Markets are volatile right now. Due to concerns regarding a looming U.S. recession, fears surrounding the Federal Reserve’s rate hike trajectory and uncertainty with respect to U.S.-China trade talks, investors have taken an increasingly cautious approach to equities over the past several months. As they have, volatility has spiked, and wild swings in stocks have become the norm.
Amid all this volatility, it’s good to find some stability. Stability can come in two forms in the equities market. You could have a defensive stock with stable ongoing operations that are largely resilient no matter the macroeconomic conditions. Or, you could have a really cheap stock that investors won’t push down further because it has already been pushed down far enough.
In this gallery, we will look at that second class of stocks. Specifically, we will look at single-digit P/E stocks that are so cheap, them falling further seems almost impossible. Yet, if just one little positive catalyst arrives, these single-digit P/E stocks could rally in a big way. As such, these stocks are classified as ones with mitigated downside potential, but huge upside potential.
With that in mind, let’s take look at six single-digit P/E stocks that look ready to turn a corner and rally in a big way.
Forward P/E Multiple: 6.1
Video game retailer GameStop (NYSE:GME) has been decimated on Wall Street over the past several years as the company’s operations have become increasingly less relevant due to the growing popularity of video game downloads. Pretty much everyone sees this company as going the way of Blockbuster, and ultimately heading for the exits within the next decade.
Yet, there’s one profitable way out for GME shareholders: a private equity buyout. Sure, it seems silly, but it might just happen. Although GameStop is heading for the graveyard, it will produce a lot of cash flow on its way there, and with the stock so cheap (only 6X forward earnings), a private equity firm can come in a buy the company and earn healthy ROI through a few good years of cash flow production. If this takeout does happen, it will likely happen around $20 per share, implying healthy upside potential for GME stock.
Single Digit P/E Stocks: AT&T (T)
Forward P/E Multiple: 8.6
Although telecom giants are usually seen as a beacon of stability and a defensive play for investors during turbulent times, the opposite has been true for AT&T (NYSE:T). AT&T stock has dropped in a big way with the rest of the market, mostly because the big concern hitting the markets (the threat of the Fed rising rates too fast) is a big worry for AT&T, too. Due to multiple recent acquisitions, AT&T’s balance sheet is loaded up with debt. The higher rates go, the more that balance sheet is pressured, and the more investors shun the stock.
But that big threat is moving into the rearview mirror in 2019. Multiple Fed members have come out and voiced dovish opinions regarding the rate hike path in 2019. Even Fed Chairman Jerome Powell implied that multiple further rate hikes are unlikely.
With this headwind being left in 2018, shareholders are left with an AT&T stock that is trading at a dirt-cheap valuation (8.6X forward earnings) with a big yield (6.6%) and strong earnings power through stable telecom and media-related operations. That’s an attractive combination that will bring in multiple buyers, so long as the Fed stays on the sidelines.
Dick’s Sporting Goods (DKS)
Forward P/E Multiple: 9.9
The brick-and-mortar retail sector has been stung over the past several years due to the rapid rise of e-commerce. One of the retailers feeling the sting most is Dick’s Sporting Goods (NYSE:DKS). In addition to a secular shift towards e-commerce, Dick’s is being hurt by athletic apparel brands increasingly emphasizing direct sales, meaning more product sold directly through Nike (NYSE:NKE) or Adidas (OTCMKTS:ADDYY), and less product sold through Dick’s. If this trend continues, that essentially means lower sales into perpetuity.
These concerns, however, seem overblown. This shift from wholesale to direct in the athletic apparel world is happening.
But, it’s happening mostly at lower tier players like Big Five Sporting Goods (NASDAQ:BGFV), not at Dick’s. Due to its size and branding, Dick’s is still seen as a valuable wholesale partner in the athletic apparel world. As such, concerns about this middle man getting axed are overblown. As operations improve in 2019 due to easy laps, single-digit P/E stock DKS should roar higher.
Forward P/E Multiple: 8.8
Blue-chip technology giant IBM (NYSE:IBM) has had a rough run over the past several years. The company’s revenue growth profile has been persistently weak, and healthy growth in the cloud business has been unable to consistently offset declines in the legacy business. Margins have struggled. Earnings haven’t gone anywhere. Debt is piling up. As such, the stock has struggled.
But, a big acquisition of hyper-growth hybrid cloud company Red Hat (NYSE:RHT) could change all of that. Red Hat is a double-digit revenue grower with 85%-plus gross margins and 20%-plus operating margins. IBM, by contrast, is a flat revenue growth company with 50% gross margins and almost 20% pre-tax margins. Thus, at scale, Red Hat should super-charge revenue growth and be materially additive to margins.
If so, earnings growth will turn a corner. If it does, investors will realize this stock is way too cheap at 8.8X forward earnings and with a 5%-plus yield, and the stock will normalize significantly higher.
Forward P/E Multiple: 4.8
Concerns regarding a global semiconductor industry slowdown have killed shares of memory chipmaker Micron (NASDAQ:MU) over the past several months. At its core, the growth narrative at Micron is all about supply and demand. When demand is high and supply is low, chip prices are high, margins are high, and profits are big. When demand is low and supply is high, chip prices are low, margins are low and profits are nothing.
Right now, the fear is that we are shifting from a high demand/low supply market, to a low demand/high supply one, and that is why investors have punished MU stock.
This punishing will last for the foreseeable future. But once gross margins turn a corner and start expanding again, MU stock will bounce back in a big way. This should happen sooner rather than later. The high-supply part of the equation isn’t changing anytime soon, but the low demand part seems like a temporary hiccup from trade war issues, in what is an otherwise very strong secular growth narrative fueled by ever increasing demand from AI and data related markets.
As such, once trade war issues are resolved, demand will normalize, and this will bring gross margins higher. When that happens, MU stock will explode higher given its anemic valuation as a single-digit P/E stock.
Single Digit P/E Stocks: L Brands (LB)
Forward P/E Multiple: 9.8
Once a high flyer that was an icon of retail success, L Brands (NYSE:LB) has sharply reversed course over the past several years as its Victoria’s Secret brand has struggled to grow sales amid rising competition and shifting consumer appetites. Broadly speaking, Victoria’s Secret rose to power in the women’s lingerie market during a time when bombshell beauty was the gold standard and push-up bras were what everyone wanted. Now, bombshell beauty is viewed as cheesy and artificial. Instead, consumers are opting for more natural beauty products like bralettes. As this shift has played out over the past several years, Victoria’s Secret has struggled in a big way, and those struggles have killed LB stock.
But there’s reason to believe Victoria’s Secret is turning a corner. The business reported 2% comparable sales growth in November against a -4% lap, marking one of its best one- and two-year comparable sales marks in several months.
Meanwhile, L Brands’ other segment, Bath & Body Works, fired off a record 18% comparable sales growth in November. In other words, it isn’t all doom and gloom at L Brands. Once Victoria’s Secret permanently turns a corner, this stock will rally in a big way.
As of this writing, Luke Lango was long GME, INTC, T, IBM, and LB.