The U.S. Federal Reserve’s commitment to ease liquidity in the stock market since March did too good a job. The S&P 500 traded at all-time highs in recent sessions. The tech-heavy Nasdaq Composite Index trades at new highs almost daily. There are, however, cheap stocks to buy from a standard price-to-earnings metric. When asked about what metric to use to find undervalued metrics, we turned to Clinical Professor of Finance David Kass at the University of Maryland’s Robert H. Smith School of Business.
The professor said in an email to InvestorPlace, “I would focus on the PEG ratio, or P/E ratio divided by the projected growth rate of earnings per share. The lower the PEG ratio, the more attractive (or undervalued) a stock is.”
James Angel, associate professor of finance at Georgetown University’s McDonough School of Business said:
… potential bargains can be found in stocks with low institutional ownership. Stocks with high institutional ownership have been chosen by large institutional investors and are likely to be fairly priced. Stocks with low institutional ownership are often smaller companies that are too small for the big players to mess with, so they may or may not be undervalued.
These are seven cheap stocks to buy the cash-strapped investor may consider.
- ASE Technology Holding (NYSE:ASX)
- Teradata (NYSE:TDC)
- Himax Technologies (NASDAQ:HIMX)
- Ford Motor (NYSE:F)
- Micron Technology (NASDAQ:MU)
- Teva Pharmaceuticals (NYSE:TEVA)
- Newell Brands (NASDAQ:NWL)
These cheap stocks to buy may or may not have low PEG. If they happen to have that, plus low institutional ownership, they are most probably inexpensive stocks.
ASE Technology Holding (ASX)
First on this list of cheap stocks to buy is ASE. ASE stock trades at a PEG of around 0.4 times (per finviz). The stock traded at above $5 on July 31 after posting earnings. For much of August, ASE drifted lower.
On Aug. 10, the company reported July’s net revenue rising a modest 2.6%. The slowing growth is in stark contrast to the first half 2020 growth when group revenue grew 18% year-on-year. ATM grew 23% yar-over-year (Y/Y) as gross margins rose by 3.8%.
ASE is focusing on businesses that have the best long-term growth potential. For example, its Test business grew 30% Y/Y while the Fanout business rose 68%. ASX is a “boring” semiconductor testing firm that has plenty of diversification. Its ATM unit generates revenue from such segments as wirebonding, testing, and material.
ASE stock scores 93/100 on value, based on EV/EBITDA and P/E. It also has a growth score of 90/100. As shown below, the 3-year and 5-year growth rates exceed the index and S&P 500 average:
|Sales Growth Next Year||5.00%||7.40%||11.80%|
|Sales 1‑Year Chg (%)||9.30%||-2.50%||23.30%|
|Sales 3‑Year Avg (%)||15.80%||3.50%||14.60%|
|Sales 5‑Year Avg (%)||9.50%||1.40%||8.90%|
ASE forecasts growth in the mid-single-digit range (of around 5). The U.S. export restrictions hurt the business. If the ATM business offsets the restriction, then ASE will report decent growth ahead.
Teradata trades at a PEG of 0.84 times, although institutional ownership is 98.9%. Teradata helps customers leverage their data so they can analyse and deploy it anywhere. When the company posted Q2 results beating estimates, the stock soared. TDC stock is not as cheap on a stock price basis but investors get a good company after the rally.
As shown above, TDC stock has a good quality score, thanks to its strong gross margins.
Teradata posted annual recurring revenue rising 8% Y/Y in the second quarter. A shifting focus on higher-margin consulting projects caused Consulting revenue to fall by 26%. Gross margins still rose to 58.9%.
On its conference call, CEO Steve McMillan pointed to the opportunity of the cloud business. As its customers shift from on-premise to the cloud, Teradata has an opportunity to grow. He thinks that the public does not see it as a relevant cloud player. So, as it wins more cloud-based deals and considers marketing itself more aggressively, the perception will change, driving brand awareness.
Himax Technologies (HIMX)
Himax has only 11.9% institutional ownership. Its small size leaves it unnoticed among cheap stocks to buy by the bigger investors.
In the second quarter, Himax posted revenue of $187 million. Its large driver integrated circuits contributed to 31.8% of revenue. Gross margin of 21% beat its previously supplied guidance. The company earned just a penny per diluted ADS.
Looking ahead, HIMX stock may trend higher after issuing its Q3 outlook. The company expects top-line growth in the period. Its goal of improving gross margin in Q3 through to next year should lead to higher profits.
Himax faced foundry shortages that will hurt its Q3 guidance. CEO Jordan Wu said that the 5G smartphone cycle will hurt foundry capacity that relates to the 8-inch and 12-inch CMOS image sensors. So, the long-term shortage is something the company must manage. Conversely, as more devices use its in-cell Touch and Display Driver Integration (TDDI) solutions, revenue and profits should rise modestly.
On Wall Street, the average price target is $6, albeit Tipranks reports this is based on one analyst’s numbers.
Ford Motor (F)
Ford is primarily an internal combustion engine automotive firm and an electric vehicle start-up. At a price-book below 0.9 times, value investors may want to speculate on this cheap stock.
On the ICE market, Ford has many potential hit products. Ford starts shipping the Ford Bronco in the fourth quarter. The off-road vehicle will come in two- and four-door versions. The Lincoln SUV is also a high-quality luxury product that will raise the company’s profit margin. And Ford’s line-up of SUVs, including the Escape and Edge, are mainstream products that will appeal to its loyal fan base.
Ford’s Mustang Mach-E is an all-electric SUV that takes on the popular name. Not to be confused with the Mustang sports car, the company needs Mach-E to succeed upon launch. It cannot give up more market share to Tesla (NASDAQ:TSLA). Tesla stock trades at many multiples over Ford’s stock price.
While the Mach-E enjoyed solid reservations after its announcement, Ford cannot afford to have quality issues post-launch. Recalls plagued the company for years and led to big write-downs.
Micron Technology (MU)
When Western Digital (NASDAQ:WDC) lowered its outlook for the current quarter, Micron stock fell with it. Selling pressure accelerated when the company forecast weak Q1 revenue. CFO David Zinsner expects revenue will come in below the $5.4 – $5.6 billion forecast. Analysts expected revenue of $5.82 billion.
Looking ahead, Digitimes reported profit erosions for DRAM chip suppliers. Excess capacity usage and demand uncertainties due to the coronavirus are potential risks for Micron. But after Micron’s sharp drop, value investors may bet that the semiconductor growth cycle is still in play.
The average analyst price target on Micron is $63.50. With a quality score of 88/100, the stock is worth considering:
Assuming a worst-case scenario in which demand weakens, Micron has strong gross margins. It may adjust operating costs to sustain its profitability levels should a downturn in chips persist for more than a quarter.
Teva Pharmaceuticals (TEVA)
Renewed litigation worries sent Teva stock down in mid-August. Although investors do not have a P/E or PEG to refer to, the legal risks hurting the share price creates an entry point. Teva spent most of the summer trading at the $11.50 to $13 range. If it defends itself from the latest lawsuit, the stock will rebound.
On Aug. 18, the U.S. sued Teva over alleged kickbacks for its multiple sclerosis drug. The government is accusing Teva of boosting Copaxone sales through false claim submissions to Medicare. The Department of Justice said Teva paid charitable foundations over $300 million from 2006 to 2015 to cover co-payments. In doing so, it led to false claims. Teva said the lawsuit “only seeks to further restrict patients’ access to important medicines and healthcare.”
Analysts are neutral on Teva’s prospects. Seven of the nine analysts have a “hold” rating and a $12.88 price target, on average (per Tipranks). Strong leadership under CEO Kare Schultz should put investors at ease. The executive has a good track record as he worked up the ranks at Novo Nordisk (NYSE:NVO). When he first joined Teva, he cut costs quickly. As his team grows sales, Teva stock will bounce back.
Newell Brands (NWL)
The last on this list of cheap stocks to buy is Newell. At a forward P/E of below 12 times, Newell Brands is a cheap stock. It also pays a dividend yield at close to 6%.
In the second quarter, Newell posted earnings of 30 cents a share. Revenue fell 14.9% Y/Y to $2.11 billion. The company highlighted top-line trend improvements. Operating cash flow improved $140 million compared to last year.
Newell has five operating segments: Appliances & Cookware, Commercial Solutions, Home Solutions, Learning & Development, and Outdoor & Recreation. In Q2, the Appliance and Cookware unit posted a 6.1% increase in core sales. Although revenue from the other units declined, Covid-19 disruptions hurt the business, especially in April.
The supply chain disruption resolution, rebound in retail as customers return, and improving demand patterns all suggest that Newell stock will rebound.
On the date of publication, Chris Lau owns shares of Ford.