5 Cheap Stocks With Great-Performing Companies


cheap stocks - 5 Cheap Stocks With Great-Performing Companies

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The Christmas shopping spree is firmly underway. Shoppers are increasingly getting nervous about finding the perfect or at least passable gifts for family and friends — but they are also looking for deals. Cheap and great is what is driving shoppers and hypes up retailers’ promotions as the number of days to Dec. 25 moves into the single digits. And cheap stocks is also a grabber phrase in a market where the U.S. stock market is at very frothy prices.

The S&P 500 Index is priced not just at highs in the market price at 3,699.80, but is at historic highs in terms of valuations. Price to earnings (P/E) is at 28.93 times, Price to intrinsic (book) (P/B) is at 4.05 times and price to sales (P/S) is at 2.73 times — all well above historic values.

A chart showing the S&P 500 Index Average Member Price to Earnings (P/E), Price to Book (P/B) & Price to Sales (P/S) Ratios from 2016 to 2020.

Source: S&P 500 Index Average Member Price to Earnings (P/E), Price to Book (P/B) & Price to Sales (P/S) Ratios – Source: Bloomberg

But like with Christmas gift shopping, investors are also interested in good stocks. There are plenty of penny stocks out there, but you really don’t want to load up your portfolio with them. Instead, investors should want good value in their stocks. Or I might offer an even better idea: great stocks at cheap or value prices.

Now, the term “value stocks” is not a phrase that is working for investors right now. Value stocks are deemed to be of out-of-favor companies in segments that have been laggards or losers in a stock market that has seen the return for even the general S&P 500 Index reach 16.5% so far this year alone. Too many talking heads on financial broadcasting talk about rotating into value segments, and that’s really a phrase that should be banished right now. Value segments are really about troubled companies in markets that have all sorts of structural problems. Sure, some may well see those challenges abate or even reverse — but why sink cash into troubles now without clear and proven signs of improvements?

There are plenty of stocks of great companies — companies that are anticipating more sales, with good operating margins and even impressive shareholder-focused dividends — that just happen to be cheap at the moment. And these same stocks are also generating performance right now rather than begging for investors to hold and hope for improvements in time.

My Way of Determining Value (Cheapness)

Value is recently an abused word that is thrown around by analysts, investment managers and plenty of others in the market. But for me, it comes down to how a stock of a company is priced against its trailing sales or against its intrinsic value, known as book value.

Earnings, of course, are what many analysts focus upon when looking at valuation. However, earnings come with all sorts of caveats, as companies can do a lot of one-off items to manage earnings for any given quarter. And it is always interesting to look at quarterly and annual reports and compare them from the perspective of reported numbers and numbers that are reconciled with generally accepted accounting practices (GAAP).

I always run the numbers on a GAAP basis to get a better apples-to-apples comparison, as well as getting through some of the fluff than passes through plenty of CFO’s (chief financial officer) reports. And it even gets more entertaining when looking at tax filings and SEC (Security & Exchange Commission) filings, which often can be quite a compare and contrast with standard releases by companies as it’s not a good idea to fib to Uncle Sam.

In addition, I come from a credit and buy-side perspective. For decades, I was in international banking and had to do plenty of credit analysis which I had to defend to my bank’s asset & liability committees (ALCO). And in fund management, I had to know that I wasn’t buying a pig-in-a-poke.

Can’t Hide from Real Numbers

Sales and book value are harder to fudge when examining a company and its stock. Sales are sales unless there is fraud. And sure, companies can and do take sales in a particular quarter that may be actually pending as well as other accounting measures. But again, it’s pretty easy to see through abuses.

Book value takes all of the assets of a company and subtracts liabilities to come to an intrinsic value of a company. But it can also include goodwill — particularly from acquired businesses. Goodwill takes into consideration an implied value in an enterprise, such as its customer base, that is intangible but indeed has a value. And goodwill needs to be written down over time or if it is impaired (such as in the case of customer base shrinking) it needs to be noted and a charge must be made.

So, taking sales, I use the trailing total sales for the last four quarters and then compare it to the market capitalization (number of shares times the stock price). This gives me the price to sales ratio. And I compare that ratio to the market and to a company’s peers to see how that company’s stock is valued.

Then when looking at book value, I do the same with the current book against the market capitalization to get the price to book ratio.

Now, the vast majority of cheap stocks that I recommend are at premiums to sales or book value ratios. This means that I am paying some percentage more than the trailing sales or the current book value. But I only do that at levels that are at discounts to the market and a stock’s peers.

But now and again, I find some very good companies that have stocks that are valued or priced by the stock market near or at discounts to trailing sales or book value. These are special stocks that currently have the stock market missing them or mispricing them. That makes them truly discounted value stocks that make for very good buys — or put more succinctly, cheap stocks.

I have a selection of some of these that I have inside the model portfolios of my Profitable Investing. And in addition, they tend to have attractively higher dividend income to make them all the better.

Here are some of the myriad cheap stocks right now that are great companies that are also performing in the stock market.

  • AllianceBernstein (NYSE:AB)
  • Compass Diversified (NYSE:CODI)
  • Covetrus (NASDAQ:CVET)
  • Gray Television (NYSE:GTN)
  • Atlas Corporation (NYSE:ATCO)

Cheap Stocks: AllianceBernstein (AB)

The AllianceBernstein (AB) logo inside a corporate office in New York City.

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AllianceBernstein is in the asset management business. And this has always been a good business model that recently is gaining more attention from the heavies in the financial markets. Asset managers are just about gathering and keeping assets under management (AUM). The more AUM, the more fee income is generated. And asset managers don’t have to be the best at managing market picks — just good at gathering and keeping AUM.

And it is a dependable business model. And this is what is driving firms to devote more capital to asset management including Credit Suisse (NYSE:CS) that just announced that it plans to allocate capital two-thirds to asset management and only one third to investment banking. Meanwhile, asset management companies are being gobbled up either in buyouts or mergers to gain more AUM and lock in more dependable fee income including Morgan Stanley (NYSE:MS) and its deal to grab Eaton Vance (NYSE:EV).

AllianceBernstein runs a good shop. And I’ve known them firsthand, as well as through their funds.

The company keeps building and holding on to AUM. And this continues to drive fee income and aids the company’s operating margin.

A chart showing the total return of AllianceBernstein (AB) during 2020.

Source: AllianceBernstein (AB) Total Return – Source: Bloomberg

The stock is outperforming the S&P 500 Index year to date with a return of 19.73% which includes a tax-advantaged 8.39% dividend yield as it is set up as a passthrough to avoid traditional corporate income taxes.

But it is still among our cheap stocks, as the stock is valued at a discount to revenue by 14.17%. It should be bought in a taxable account.

Compass Diversified (CODI)

A photo of a businesswoman pointing at charts on a piece of paper on a table.

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Compass Diversified is an investment holdings company under the Investment Companies Act of 1940. As such, it avoids traditional corporate income taxes for more cash for investments and dividends.

It buys, owns and sometimes sells middle-market companies with strongly branded industrial and consumer products. On the industrial side, one of the current companies it has is Foam Fabricators that is part of the U.S. Administration’s Warp Speed vaccine program. Foam Fabricators makes the foam for vaccine vials and syringes for shipping.

Then on the consumer side two of the companies to note including 5.11 and Velocity Outdoor. Both of these companies make and offer gear for outdoor sports as well as for first responders. Hunting and fishing licenses in the U.S. are soaring this year — and this means millions more folks that need more stuff to be out in the wild.

A chart showing the total return of Compass Diversified (CODI) from March through December 2020.

Source: Compass Diversified (CODI) Total Return – Source: Bloomberg

Revenue keeps climbing, with the trailing five years showing an average annual compound growth rate (CAGR) of 16.89%. Good operating markets and positive return on equity as well as piles of cash and little debt make for a great company. And it pays a yield of 7.2%.

Compass has been soaring in the stock market particularly since March to date, with a return of 77.83%. And it has a long history of great returns, with the trailing 10  years averaging an annual equivalent of 10.49%. It should be bought in a taxable account.

Covetrus (CVET)

a puppy and a kitten sniggling together. represents pet stocks

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Covetrus is a company that is right in the thick of the already-dependable pet-care market –a market that, this year, has been as yappy-happy as a new Christmas puppy.

The company provides supplies and drugs for pets via veterinarian offices around the country. And it is also a technology leader with great pet parent systems to deliver and keep drug and other pet products moving as they are needed to keep our pups and other pets healthy and happy.

Revenue for the company since its spin-off from its multi-decade-old former parent company Henry Schein (NASDAQ:HSIC) is soaring. Sales are climbing on a CAGR basis by an annual average of 26.55%.

A chart showing the total return of Covetrus (CVET) from March to December 2020.

Source: Covetrus (CVET) Total Return – Source: Bloomberg

The stock is getting noticed, as it has returned 366.61% since March to date this year. And yet the stock is cheap, as it is valued at a 20% discount to trailing sales right now.

It should be bought in a tax-free account.

Gray Television (GTN)

Two pairs of feet in socks in front of a television set

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Gray Television owns and operates a vast number of local television stations as affiliates of major networks including Disney’s (NYSE:DIS) ABC, Comcast’s (NASDAQ:CMCSA) NBC, Viacom’s (NASDAQ:VIACA) CBS and FOX (NASDAQ:FOXA) throughout the U.S. It also has local go-to websites throughout its network that are major draws for local news and weather. This combination is driving revenue including piles of ad buys soaring over the trailing year by 95.7%.

It also has piles upon piles of cash that it is using to acquire and develop further capabilities throughout the U.S.

A chart showing the total return for Gray Television (GTN) from March to December 2020.

Source: Gray Television (GTN) Total Return – Source: Bloomberg

The stock has delivered, with a return since later March to date of 106.02%. And yet the stock is cheap on two levels. First, the stock is at a discount to its intrinsic (book) value. Think about that. It owns a highly difficult to impossible to replicate series of broadcast and online media and yet the company’s stock is pricing that at less than its meltdown value. Then on a price-to-trailing-sales basis, the stock is priced at of 20% discount as well.

Cheap. It is a buy in a tax-free account.

Atlas Corporation (ATCO)

A pink piggy bank sits on top of piles of cash to represent cash-rich stocks

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Atlas Corporation is an asset management company that principally owns two major corporations under its company. The first is APR Energy that provides turn-key mobile and deployable power supplies. APR is the go-to company for onsite backup or primary power for companies that are either setting up operations or are in recovery. And for markets without reliable local utilities (including California) – APR is the dependable power provider.

And this also included governments – from onsite operations of national governments to local authorities – APR is the company that keeps getting the calls and the contracts.

The second company is Seaspan. Seaspan is an owner of container ships that are leased out to operators on long-term contracts. Think of the company as a landlord of the sea. Container ships are highly in demand as goods need to move from Asia to the US and Europe and there are shortages right now in the capacity of global shipping.

The company has 127 ships that are young at an average age of under eight years and are in the right markets right now.

A chart showing the total return of Atlas Corporation (ATCO) from March through December 2020.

Source: Atlas Corporation (ATCO) Total Return – Source: Bloomberg

Revenue of Atlas is in growth mode. Sales are up over the trailing three years on average by 23.86% on a CAGR basis. And operating margin is super fat at 60.7% which even for an investment company is very impressive.

And the stock is performing. It has returned 75.27% since late March to date. And this includes an attractive dividend yielding 4.76%.

But yet it’s certainly one of our cheap stocks, as it trades now at a 30% discount to its intrinsic (book) value of all of those valuable ships and must have power supplies.

Buy it on the cheap with yield in a tax-free account.

About Neil George:

As the editor of Profitable Investing, Neil George helps long-term investors achieve their growth & income goals with less risk. With 30+ years of experience in the financial markets, Neil recommends undiscovered and underappreciated companies that offer subscribers double-digit yields now and triple-digit returns over time.


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