The 5 Best Cheap Stocks to Buy for Contrarian Investors

cheap stocks to buy - The 5 Best Cheap Stocks to Buy for Contrarian Investors

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While considering the best cheap stocks to buy now, I realized I should first clarify to readers what I mean by cheap stocks. I follow the Benjamin Graham line of thinking. And that means I look at value. That’s more than a little contrarian with the current dogma surrounding growth stock investing, but that’s where I’m at.

If you’re still with me, then I have a few cheap stocks that may be interesting for you to consider. However, they come with an unknown amount of risk. They are cheap for a reason, after all.

The stocks on this list have price-to-book ratios that are among the lowest in the market. They also offer an appealing price/earnings-to-growth ratio of around one. And with many of these stocks, you’ll get a dividend for holding the stock.

It bears repeating once again, these stocks do come with an elevated level of risk. However, the same can be said of just about any stock in this market, particularly with an election in two months, the continued uncertainty surrounding the novel coronavirus and, possibly, a vaccine.

If you want to continue this walk on the contrarian side, continue reading about these cheap stocks to buy:

  • Lincoln National (NYSE:LNC)
  • American International Group (NYSE:AIG)
  • Carnival Corp. (NYSE:CCL)
  • Molson Coors (NYSE:TAP)
  • Diamondback Energy (NASDAQ:FANG)

These stocks may not look like much now, but they present attractive buy-and-hold opportunities.

Lincoln National (LNC)

Lincoln National (LNC) logo on sign outside of corporate office
Source: Jonathan Weiss / Shutterstock.com

PEG Ratio: 0.32x
P/B Ratio: 0.37x

When identifying cheap stocks to buy, using a ratio like the P/B ratio is more ideal for a business like Lincoln National. Companies that deal with finance and banking have many liquid assets on its books. These assets are tangible and so give investors more confidence. With that in mind, let’s look at the good and the bad for LNC stock.

The bad news is that the company is under pressure from low interest rates and it is seeing a multi-faceted effect on revenue due to Covid-19. However, the company is also starting to realize some cost benefits from its investment in creating a digital experience. The company’s earnings currently have a three-year compound annual growth rate (CAGR) of 11%. Lincoln National is also on track to hit its goal of between $90 million to $150 million in annual run-rate savings.

And while the company does face an extremely competitive environment, it maintains a strong cash position and offers its shareholders a nice dividend of $1.60 per year (paid in four quarterly segments). The dividend yield currently sits at 4.42%.

American International Group (AIG)

American International Group (AIG) logo on a corporate building
Source: Jer123 / Shutterstock.com

PEG Ratio: 1.24x
P/B Ratio: 0.41x

Not completely surprisingly, the AIG stock chart is almost a mirror image of Lincoln National’s. That’s just how the market goes. The stock is down 44% for the year and faces similar cost pressures to Lincoln. In the best of times, the annuities market can be challenging. In a low interest rate market like the one we are experiencing today (and will be with us for long into the future), it’s brutal.

This, in turn, is putting pressure on the company’s revenue and ultimately its earnings. However, like Lincoln National, analysts are turning decidedly more bullish on the prospects for AIG. And the biggest reason for the optimism is the fact that the economy is getting better. The jobs number posted on Sept. 4 indicated that more people are headed back to work. This should allow policyholders who may have been foregoing premium payments to make ends meet and get back on track.

And the recent upturn in the market (prior to the recent selloff) is helping the company generate more income from its investment of insurance premiums.

Carnival Corp. (CCL)

carnival cruise (CCL) ship on the water
Source: Ruth Peterkin / Shutterstock.com

PEG Ratio: 0.32x
P/B Ratio: 0.53x

Carnival is sitting on a ton of cash. The company is burning through approximately $650 million per month. However they have a war chest of approximately $7.6 billion. But investors already knew insolvency wasn’t the issue. That’s not the reason CCL stock is down 60% in 2020. The primary issue for CCL stock is demand. And that may be improving.

Gina Sanchez, chief executive officer (CEO) of the analyst firm Chantico Global was recently interviewed on CNBC. According to Sanchez, the L.A. Times conducted a survey on cruise line bookings for 2021. The results may surprise you. Bookings for 2021 are currently 40% higher than they were for 2019.

Demand exists. But can the cruise lines prove themselves to be safe? Carnival will be testing that when it begins operating cruises out of Italy. This will be a huge test case for cruise line protocols. If the company can manage to successfully keep the virus off its ship, there could be a release of pent-up demand on a large scale. And that could have a significant effect on CCL stock, which is up over 100% from its March low.

Molson Coors (TAP)

Molson Coors (TAP) logo on a web browser magnified by a magnifying glass
Source: OleksandrShnuryk / Shutterstock.com

PEG Ratio: 1.43x
P/B Ratio: 0.60x

Molson Coors faces a different, but equally virus-related problem as Carnival. The company relies on restaurants and bars for about 25% of its volume. The problem goes beyond merely having this sector reopen. The reality is many of the bars and restaurants that closed are not going to reopen. Unfortunately, that’s not the only problem confronting TAP stock.

With the broader economy perhaps lumbering towards a recession, you could make a case that individuals will have less disposable income, which could mean they will start trading down when it comes to their alcohol purchases. Molson also faces problems by being late to the “seltzer craze” that is popular with drinkers of all ages.

And I’ll also mention that Molson Coors took the prudent, but painful, step of suspending its dividend.

So what puts TAP stock on the list of cheap stocks to buy? Simply the fact that the market has all of this to digest, and at the current moment, analysts are pricing in a potential upside to the stock.

Diamondback Energy (FANG)

diamondback energy logo on its website to represent oil stocks
Source: Pavel Kapysh / Shutterstock.com

PEG Ratio: 1.24x
P/B Ratio: 0.41x

In a reverse sort of serendipity, I’m writing this while seeing oil get hammered. And so the natural thought is what is FANG stock, or any oil stock for that matter, doing on this list? But when you step back and take a deep breath, you realize there’s really nothing new going on here. At least for the moment.

The reality is that seasonal demand for gasoline tends to go down after Labor Day. And this year that demand decline may be more pronounced due to the fact that major parts of the country are still not open. As I’ve written before, consumers are all dressed up, but they have limited places to go. And now with children back in school in whatever fashion, traveling is bound to be down.

But, Diamondback Energy has benefited in the past from low-cost operations that allow it to quickly generate cash flow. Total debt is approximately three times less than the company’s cash flow. And, the company should “only” need WTI crude prices to be in the mid-$40 range to generate a reasonable profit on any new wells they drill.

On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for Investor Place since 2019.


Article printed from InvestorPlace Media, https://investorplace.com/2020/09/the-5-best-cheap-stocks-to-buy-for-contrarian-investors/.

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