Equity markets are so hot that it is hard to find cheap stocks to buy. This is in spite of having the toughest economic conditions we’ve ever seen on a global basis. The problem started with the pandemic, and it is an ongoing human tragedy. But the side effects of the medicine that the world took to fight the virus were devastating to commerce. The world is still reeling from the effects of the quarantine, and there will be millions of businesses that won’t survive it.
The U.S. government is trying very hard to bridge the gap between this tough period and the time it will take to safely reopen the nation. Last week, investor sentiment suffered a blow when some of the states that reopened first started showing spikes in Covid-19 infections. The wound was still too fresh, so investors sold stocks in panic.
In the U.S. alone, we have over 20 million people out of work, yet stocks are making all-time highs. Something has to change and soon, otherwise this disconnect between Wall Street and Main Street is going to end badly. This week, we will learn more about the jobs situation from the government non-farm payroll reports. Last month it was a huge upside surprise, and if it’s not one again this time, stocks will suffer badly later this week.
Meanwhile, there are some cheap stocks that investors can add into long-term portfolios, and today we discuss these three
Surprised by some of these names on a cheap stocks list? Read on to learn more about why each was included.
Cheap Stocks to Own into 2021: Amazon (AMZN)
Anytime I mention the fact that Amazon is among the great cheap stocks, I get the response that it has a huge trailing price-earnings ratio of 132. This is the ultimate growth stock, so to judge it based on profitability is a mistake. This mistake cost a lot of bears money for over 10 years before they figured it out. It is a futile effort too short AMZN stock for the long-term.
Growth companies have to spend a lot in order to deliver on their promises, and Amazon never disappoints. Case in point, last year consensus was that it was spending big and therefore, investors should avoid it. They were dead wrong and it rallied over 50%.
The only metric that matters for Amazon is how the stock price relates to its full-year sales.
From that perspective, it is the cheapest of all of the mega-tech stocks because its stock price is only 4.7 times of its full-year actual sales and that is a bargain. That is 30% cheaper than Apple (NASDAQ:AAPL). Consider the wow factor comparison to Zoom Video (NASDAQ:ZM), whose stock price is 92 times its full-year sales. Anyone buying that stock today is prepaying the owners of the company 90 years worth of current sales. That is an astonishingly expensive price — even for ZOOM.
The Amazon team under the leadership of Jeff Bezos has executed on plans flawlessly. They consistently grow 30% per year. They are not afraid to spend money, but more importantly they are not afraid to cut bait when they don’t see results. Most recently we learned about them buying Zoox, so they are constantly looking for new sources of income even in self-driving cars. Tesla (NASDAQ:TSLA) should be worried, because Bezos is a foe to fear.
I will close this section by saying that Amazon is a good buy on every big dip.
There is never a shortage of headlines from Facebook. Late last week, the company came under fire from public opinion over censorship. Finally the company is caving in, but the damage in the FB stock price continues into this morning. This is an opportunity to buy shares.
When a company becomes as big as this, it draws attention — and not all of it is good. Facebook stock fell 15% in four days because advertisers are leaving over the same issue. I personally have no room for hate in my life, but I also don’t like the fact that we are asking a platform to censor its content. If it’s legal it should exist — especially in the United States because this is the freedom we have. Nevertheless, FB management has to protect the bottom line, so when when its clients like Procter and Gamble (NYSE:PG) and Unilever (NYSE:UN, NYSE:UL) join the boycott last week. These two have been at this for years so it’s not a fresh idea. On Friday we also learned that Mark Zuckerberg the CEO of Facebook announced that they would indeed comply with the public opinion.
This shows maturity, and therefore I believe that Facebook is still in good hands.
We also have to remember that only 5% of Facebook users are in the U.S. The vast majority of the eyeballs are overseas, and in the end the advertisers well follow the eyeballs. Over time, FB stock will shrug this off like it did the Cambridge Analytica incident and the 2016 election mess. The important bit is that it maintains its massive user metrics and it belongs in every portfolio.
A good way to get long a stock that is falling this hard is to sell puts on really bad days instead of buying the shares outright while they are still falling. This way, investors can leave much more room for error. For example investors can sell the November Facebook $140 put for about $4. There will be full profit from this even if Facebook falls another 30%. I am confident that as the stock approaches $180 per share, it will find buyers. This trade breaks even near $136 per share.
Wells Fargo (WFC)
Friday was also a bad day for banks. This came on the heels of the Federal Reserve releasing their stress tests. Even though they passed, there now have new restrictions on their financial engineering efforts.
The first problem for investors was that banks will need to go through this process again soon, and Wall Street did not like that fact one bit. On top of it, they are now restricted from doing buybacks, and they may even have to cut the dividends.
Wells Fargo was especially vulnerable to that because it is already close to the threshold that would force it to cut its dividends. The stock fell 7.5%, out of proportion from the rest. JP Morgan (NYSE:JPM) and the Financial Select Sector SPDR Fund (NYSEARCA:XLF) fell 5%. Wells Fargo is not new to being the black sheep. Not too long ago they were caught cheating and it’s still suffering from that debacle. But WFC stock usually bounces back for the investors. Even though it is not the most pristine bank to own, it will rally after bad stints.
This is a knife I usually like to catch. However, since banks don’t like to sustain rallies long, here too I prefer selling puts into value. Traders got lucky this year trading JP Morgan and Wells Fargo because they had strong rallies but I like to play it safe. The bottom may not be yet in for stocks. Nor do I like the upside potential.
The only constant that banks have is value. WFC stock has a lot of it, in spite of its problems. It has a 9x P/E and it sells at almost half of its book value. This means that investors are not even giving it full credit for its assets. This year there will be millions of businesses that will fold, and I’m confident that Well Fargo will have its fair share of pain from the forbearance programs, so I must leave room for error.
On Friday when the stock was $25.40 per share, investors could have sold the January $20 put and collected almost $2 for it. This trade breaks even at $18.
Eventually this too shall pass, and these stocks are well-capitalized to handle it. But even in these three cheap stocks, I don’t believe that the bottoms are in. This is not because these stocks are doomed. My worry comes from the overall equity markets. They are still too high given the circumstance the world is in. The Nasdaq just broke new records and that’s just not right, so there are plenty of disappointment potentials.
Conversely, a strong jobs report this week will spur a huge rally, so both bulls and bears need to be cautious. This is an important point to understand because taking full positions during these bifurcated and binary times is a mistake. Investors must stay humble until we get new information. There is no rush to jump into any of these trade setups, and there’s definitely not a good idea to take 100% size position.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities.