Broader markets have been hot in recent months, and many stocks are near record-highs. It could even feel like there are not that many bargains to be found. However, many investors would agree that it is important not to overpay for a firm’s future growth. Therefore, today’s article introduces seven cheap stocks to start 2021.
Cheap stocks do not always offer good value. Thus, doing due diligence to find bargain shares with growth potential is important. When we talk about value investing, the two names who come to mind are Warren Buffett as well as Benjamin Graham, who was his professor at Columbia University as well as his boss after graduation. According to Graham, value investors had to find shares selling at a discount to their intrinsic value.
Different investors may use different metrics and valuation tools to analyze whether a stock is cheap or expensive. This article highlights the forward price-to-earnings (P/E) ratios for each stock mentioned, as I believe their respective ratios offer value.
Research led by Joseph G. Haubrich of the Federal Reserve Bank of Cleveland states:
The trailing P/E ratio uses a company’s historical earnings data, while the forward P/E ratio uses an estimate of future earnings. (Specifically, the forward PE uses analysts’ consensus earnings forecast for the next 12 months.) When a P/E ratio is high, it is often a signal that either prices or earnings will change to bring the ratio back toward its average. Some people use the ratio to see if a stock is overvalued, if they think the price is too high to be supported by the earnings.
Many cheap stocks tend to offer dividends, appealing to passive income-seekers. Finally, we should note that it may take months for the prices of some to become fully valued. Therefore, patience may be required on the part of investors.
With that said, here are the seven cheap stocks to consider:
- Amgen (NASDAQ:AMGN)
- D.R. Horton (NYSE:DHI)
- General Motors (NYSE:GM)
- FedEx (NYSE:FDX)
- JPMorgan Chase (NYSE:JPM)
- Prudential Financial (NYSE:PRU)
- Walgreens Boots Alliance (NASDAQ:WBA)
Cheap Stocks: Amgen (AMGN)
52-week range: $177.05 – $264.97
Dividend yield: 2.95%
Forward P/E: 19.23
First up on this list of cheap stocks is the Thousand Oaks, California-based Amgen, a leading biotechnology company. Its six therapeutic areas include cardiovascular disease, oncology, bone health, neuroscience, nephrology, and inflammation. In addition to the current range of stable drugs, the company also has several new drugs in the pipeline.
In late October, Amgen reported robust Q3 results. Revenue went up by 12% to $6.4 billion. Management credited higher volume growth, partially offset by lower net selling prices. Product sales increased by 12% worldwide. However, about three-quarters of revenue still come from the U.S.
Non-GAAP operating income was $3.2 billion, up 14% YoY, and non-GAAP EPS was $4.37, increasing 19% YoY. Free cash flow came at a respectable $3.2 billion. During the quarter, the company continued with its share buybacks.
CEO Robert A. Bradway, who was pleased with the metrics, cited, “Amgen continues to deliver strong, volume-driven growth in a challenging environment, while also advancing new medicines in our pipeline.”
I believe most buy-and-hold portfolios would benefit from holding a pharmaceutical stock, and wide-moat Amgen stock could easily be the one for 2021.
D.R. Horton (DHI)
52-week range: $25.51 – $81.21
Dividend yield: 1.2%
Forward P/E: 10.44
Texas-based homebuilder D.R. Horton is our next cheap stock. By volume, it is one of the largest homebuilders stateside. Its offerings, which range from starter to large family homes, appeal to a large number of buyers.
2020 was an extraordinary year with many challenges. Yet, the domestic housing market stayed strong. Last year, the number of permits and starts rose from Covid-19 lows and ended up growing YoY.
In early November, D.R. Horton announced Q3 results. Investors were pleased to see the company beat both on the top and bottom lines. Revenue was $6.4 billion, an increase of 27% YoY. Net income came at $829 million, up 64% YoY. Diluted EPS was $2.24, up from $1.35 in Q3 2019.
The company closed 65,388 homes in the 12-month period ended Sept. 30, 2020. It also increased its backlog, and management raised guidance.
Any decline toward the $65 level or below would make DHI shares even more attractive for long-term investors in the coming weeks. I believe the company’s balance sheet is strong. Therefore it can weather any potential economic challenges, if any, 2021 could offer.
FedEx (FDX)
52-week range: $88.69 – $305.6
Dividend yield: 1.07%
Forward P/E: 26.5
Tennessee-based global logistics giant FedEx needs little introduction. In mid-December, it released day results for Q2 ended Nov. 30. Non-GAAP revenue came at $20.6 billion, up from $17.3 billion a year ago.
Net income of $1.3 billion translated into EPS of $4.83. Last year’s comparable metrics had been $6.6 million and $2.51.
Management noted, “Operating results increased due to volume growth in FedEx International Priority and U.S. domestic residential package services and pricing initiatives across all transportation segments.”
The company is likely to have benefited from increased sales around the holiday season as well as international shipments. I believe cheap stocks like FedEx belong in a diversified portfolio.
General Motors (GM)
52-week range: $14.33 – $46.71
Dividend yield: 3.52%
Forward P/E: 19.35
This legacy carmaker’s Q3 earnings report showed revenues of $35.48 billion and net income of $4.05 billion.
Analysts were pleased to note, “Despite the COVID-19 pandemic, the company continued to invest in its electric vehicle and autonomous vehicle growth initiatives, launched an all-new portfolio of full-size Chevrolet, GMC and Cadillac sport utility vehicles, and maintained leading U.S. full-size pickup truck and large SUV market share.”
InvestorPlace.com readers are likely to know that General Motors is also a partner in the autonomous driving entity “Cruise,” whose other partners include Softbank (OTCMKTS:SFTBY) and Honda (NYSE:HMC). The new decade could possibly see GM become one of the leading names in the EV space.
In September 2020, the company made headlines when it offered to buy an equity stake in Nikola (NASDAQ:NKLA), which it withdrew in a few weeks, following various fraud allegations over Nikola. Most analysts concur it was possibly the right decision for GM not to proceed with the purchase.
GM’s forward P/E, P/S and P/B ratios stand at 19.35, 0.52, and 1.38, respectively. In the case of a decline below $40, the shares would offer better long-term value. I expect management to steer General Motors in the right direction to evolve and become a well-respected EV company.
JPMorgan Chase (JPM)
52-week range: $76.91 – $140.76
Dividend yield: 2.65%
Forward P/E: 17.7
Our next company is a member of the Dow Jones Industrial Average (DJIA). The leading global financial services firm JPMorgan Chase started 2021 well as the shares are already up over 7% in the first few trading days of the year. With assets of over $3.2 trillion, it is one of the most important names in investment banking, consumer financial services, commercial banking, financial transaction processing, and asset management.
In a matter of days, a new earnings season will start. Therefore, investors wonder if JPMorgan Chase will be able to show robust metrics. Earlier in Q3 results revenue was $29.1 billion, almost flat YoY. Net income hit $9.4 billion, an increase of 4% YoY. Earnings per share came at $2.92, up 9%. One of the report’s highlights was “assets under management,” which reached $2.6 trillion, or up 16% YoY.
CEO Jamie Dimon commented, “… we maintained our credit reserves at $34 billion given significant economic uncertainty and a broad range of potential outcomes. We further strengthened our capital and liquidity position.”
2019 had been a great year for JPM shareholders with returns of over 40%. Then came the coronavirus and lower interest rates. As a result the stock was down close to 10% in 2020. In 2021, I expect JPM stock to create shareholder value once again.
Prudential Financial (PRU)
52-week range: $38.62 – $97.24
Dividend yield: 5.44%
Forward P/E: N/A
New Jersey-headquartered diversified multinational insurer Prudential Financial is our next stock. The group is well-known for its life insurance products, mutual funds, annuities, retirement-related services as well as investment management products. Its operations extend to 40 countries.
Lower interest rates have meant challenges for most financial businesses like Prudential. Besides, due to the pandemic, health care costs and insurance claims have increased worldwide. Q3 metrics released in November showed revenue of $15.4 billion, up 2% YoY. Net income came at $1.5 billion or $3.70 per share. A year ago, the comparable numbers were $1.4 billion and $3.44.
CEO Charles Lowrey cited, “We are ahead of pace with our cost savings program, already realizing $135 million of savings through the third quarter of 2020 versus our full-year goal of $140 million. As a result, we expect to generate an additional $250 million in efficiencies by the end of 2023, bringing our total expected cost savings to $750 million.”
I expect the stock price to recover in the coming quarters. Those investors looking to buy a diversified insurance name with a high dividend could consider PRU stock.
Walgreens Boots Alliance (WBA)
52-week range: $33.36 – $59.78
Dividend yield: 3.96%
Forward P/E: 8.84x
The final stock for today on this list of cheap stocks is also a member of the DJIA. As a a pharmacy-led health and wellbeing company, Illinois-headquartered Walgreens Boots Alliance is operates over 9,000 Walgreens and Duane Reade pharmacy retail stores stateside. Outside the U.S., in Asia and Europe, its pharmacy stores operate under the Boots name. Its operations extend to well over 25 countries. Last month, the group started administering Pfizer’s Covid-19 vaccine.
The FY20 Q4 metrics showed sales of $34.7 billion, up 2.3% YOY. Yet, adjusted net earnings declined 30.9% to $887 million. Adjusted earnings per share also fell 28.2% YoY to $1.02. Management highlighted the decrease in foot traffic due to various lockdowns as the main reason behind weak numbers.
CEO Stefano Pessina said, “Despite uncertainty amid the global COVID-19 pandemic, we are seeing gradual improvement in key U.S. and UK markets and continued strong performance in our wholesale business. I’m also encouraged by the accelerating growth in our e-commerce platforms. Looking ahead, we are projecting adjusted EPS growth in fiscal 2021, as reflected in our new guidance.”
Markets have been concerned about the group’s declining margins in recent quarters. Also, Amazon‘s (NASDAQ:AMZN) announcement that it is entering the market with Amazon Pharmacy has not helped WBA stock. However, I believe most of the bad news is already priced into the shares.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation and publishes educational content on investing.
