If we look at average monthly returns for the S&P 500 (1928-2020), the index has delivered 0.5% returns in March. Further, index returns in April have been 1.5% on a historical basis. If we go by this trend, the next two months are likely to be good for the markets. However, broad markets seem expensive and it makes sense to go overweight on cheap stocks than chase hot stocks that are overvalued.
Example: Tesla (NASDAQ:TSLA) has lost 18% in the past month. On the other hand, Altria (NYSE:MO) has given positive returns of 7.4% for the same period. Similarly, JPMorgan Chase (NYSE:JPM), another undervalued stock, has delivered positive returns of 16%.
Of course, I would consider TSLA stock on correction. However, some cheap stocks look good for a rally in the next few months.
Let’s talk about seven cheap stocks that have robust fundamentals and can potentially out-perform the index in the foreseeable future:
- Freeport-McMoRan (NYSE:FCX)
- Alibaba Group Holding (NYSE:BABA)
- Pfizer (NYSE:PFE)
- AT&T (NYSE:T)
- Borr Drilling (NYSE:BORR)
- Apple (NASDAQ:AAPL)
- Chevron Corporation (NYSE:CVX)
Cheap Stocks to Buy for March: Freeport-McMoRan (FCX)
FCX stock has surged 150% in the last six months. However, the big rally does not make the stock expensive. At a price-to-earnings-ratio of 16.8x, FCX stock is attractive for fresh exposure.
On Feb. 16, Citigroup upgraded FCX stock to a “buy” rating with a forecast that copper prices are likely to hit $10,000/ton. Citigroup also has a “bull case” copper price forecast of $12,000/ton. If copper continues to trend higher, Freeport-McMoRan is positioned for EBITDA margin expansion and free cash flow upside.
It’s important to note that there is a global push toward clean energy. This has translated into a boom for the renewables and electric vehicle sectors. Freeport-McMoRan estimates that copper consumption in these two sectors will double in the next five years. Therefore, the rally in copper is backed by fundamental reasons.
Another factor to note is that the company reported copper sales of 3.2 billion lbs in fiscal year 2020. For the current year, sales are expected to increase to 3.8 billion lbs. Therefore, the company stands to benefit from higher prices coupled with higher sales volume.
Freeport-McMoRan also has a strong financial profile. As of December 2020, the company reported total debt of $6.1 billion and a debt-to-EBITDA ratio of 1.5x. With low leverage and a liquidity buffer of $7.2 billion, the company is well positioned to benefit from higher commodity prices.
BABA stock has under-performed compared to other Chinese e-commerce stocks. A key reason has been the regulatory headwinds bearing down on Ant Financial. However, the Ant Group is working with regulators and it seems likely that the differences will be ironed out.
Further, specific to Alibaba, robust growth has sustained. With BABA stock currently trading at an attractive P/E 24.3x, it’s a top-pick among cheap stocks.
In February 2021, Alibaba reported third-quarter results for 2020 and there were several positives. The company’s cloud business reported positive EBITDA for the first time. With strong top-line growth, the cloud business is positioned to be another cash flow machine for Alibaba Group.
Alibaba’s core commerce business also remained robust with 38% top-line growth. It’s worth noting that Alibaba has been reporting strong e-commerce growth from Southeast Asia. In addition, there is ample scope for e-commerce penetration in China.
With two high-growth business segments, BABA stock is trading at an attractive P/E. Broad markets are expensive and investors are looking for value. I will not be surprised if BABA stock out-performs in the next few quarters. Besides the company’s growth factor, Ant Group’s deal with Chinese regulators is a key upside catalyst for the stock.
PFE stock has remained depressed for an extended period. In the past year, the stock has only returned 5%. However, at a current P/E of 10.25x, I don’t see much downside risk for the stock. Without doubt, PFE stock will be among the top three cheap stocks to buy.
In addition to potential for capital gains, PFE stock also offers an annual dividend payout of $1.56. This implies a robust yield of 4.5% and dividends are sustainable. With broad market valuations looking stretched, PFE stock is also attractive with the stock having a beta of 0.63x.
In terms of positive news related to the novel coronavirus vaccine, Israel’s Health Ministry data shows that Pfizer’s vaccine prevents 98.9% Covid-19 deaths. Over the next few weeks, Pfizer is also planning to double the U.S output of vaccines. For the current year, Pfizer expects $15 billion in revenue from BNT162b2. With these positive developments, I am bullish on PFE stock.
Of course, the Covid-19 vaccine is not the only cash flow driver. The company has a deep pipeline of products and expects revenue to grow at a CAGR of 6% (excluding the impact of the Covid-19 vaccine) through FY2025.
T stock has been an under-performer and has remained relatively sideways for the last few quarters. At a P/E of 9.25x, I would include T stock among the cheap stocks to buy for March. After an extended period of consolidation, a break-out on the upside is likely.
Besides the visibility for capital gains, T stock is another attractive dividend stock. The company pays an annualized dividend of $2.08, which implies a yield of 7.2%.
From a growth perspective, AT&T continues to focus on 5G, fibre network and HBO Max. For the current year, capital expenditure is expected at $18 billion. This is likely to translate into continued subscriber development in various business segments. Further, even after the capital expenditure, the company is likely to report $8 billion in free cash flow. Therefore, dividends are sustainable and the company is positioned to de-leverage.
It’s worth noting that HBO and HBO Max subscribers are already at 41 million in the U.S. and 61 million globally. Investment in new content will continue to drive subscriber growth.
AT&T also claims to have the nation’s fastest 5G network. As the adoption of 5G increases in the next few years, average revenue per user in the mobility segment is likely to increase.
Overall, T stock is attractive at current levels with minimal downside risk. Even if there is a broad market correction.
Borr Drilling (BORR)
It makes sense to include some small-cap stocks in the list of cheap stocks. BORR stock, at a current market capitalization of $361 million, is undervalued and can deliver strong returns.
It’s worth noting that BORR stock is already higher by 65% for year-to-date FY2021. The reason is capital raising and higher oil prices. With Brent above $60 per barrel, I expect further upside for the stock in March.
Borr Drilling is an operator of offshore rigs and if oil prices sustain at higher levels, the rigs are likely to earn a higher day-rate. This will translate into top-line growth and EBITDA margin expansion.
From a financial perspective, the company has infused liquidity (equity issue) in the last few quarters. This is likely to result in $1 billion in liquidity improvements until FY2023.
Overall, with an extended debt maturity profile, liquidity buffer and potential industry tailwinds, Borr Drilling is positioned for a strong turnaround. The company has modern rigs that are likely to be contracted for the long-term and provide clear revenue and cash flow visibility.
BORR stock currently trades at $1.33 and I would not be surprised if the stock is higher by 100% in the next two to three quarters.
I would include AAPL stock in the list of cheap stocks to buy for March. The stock has been in an extended period of consolidation with a loss of 2% over the last six months. With a strong balance sheet, sustained growth and entry into new business segments, AAPL stock is attractive for fresh exposure.
One factor that I like about Apple is that the company is increasingly diversified. No doubt, the iPhone segment still remains the cash cow. However, I am bullish on sustained growth for the services and wearable business. For Q1 2021, these segments reported top-line growth of 24% and 30%, respectively, on a year-over-year basis.
In the iPhone segment, Apple sold the highest number of smartphones in Q4 2020 with a market share of 20.8%. With 5G iPhone 12, it’s likely that strong sales will sustain through the year.
Apple has also continued to talk with automakers on a potential deal for the company’s electric car. While the market launch might still be few years away, positive development related to an industry partnership is likely to trigger upside for AAPL stock.
Overall, AAPL stock is likely to break-out of a narrow trading range. At current levels of $126, the stock is attractive for the near term as well as for the long term.
Chevron Corporation (CVX)
The energy sector is likely to have a turnaround year. Brent oil is already above $60 per barrel and gradual economic recovery can trigger further upside for black gold. CVX stock is among the cheap stocks in the energy sector.
Warren Buffett is known for value investing and the legendary investor has picked-up 4,84,98,965 equity shares of Chevron. It’s worth noting that over a one-year period, CVX stock is only up by 2%. At a P/E of 27x and a dividend yield of 5.39%, the stock is indeed attractive.
Even after navigating one of the worst periods for the energy sector, Chevron has strong fundamentals. As of Q4 2020, the company reported a net-debt ratio of 22.7%. The company therefore has ample financial headroom for organic and inorganic growth.
It’s also worth noting that Chevron managed to generate operating cash flows of $10.6 billion in FY2020. If oil sustains above $60 per barrel, OCF can be meaningfully higher in the current year. For FY2019, the company’s OCF was $27.3 billion. Therefore, with low break-even assets, Chevron is well positioned for value creation.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored more than 1,500 stock specific articles with focus on the technology, energy and commodities sector.