz (HTZ).
As an added bonus, GM pays a dividend yield of 5%, making the attractive even more appealing.
Cheap Hot Stocks: Delta Air Lines, Inc. (DAL)
Market Cap: $35B
Forward P/E: 6
Fuel prices are cheap, airports are packed and Delta (DAL) is now reducing capacity to boost margins and unit revenue growth.
Delta shares have been punished in 2016 due to an influx in capacity, yet the company’s move to reduce capacity should allow its stock to build on the Monday rally. Much like the others on this list, DAL is unjustly valued, at just six times forward earnings.
So even if shares pop 30%, the stock is still cheap! Given that Delta is expecting a return to unit revenue growth later this year, and analysts are forecasting 3% revenue growth next year, those stock multiples should start to appreciate.
Thankfully, there is a lot of room for DAL to run higher once sentiment starts to turn higher.
Cheap Hot Stocks: Valeant Pharmaceuticals Intl Inc (VRX)
Market Cap: $10B
Forward P/E: 2.73
There is a lot controversy surrounding the $10 EPS target that Valeant (VRX) has provided for its outlook this year. Those who are bearish note that pro-forma earnings are misleading, with not all costs being removed from its per-share earnings.
The one thing that’s undeniable is a company’s free cash flow and operating income minus capital expenditures. To this end, Valeant will earn about $2 billion in FCF this year. Thus, it trades at about five times FCF, whereas other biotechs with mid-single digit growth typically trade at 15 times FCF or more.
Therefore, VRX really could jump 30% and still be cheap. And while the VRX story is far more complicated than multiples and free cash flow generation, the company is making improvements to right the wrong of past management, and eventually, it will likely realize the underlying value in its stock.
Cheap Hot Stocks: Skechers USA Inc (SKX)
Market Cap: $5B
Forward P/E: 11.9
Skechers (SKX) has been beating expectations and raising guidance for about three years now. Yet, it had one troublesome quarter in Q3 2015 and the stock has since fallen 40%.
At 12 times forward earnings, SKX stock is not all that much cheaper than other retail stocks right now. The industry as a whole has been beaten. However, SKX separates itself due to mid-teen top-line growth. In an industry that lacks growth and has faced ongoing margin pressure, SKX is a breath of fresh air.
In fact, even at 14 times FY2017 EPS, Skechers stock would still be a screaming buy!
Cheap Hot Stocks: Fitbit Inc (FIT)
Market Cap: $3B
Forward P/E: 10
Find me another company in the market that beat last quarter’s expectations, raised full year guidance, is expected to grow revenue 37% this year and 18% next year, and trades at just 10 times FY2017 EPS.
There is only one, and that is Fitbit (FIT).
Fact is there is nothing like FIT in the market right now, nothing with that kind of growth, history of beating earnings and raising guidance, and that trades at just a crazy low multiple. If this were a software company, it would have a 50 times earnings multiple.
As a result, we can all conclude that a 13 times multiple (upside of 30%) still leaves FIT deeply undervalued.
Cheap Hot Stocks: XPO Logistics Inc (XPO)
Market Cap: $2.7B
Forward P/E: 15
The growth story surrounding XPO Logistics (XPO) is well known: It had $2.3 billion in revenue back in 2014, $7.6 billion last year, and by the end of next year it will top $16 billion.
This is a massive company, but what’s unknown is the improved margins and profit creation that is about to steal the headlines at XPO.
Yes, XPO has burnt a lot of cash to achieve its growth, but with one-time events related to acquisitions coming to an end, and integration costs related to its expansion finally tapering off, XPO is on pace to create more than $600 million in free cash flow next year.
With the stock down 50% and its market capitalization down nearly 30% over the last year, XPO now trades at less than five times 2017 FCF. For a company that is growing its revenue so fast, and is expected to achieve even faster margin and profit growth in the years ahead, that is a very cheap multiple.
In fact, XPO could rise 30% and still be 50% cheaper than CH Robinson (CHRW), which lacks top-line growth.
Cheap Hot Stocks: Restoration Hardware Holdings Inc (RH)
Market Cap: $1B
Forward P/E: 10.5
Restoration Hardware’s (RH) expansion plan has proved to be more difficult than expected. But still, the company is expected to grow 5% this year and another 11% in 2017. That is quite impressive in today’s retail environment.
Therefore, the question becomes whether you would pay 13 times next year’s earnings to own a luxury home improvement retailer whose organic growth remains very impressive, but who made a few bad expansion-related decisions over the last year.
I would say yes, and if you agree, then you would be willing to own RH stock at a 30% premium to today’s price.
Currently, RH trades at 10 times forward earnings.
As of this writing, Brian Nichols owns shares of RH, XPO, SKX, FIT, VRX, DAL, GM and AAPL.