Finding cheap stocks to buy in this market is a challenge. Broad market indices aren’t far from all-time highs. Yet risks abound. The bull market has been going strong for a decade. Trade battles still haven’t been resolved. And at some point, the U.S. macroeconomic situation will reverse.
But there are opportunities out there, and some stocks remain attractive. These 15 stocks all potentially fit that bill for one simple reason. All 15 trade at less than 15x earnings, yet those earnings are growing. That means they provide a solid combination of value and growth.
These stocks — like the market as a whole — aren’t without risk. In many cases, there are reasons investors are keeping valuations low. But those valuations are low enough that those risks are priced in, while the potential rewards are not.
With all of that in mind, here are 15 growth stocks with low P/E ratios.
In a chip sector seeing quite a bit of pressure at the moment, Broadcom (NASDAQ:AVGO) seems to be holding up just fine. AVGO stock briefly touched an all-time high last month, while most semiconductor stocks trade well off 2018 peaks.
Even with the gains so far, however, Broadcom stock still looks attractive. An 8% pullback makes the stock even cheaper: AVGO now trades at just 11.6x FY19 (ending October) earnings-per-share estimates.
Yet earnings continue to grow. Operating margins are expanding, with FY19 guidance suggesting a 51% adjusted figure — one of the highest in any industry. And analysts are seeing even better growth next year, with earnings rising nearly 15%.
There are risks here. Semiconductor stocks are usually cyclical, which suggests Broadcom earnings could peak in the next couple of years. Few companies have more impressively executed in terms of M&A over the years, but that success may not last forever.
Still, those risks look worth taking. Broadcom’s diversified base limits cyclical effects and increases exposure to long-term trends like Internet of Things. With the Qualcomm (NASDAQ:QCOM) acquisition abandoned, Broadcom likely will stick to smaller deals. This has been one of the best stocks in tech for years now — there’s not much reason to suggest that will change.
ABM Industries (ABM)
Facility services provider ABM Industries (NYSE:ABM) isn’t exciting. The company provides outsourced labor and solutions for janitorial services, landscaping, parking and other needs. Margins are relatively thin; growth is steady but not spectacular.
But the same has been true of the returns provided by ABM stock. The Dividend Champion has returned nearly 11% per year over the past quarter century, including dividends. That’s true even with the stock 30% off 2017 levels.
The concerns of late have been driven by worries about rising labor costs, and ABM’s ability to pass along those costs. The stock dipped 8% after earnings last week. But the selloff seems overdone: fiscal Q1 numbers were fine, and ABM’s margins, while still thin, are holding up.
This is a stock that will take some patience, and not one that is likely to produce eye-popping returns. But ABM trades at less than 15x FY20 EPS estimates, while growth should continue for some time. And the nature of the business provides protection against a cyclical downturn, which actually could help ABM by pushing labor rates (and availability) back down. All told, ABM looks too cheap and likely to start producing 10%+ returns again in the not too distant future.
Bank of America (BAC) and JPMorgan Chase (JPM)
To be fair, most bank stocks, not just Bank of America (NYSE:BAC) and JPMorgan Chase (NYSE:JPM), seem reasonably cheap at the moment. Big bank stocks are generally trading at 10x 2019 earnings estimates, and smaller banks are in the same range.
The obvious concern is that the economic cycle will turn at some point, bringing bank profits down as a result. Optimism toward the sector after the 2016 U.S. presidential election has dissipated, though the sector has done better in 2019.
There still should be more upside ahead. Regulations put in place after the financial crisis have been criticized in some quarters for limiting growth. But — as far as we can tell — they likely also limit risk. In the meantime, earnings continue to grow.
BAC and JPM continue to the best bets in the industry, as I argued in December. The ‘smart money’ seems to agree. For investors who see the current economic strength continuing, these two stocks should be on the top of their shopping list.
The risk with Photronics (NASDAQ:PLAB) is that it’s cheap, but will always be cheap. The company manufactures photomasks used in semiconductor production. It’s a difficult, cyclical and capital-intensive business, which is one reason why PLAB has mostly traded sideways for years now, and usually receives low multiples.
But there’s still an intriguing case for PLAB stock at the moment, which is why I personally own the stock. PLAB trades at 16.5x trailing twelve-month EPS, but the multiple drops to 13x backing out net cash. New facilities in China are coming online this year, positioning the company as the leading supplier to a growing domestic semiconductor industry.
The risks here are obvious, given recent weakness in both semiconductor stocks and Chinese equities. PLAB itself has pulled back after a decent, but not quite spectacular, earnings report last month. But below $10, PLAB is still too cheap. I argued last year that the stock could double, and looking a few years out, that’s still a possibility.
To be honest, I’m not entirely sold on Aaron’s (NYSE:AAN). The legacy rent-to-own business has struggled for years now. And there’s obvious risk in the company’s Progressive Leasing business, which provides financing to customers of retailers like Signet Jewelers (NYSE:SIG) and Conn’s (NASDAQ:CONN).
But with AAN trading at 14x the midpoint of 2019 EPS guidance, there are few stocks at a similar valuation with as much upside in the bullish scenario. The Aaron’s concept is starting to show some signs of life, with same-store revenues guided to be flat to up 2% in 2019. Progressive has a massive opportunity in front of it, and this year should drive over 60% of profit. A clean balance sheet provides room for share buybacks, increasing returns and boosting EPS.
Again, there are risks here. But if Progressive is what the company believes it can be, and Aaron’s can start driving organic profit growth, this is a stock that could show huge returns for years to come.
Southwest Airlines (LUV)
Airline stocks like Southwest Airlines (NYSE:LUV) have struggled in the last couple of years. Southwest stock itself was hit by a couple of factors last month. Grounded planes — possibly due to a labor dispute — will hit first quarter revenue. And Goldman Sachs downgraded the stock, citing higher costs related to its new service to Hawaii.
But even Goldman admits that from a long-term perspective, LUV looks attractive. The firm is right. Southwest long has been one of the best domestic operators. It performed quite well in 2018, including a strong fourth quarter. LUV stock may see some near-term turbulence, but at less than 10x forward earnings, it looks far too cheap.
Central Garden & Pet (CENT)
Central Garden & Pet (NASDAQ:CENT, NASDAQ:CENTA) is trading near its lowest levels in over two years. The key catalyst of late has been a disappointing fiscal Q1 report that sent the stock down some 22%.
But the selloff looks like an overreaction. Central has seen nice growth in both its Garden and Pet businesses. Debt and equity offerings last year leave the company with some $500 million targeted for M&A; Central’s current results include the costs of the offerings but no benefits from the spend. And yet CENTA (the cheaper of the two classes) now trades just under 15x the company’s FY19 EPS guidance of $1.80 or higher.
For a company that has grown earnings steadily in recent years, and has solid market share in two stable, if not spectacular, consumer categories, that valuation is far too low. As Central works through the issues that hit Q1, and as it puts that cash to work, CENT and CENTA shares should recover.
The concern when it comes to Knoll (NYSE:KNL) is that the company’s exposure to office furniture represents a real risk. The sector didn’t perform all that well as the economy rebounded. Lower demand due to “open office” trends and increased telecommuting offset higher spending from medium- and large-sized companies.
But the case for Knoll is based on the idea that the office furniture side of the business is becoming less important. The company’s residential businesses are growing, including high-end offerings like Holly Hunt and Muuto. They’re more profitable as well and shouldn’t see quite the same “cyclicality” as the office furniture industry generally does.
At just over 10x 2019 EPS estimates, Knoll is priced as if its business is headed for a decline. That doesn’t appear to be the case, however. Rather, investors can own a high-end, well-managed, diversified business at an attractive multiple — and with a 3% dividend yield.
Brunswick (BC), MasterCraft (MCFT), Malibu Boats (MBUU) and Johnson Outdoors (JOUT)
Boating stocks, too, are valued as if earnings are going to peak. That might actually make some sense. The economic recovery will slow at some point. There are concerns that millennials may be less interested in motorized watersports (as opposed to kayaks or paddleboards). And potential boat-sharing models (something like Uber for boats) could impact demand.
But industry sales still remain well below past peaks. And valuations in the sector suggest opportunity for investors who believe the industry will continue to grow — and those valuations create a wealth of targets.
Brunswick (NYSE:BC) probably is the safest play, given a broader international reach and a growing reliance on less-cyclical parts and accessories revenue. Malibu Boats (NASDAQ:MBUU) has been the best grower — and the best-performing stock — of late, and should be the choice for investors seeing renewed confidence toward the space.
All four stocks look somewhat attractive. Investors of all types may have their own particular favorite.
Omnova Solutions (OMN)
Chemical manufacturer Omnova Solutions (NYSE:OMN) is an intriguing turnaround opportunity. Operations have improved notably under a new CEO. Long-running declines in carpet and paper products are starting to fade as those categories become a small portion of total revenue.
The big problem is that history colors any bull case for OMN. This is a stock that was spun off at the beginning of this century – yet hit an all-time high of just $12 last year.
But it’s possible that this time is different, to use the four most dangerous words in investing. Management has changed. Paper and carpet headwinds finally are moderating. And below $8, OMN trades at a notable discount to those highs despite a decent fiscal 2018 performance. At 12x FY19 EPS, it might be worth seeing if Omnova finally can inflect upward.
Target (NYSE:TGT) is a stock that I’ve been skeptical of for quite a while and I’m still not completely convinced of the bull case. But it’s much easier to turn bullish after the company’s blowout Q4 report earlier this month. Target’s omnichannel strategy has required billions of dollars in investments, but 5% same-store sales growth seems to show that spend is worth it.
Meanwhile, Target is guiding for 7-12% EPS growth in fiscal 2019 (ending January 2020), as operating margins are expected to expand. Yet the stock trades for just 13x that guidance.
Competition remains a risk, with Walmart (NYSE:WMT) and Amazon.com (NASDAQ:AMZN) building out their own omnichannel strategies. A cyclical swing downward could impact demand. But Target has done a much better job the last few years becoming a real rival to those other retail giants. It hasn’t quite been rewarded enough.
As of this writing, Vince Martin is long shares of Photronics. He has no positions in any other securities mentioned.