By now, you certainly know that the stock market is in free fall. From its mid-February highs, the S&P 500 has cratered 35%, falling into a bear market as fast as it ever has in its 100-plus year history. At fault, of course, is the rapidly spreading coronavirus from China, which has brought the global economy to a screeching halt as consumers are ordered to stay at home.
Amid this panic, almost all stocks have been hit. Some have been hit worse than others. And a select few undervalued stocks have crashed and burned over the past month, losing upwards of 50% of their value.
Typically, investors consider an undervalued stock to be a stock that is trading below its fair value, based on the fundamentals, like earnings and cash flows. At present, there are a handful of stocks out there which are trading way below where their fundamentals say they should be trading.
But, this undervaluation doesn’t necessarily mean it’s time to buy the dip. Instead, these stocks are undervalued because they have serious insolvency risks. That is, investors think that the coronavirus could actually force some of these companies to declare bankruptcy over the next few months. Such a move would wipe-out shareholders — regardless of valuation.
So, when looking at a basket of undervalued stocks that have crashed because of the coronavirus, tread carefully. Some of them are bargain buys with huge upside. Others are risky buys with too much risk.
With that in mind, here are 10 undervalued stocks that are crashing right now:
- Boeing (NYSE:BA)
- Dave & Buster’s (NASDAQ:PLAY)
- SeaWorld (NYSE:SEAS)
- Six Flags (NYSE:SIX)
- United Airlines (NASDAQ:UAL)
- American Airlines (NASDAQ:AAL)
- Carnival (NYSE:CCL)
- AMC (NYSE:AMC)
- Dine Brands (NYSE:DIN)
- Denny’s (NASDAQ:DENN)
Let’s take a deeper look at these 10 cheap, undervalued stocks to find out which ones are worth buying, and which ones are worth avoiding.
Undervalued Stocks: Boeing (BA)
Year-to-date decline: 45%
2021 Price-earnings multiple: 6.5
Air and space industrial heavyweight Boeing was, not too long ago, a $200 billion company that was one of the most important and successful companies in the U.S.
In 2020, though, Boeing stock has lost 45% of its value. With the coronavirus bringing air travel to a halt, investors have questioned whether or not this former giant has sufficient liquidity to manage through the current crisis. Such concerns have pushed BA stock to trade at a dirt-cheap 6.5 times 2021 earnings estimates.
On their face, such concerns seem to have value. Boeing has about $10 billion in cash on its balance sheet. The company averaged just under $700 million operating and interest expenses per month last year. That doesn’t include capital expenditures, or any cost of goods sold. From that perspective, the $10 billion doesn’t give Boeing much runway to avoid insolvency.
However, government support is on the way. It is very unlikely that President Donald Trump lets Boeing — with 150,000-plus employees — fail. Instead, Boeing will very likely get that life-line it is looking for, this company will live to see another day and BA stock will pop from its current lows.
Dave & Buster’s (PLAY)
Year-to-date decline: 60%
2021 Price-earnings multiple: 3.2
Arcade operator Dave & Buster’s has naturally been slammed this year as social distancing and store closures have swept across America. Most of Dave & Buster’s stores are closed, and those that are open are presumably seeing low traffic.
Year-to-date, PLAY stock is down about 60%. Shares trade hands at just 3.2 times 2021 earnings estimates.
This plunge to dirt-cheap levels makes sense when you look at Dave & Buster’s balance sheet. There’s only $21 million in cash on there, and over $1.9 billion in debt and lease liabilities. That skimpy $21 million cash pile won’t do much in the current crisis, where expenses are piling up and revenues aren’t coming in.
The company will have to tap into credit markets to secure additional financing, and perhaps even rely on government money to survive this crisis.
All in all, there’s a lot of financial uncertainty surrounding Dave & Buster’s at the moment. That uncertainty makes the stock a tough buy. But, if you can weather near-term volatility and believe that D&B will secure sufficient financing to survive over the next few months, then the stock does look awfully appealing here at just 3.2 times 2021 earnings.
Year-to-date decline: 50%
2021 Price-earnings multiple: 4.1
Theme parks across America are closed, and that’s bad news for ocean-oriented theme park operator SeaWorld. Year-to-date, SEAS stock has plunged 50%.
The concerns, however, don’t end with theme park closures. Most theme park operators have huge fixed costs even when their parks are closed. SeaWorld is no exception. To make matters worse, SeaWorld has live animals in its parks, which only complicates the picture and adds more recurring expenses into the model.
Although SeaWorld won’t see any revenue over the next few weeks (and maybe even months), the company will run up a ton of expenses, leading to significant cash burn. With just $40 million in cash on hand, SeaWorld can’t afford significant cash burn. So, this company will need to rely on a government bailout or credit markets to help avoid insolvency.
Having said all that, it does appear that the government is willing to help here. If so, then SeaWorld should be able to stay on its feet and avoid insolvency for the next few weeks. If that does happen, then SEAS stock — trading at a dirt-cheap 4.1 times 2021 earnings multiple — is primed for a big rebound.
Six Flags (SIX)
Year-to-date decline: 62%
2021 Price-earnings multiple: 6.2
Much like SeaWorld, theme park operator Six Flags has been hit hard this year as its theme parks across the country have closed down until the end of March (at least), and likely for longer.
Also much like SeaWorld, Six Flags has huge fixed costs that will continue to pile up even amid park closures, and a weak balance sheet that won’t be able to fully support the cash burn for long. Indeed, with just $174 million in cash on hand, the company has barely enough cash to pay its annual interest expense, which is about $110 million.
Still, these closures won’t last forever, jut probably until the summer. Six Flags does appear to have enough cash to withstand the burn until then. If so, and if the company can get back on its feet in the summer and fall, then SIX stock is woefully undervalued here at 6.2 times 2021 earnings estimates.
Thus, a rebound in SIX stock is likely. But, not until some clarity emerges as it relates to coronavirus containment and park re-openings.
United Airlines (UAL)
Year-to-date decline: 55%
2021 Price-earnings multiple: 2.3
Global air travel has ground to halt in the wake of the pandemic, and airline stocks like United Airlines have come crashing down. Year-to-date, UAL stock is off more than 55%. Shares now trade at 2.3 times 2021 earnings estimates. This makes it perfect for this list of undervalued stocks.
The rationale behind the selloff is simple. United has huge fixed costs, and very little revenue coming in. The balance sheet isn’t particularly cash-heavy, and therefore, insolvency is a huge risk.
That all makes sense. But, United does have $8 billion in liquidity to go along with $20 billion in unencumbered assets. That’s as much liquidity and borrowing power as the company has had … ever.
Also, it’s highly unlikely that Washington lets the airlines — which together employ 750,000 Americans — go under, or even face significant enough pressure to result in mass layoffs.
In other words, United is in a rough spot, but government relief coupled with ample liquidity will help the company navigate through this turbulence. Over the next 12 to 18 months, then, UAL stock should bounce back big from its currently depressed levels.
American Airlines (AAL)
Year-to-date decline: 40%
2021 Price-earnings multiple: 2.4
One of the least well-capitalized airlines in the U.S. is American Airlines.
With less liquidity and unencumbered assets than its peers — as well as an overall weaker balance sheet — American is a much riskier play than most other airlines at the moment.
Still, the idea that Washington won’t let airlines go under rings true for American, too. Ultimately, government support will show up in a big way. Liquidity will improve. Insolvency risks will back off. Dirt cheap AAL stock — which trades at just 2.4 times 2021 earnings estimates — will rebound.
This rebound will take time to materialize. But, it will materialize, broadly meaning that patience will pay off with AAL stock.
Year-to-date decline: 65%
2021 Price-earnings multiple: 2.8
Much like airlines, cruise lines have paused operations amid the coronavirus outbreak. There’s also some concern that, even once operations do resume, demand will be choppy, given lingering memories that the coronavirus seemed to strike certain cruise ships with unusual vigor.
It should be no surprise, then, to see shares in America’s largest cruise line operator, Carnival, down nearly 65% year-to-date. It also should be no surprise that CCL stock is trading at just 2.8 times 2021 earnings estimate, given bankruptcy concerns. Carnival has huge fixed costs and only about $3 billion in liquidity (which won’t last very last long).
Still, there’s a good chance that cruise line operators like Carnival survive this crisis. They can pull several levers to reduce opex and capex. They can tap the credit markets for additional financing. They’ll probably even win over some government money to provide much-needed relief during this time.
All in all, Carnival — despite its currently stressed financials — will be just fine in the long run. The company will survive this crisis financially in-tact, and rebounding demand on the other side will propel shares significantly higher than where they trade today.
AMC Entertainment (AMC)
Year-to-date decline: 50%
2021 Price-earnings multiple: N/A
Because the Centers for Disease Control and Prevention has warned against social gatherings of 10 or more people and because multiple states have now issued “stay at home” orders, America’s largest movie theater operator — AMC — has been forced to shut down all of its theaters for 6 to 12 weeks.
That’s a long time. During that time, AMC will also pause its subscription movie program. The company will only earn revenues through its AMC Theater on Demand portal, which is a very small slice of the AMC revenue pie.
Over the next 2 to 4 months, AMC will earn very little revenue, but have sizable fixed costs. That will lead to significant cash burn, which will put pressure on the company’s cash-poor, debt-heavy balance sheet that has only $600 million in liquidity.
This pressure is largely why AMC stock had dropped 50% year-to-date to all-time lows.
The stock will rebound from here if: 1) government support arrives, 2) coronavirus containment happens relatively quickly and 3) pent-up consumer demand turns into robust movie-going in the summer. I’m not entirely sure all three of those dominoes will fall into place … yet.
Dine Brands (DIN)
Year-to-date decline: 55%
2021 Price-earnings multiple: 2.5
With many Americans under “stay at home” orders — and almost all Americans practicing social distancing — the restaurant industry has taken a huge hit over the past few weeks. Quite simply, no one is going out to eat.
In response to this crisis, restaurant conglomerate Dine Brands has seen its stock drop nearly 55% this year to a dirt-cheap 2.5 times 2021 earnings multiple.
But, unlike many of the other struggling companies on this list, Dine Brands’ balance sheet and cash flows appear strong enough to withstand this slowdown. That is, there’s over $150 million in cash on the balance sheet, and the company has produced in excess of $140 million worth of free cash flow in each of the past two years.
More than that, Dine Brands won’t be entirely shut down over the next few weeks. Its restaurants can operate through delivery platforms. That will provide the company with some revenue while its physical locations are closed. Even further, it appears that both Democrats and Republicans want to to provide assistance to the restaurant industry.
Dine Brands is actually in a good position to weather the coronavirus storm, meaning that the 55% year-to-date plunge in DIN stock looks like an opportunity.
Year-to-date decline: 50%
2021 Price-to-earnings multiple: 7.1
Much like Dine Brands, restaurant operator Denny’s has seen its share price slide to new lows this year on concerns that traffic declines will pressure the company’s debt-heavy balance sheet.
But, Denny’s is actually in a solid position to survive this crisis.
About 96% of the company’s restaurants are franchised. That means that the company has relatively low fixed operating costs, and relatively low cash capital expenditures. At the same time, revenues will be somewhat resilient during store closures thanks to the company’s robust delivery business (Denny’s on Demand accounted for 12% of revenues last quarter). Somewhat resilient revenues coupled with low costs should result in minimal cash burn.
Denny’s will weather this storm. On the other side of the coronavirus pandemic, demand trends will rebound. So will the stock.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.