No one likes to be the investor who watched a stock soar higher and higher, then bought it in right near the top. That’s one of the worst feelings and once it happens, it can scar investors. Rather than look for the high flyers, it leaves investors looking for value plays. These cheap stocks are ones they can comfortably accumulate.
However, cheap stocks are usually cheap for a reason. Sometimes it’s the debt load, others times it’s a volatile revenue stream. In other occasions, the stock is just flat out misunderstood.
We want to avoid value traps the same way we want to avoid buying a high-flying stock near its peak. It’s a similar feeling to buying a stock that trades at 8 times earnings, only to watch it drop to 5 times earnings.
With low-valuation stocks though, we tend to get slower growth and a larger dividend yield. In some cases, though, these cheap stocks have double-digit growth and a strong forward outlook. So, why are they cheap? That’s part of the puzzle.
With that in mind, let’s look at seven cheap stocks to buy before the market picks up on the value:
- AbbVie (NYSE:ABBV)
- AT&T (NYSE:T)
- Qualcomm (NASDAQ:QCOM)
- Gogo (NASDAQ:GOGO)
- Goldman Sachs (NYSE:GS)
- Nautilus (NYSE:NLS)
- Ford (NYSE:F)
Cheap Stocks to Buy: AbbVie (ABBV)
Wall Street started realizing AbbVie’s value after its latest earnings report. The company beat on top- and bottom-line expectations. However, it wasn’t just a quarter’s worth of business that investors suddenly decided to pivot on. At least, not in my opinion.
Instead, they are starting to see the bigger picture.
Unfortunately, shares are up 30% after reporting earnings. Fortunately though, there is still value. Trading at just 10x this year’s earnings, ABBV stock is far from expensive. Add in its 5% dividend yield and income-oriented investors may have a hard time avoiding this name.
After acquiring Allergan in a massive, $63 billion deal, the company did bloat up the balance sheet. However, in doing so, the company also bought a steady stream of free cash flow. That free cash flow is worth a lot, even though it hasn’t gotten the value it deserves.
Investors have had concerns, ranging from the debt, expiring drug patents and even how well (or unwell) Botox is selling during the pandemic.
But management has proved it can reduce debt, cover the dividend and generate growth. Next year alone, revenue is forecast to climb more than 17%, while earnings are forecast to grow 16.5%. Not bad for one of our cheap stocks.
AT&T doesn’t get much love — but that’s exactly why it’s on our list of cheap stocks. Coming into the year, investors were finally realizing its worth, as shares hovered near $37.
Compared to where it was a year before, that was up about $10 a share, so really, the value realization was there. But then T stock plunged with the market in March, bottoming just below $25.
Unlike the rest of the market though, AT&T shares never really bounced back with any rigor. As such, the stock remains almost 22% below its 2020 high.
The biggest thing critics attack is AT&T’s debt. With long-term debt of $151.2 billion, one can see why. The company has made some great acquisitions in the past (like TimeWarner) and some horrible acquisitions as well, (like DirecTV).
Thankfully, the TimeWarner deal was the company’s most recent and has given AT&T a significant boost in its free cash flow. As it stands, only about 60% of that free cash flow is needed for the dividend, which yields a whopping 7.12%.
However, that free cash flow ratio should dip as the company continues to benefit from an economic recovery. Further, management continues to attack its debt pile aggressively, while low rates allow for refinancing and major savings down the stretch.
Put it all together and this stock has a big yield, trades at 9x this year’s earnings and has the free cash flow to last a lifetime.
Investors have been realizing the value that Qualcomm brings to the table, gobbling up its shares this year. QCOM stock has more than doubled from the March low and are up more than 52% from the pre-coronavirus 2020 high.
As the 5G revolution is underway, Qualcomm is set to benefit in a major way.
The company’s chips are going to be part of what makes this blazingly fast technology a reality. With a new deal in place with Apple (NASDAQ:AAPL), the company has turned its fortunes around in a major way over the last 12 to 18 months.
And really, it’s just getting started.
Qualcomm just started its fiscal 2021 year, where estimates call for 39% revenue growth and almost 70% earnings growth! That leaves the stock trading at just 20 times earnings.
Throw in the fact that analysts expect more growth in 2022 (albeit, at a lower rate) and a 1.8% dividend yield, and Qualcomm stock still seems undervalued. Let’s see if we get a dip in this name to buy. It’s one of the few cheap stocks out there that’s near new highs.
With a market capitalization of $940 million, Gogo is far from the biggest name on the list. However, the company continues to work on ways to unlock value.
Admittedly, GOGO stock faced a potential liquidity situation earlier this year. Not known for its robust financial footing, the company faced a serious risk when airline traffic plunged due to Covid-19. With less traffic, revenue dried up and cash flow was a major concern. Now though, there is a major potential opportunity in this stock.
Gogo has two business segments, commercial aviation and business aviation. The former is how we have WiFi on regular planes, but it’s not profitable and drags down Gogo’s financials. While its business aviation unit also provides WiFi, it does so on private planes and is in much better financial shape.
Now, wouldn’t it be nice if Gogo could sell the commercial aviation unit, allowing it to pay down debt while focusing on its profit-generating business?
Truth be told, it would be a win if Gogo could give away its commercial business. Instead, it’s selling the unit for $400 million in cash.
From CEO Oakleigh Thorn: “The Transaction will give us the ability to de-lever, generate positive free cash flow, take advantage of our substantial NOL carryforwards, and invest in strengthening our Business Aviation franchise.”
In that earnings update, management expected the deal to close by the end of Q1 2021. However, a more recent update has the closing in a few weeks.
Goldman Sachs (GS)
I love Goldman Sachs for this list, even if the stock has rallied more than 25% from its recent low. Simply put, this company is killing it right now.
Here’s the problem (and the opportunity). GS stock gets lumped in with the shares of big banking giants, like JPMorgan (NYSE:JPM), Bank of America (NYSE:BAC) and others. That’s fine under most circumstances.
While the banks are actually doing quite well from a business perspective during such trying times, Goldman Sachs is making a fortune. That’s because it’s not a traditional bank.
Instead of being a traditional lending bank, it’s an investment bank that derives most of its revenue from trading and deal-making. With volatile markets to trade and plenty of deals coming through the pipeline via M&A and IPOs, Goldman is busier than ever.
Let’s put it this way: Last quarter, the company reported revenue of $10.78 billion, up almost 30% year over year and ahead of estimates by $1.4 billion. Earnings of $9.68 per share were almost double analysts’ expectations for $5.50 per share. That was up 102% year over year.
The best part is, Goldman pays out a 2.1% dividend yield and trades at just 12x this year’s earnings estimates. Its robust growth should continue through Q4 with a number of new deals being announced as well.
For a stock that’s gone from $1.20 at its March low to more than $28 in November, readers may be hard-pressed to believe that Nautilus belongs on a list of cheap stocks.
But hear me out, because while there is risk with this one, there is also opportunity.
When Covid-19 hit, Nautilus was crushed. That’s presumably on the assumption that without any gyms open, demand would dry up for the company’s products. That part was true, but it didn’t account for new demand from consumers.
Now, Nautilus can’t even keep up. The most recent earnings report was very bullish, with revenue soaring more than 150% year over year and GAAP earnings of $1.05 per share easily crushing estimates by more than 70 cents.
Expected to earn $2.30 per share this year, NLS stock trades at just over 8 times earnings. With its $580 million market cap, it trades at about par with revenue. If all it ever does it produce workout equipment, that valuation is probably fair.
However, if Wall Street even gets a whiff that a recurring revenue stream is realistic — via a workout subscription service — then this valuation is going far higher. That’s how Peloton (NASDAQ:PTON) pedaled its way higher.
Off the recent dip, bulls may find Nautilus to be a reasonable investment on this potential revenue stream, which by the way, the company was working on before Covid-19 came along.
Ford belongs on our list of cheap stocks, simply because it has almost always had a low valuation. Being an automaker doesn’t exactly excite investors. Or at least, hasn’t excited them enough to bid up F stock to a premium.
But will all that change? Tesla (NASDAQ:TSLA) is admittedly more than an automaker, but as its market cap swells beyond $500 billion, it has brought a premium valuation to those who make electric vehicles (EVs).
Ford is now busting into that realm as well.
The company’s Mach-E vehicle and push to electrify the top-selling vehicle in the country — the F-Series pickup — has investors excited. Coupled with its recently announced Ford Bronco and investors have really started to perk up.
Between the pre-release excitement of the Bronco — due out in the spring — and the push toward electrification, Ford has a lot of momentum right now. Obviously Covid-19 hasn’t done Ford any favors, but at less than 10 x forward earnings, there could be room to the upside. Particularly if it reinstates its dividend.
Recently, Barron’s suggested that Ford stock could double.
On the date of publication, Bret Kenwell held a long position in ABBV, GS and GOGO.