The past year has largely been about richly-priced growth stock getting pricier. Markets are still near record highs, as investors anticipate a novel coronavirus recovery in 2021. But, for value investors, there are still plenty of cheap stocks to go around.
Of course, what counts as a “cheap stock” is in the eye of the beholder. Some investors may be fine with owning stocks that sport low price-to-earnings (P/E) ratios, but come with many fleas. Others may prefer situations where the stock sells for a moderate valuation, but with strong fundamentals.
Small-cap stocks can be a great hunting ground for low priced equities. Yet, even among mid-cap and large-cap stocks, you can find cheap stocks that could be considered screaming buys.
What are some examples of cheap stocks in today’s still-strong stock market? These nine may be great value plays to consider:
- Best Buy (NYSE:BBY)
- DaVita (NYSE:DVA)
- DXC Technology (NYSE:DXC)
- Fox Corporation (NASDAQ:FOX)
- Lumen Technologies (NYSE:LUMN)
- Altria Group (NYSE:MO)
- Pfizer (NYSE:PFE)
- Sprouts Farmers Market (NASDAQ:SFM)
- Verizon Communications (NYSE:VZ)
Cheap Stocks: Best Buy (BBY)
As I wrote back in January, Best Buy has successfully pivoted to an omnichannel strategy. This not only helped its share price recover following last March’s coronavirus-driven stock market meltdown. It helps shares rise to prices far above its pre-pandemic highs.
But, with weaker-than-expected sales in the fourth quarter (ending Jan. 31), the company’s growth in 2020 looks to be mainly a “one and done” Covid-19 driven event. This has pushed BBY stock from above $120 per share down to around $102.50 per share.
However, with this pullback, investors interested in this hybrid brick-and-mortar/e-commerce play can get in at a reasonable valuation. At these prices, shares trade for just 13.9x forward earnings. Analysts may be on the fence about fiscal 2022 (FY22, ending Jan 2022), but earnings growth could resume in FY23.
It’s not only valuation that makes this a stock to consider. Sporting a moderately high 2.73% dividend yield, get paid while you wait for the stock to take off once again. If results wind up more positive than analysts believe today, shares could produce solid returns in the coming years.
Dialysis center giant DVA stock has been a long-time favorite of Warren Buffett. The size of this position in the Berkshire Hathaway (NYSE:BRK.A,NYSE:BRK.B) portfolio may pale in comparison to its $111 billion+ position in Apple (NASDAQ:AAPL).
But, already DaVita’s largest shareholder, Berkshire recently upped its stake, and now owns 33% of outstanding shares. Taking a look at the numbers, it’s easy to see why the legendary value investor likes this stock. Its forward P/E ratio of 12.6x by itself makes it a cheap stock. Yet, when you consider its projected double-digit earnings-per-share (EPS) growth, shares look to be even more of a bargain relative to growth projections.
Now, a lot of this EPS growth comes from the company’s aggressive stock buyback policy. Last August, the company repurchased $1 billion worth of shares, at the time representing around 10% of shares outstanding. However, this financial engineering strategy may have its limits.
As a Seeking Alpha contributor broke it down back in January, the company’s aggressive repurchasing now exceeds annual free cash flow. If it has to borrow to make repurchases, this strategy to move the needle may not be sustainable. Yet, while this remains a risk, consider this one of the top cheap stocks to keep on your watch list.
DXC Technology (DXC)
DXC, which came to be when Hewlett Packard Enterprise (NYSE:HPE) merged its enterprise services unit with Computer Sciences Corporation, may be a bit of tech dinosaur. But, while it’s not the most exciting tech stock out there, investors today can buy into it at a dirt cheap valuation.
What do I mean? DXC stock trades for just 8.7x analyst consensus for FY21 (fiscal year ending Oct. 2021). And, while earnings aren’t exactly growing at a record clip, with analysts projecting slightly higher EPS in FY22 (ending Oct 22), signaling that the recent single-digit P/E doesn’t imply earnings are just about to fall off a cliff.
Bottom-fishing value investors may not be only ones who see DXC Technology to be a bargain. At the start of 2021, rumors circulated that France-based technology company Atos SE was mulling a bid for the U.S.-based firm. However, Atos announced in early February it was no longer pursuing the deal.
But, just because it’s no longer a takeover target, doesn’t mean it can’t be a great value stock for your portfolio. Organic growth is a challenge, so the company will likely have to pursue something like “strategic alternatives” to put points back in the stock. However, no matter what moves it makes, there’s more than enough runway for this stock if positive news comes out, as the stock at around $25.75 per share remains below its pre-pandemic price levels (around $35 per share).
Fox Corporation (FOX)
Spun off from 21st Century Fox prior to that company’s merger with Disney (NYSE:DIS), this piece of Rupert Murdoch’s media empire consists of the over-the-air and cable broadcast assets that were not included in that $71.3 billion transaction.
But, while Fox Broadcasting, Fox News, and its other old-media assets face challenges, as entertainment/media shifts moves toward being streaming-focused, this remains a very valuable collection of media properties. And, with last year’s $440 million purchase of ad-supported streaming app Tubi, the company is well-positioned to adapt to the streaming era.
Yet, even as investors have bid FOX stock up from its coronavirus crash lows (under $20 per share), back up to around $36 per share, it remains a cheap media stock. Admittedly, investors give this stock a lower valuation (13.8x forward earnings), since it’s now more similar to TV station operators like Nexstar (NASDAQ:NXST) than it is to content powerhouses like Viacom (NASDAQ:VIAC).
That being said, there may be some room for multiple expansion, given its (albeit small) streaming exposure. Also, with tax-related restrictions on a company sale post-Disney deal now lifted, Murdoch may sell it to a private equity buyer. This takeover potential alone doesn’t make it a buy. But, there’s more than enough going on here to make it an interesting opportunity.
Cheap Stocks: Lumen Technologies (LUMN)
When I last wrote about LUMN stock, I discussed how the company was a cheap de-leveraging/turnaround play. How’s it performed since then? Briefly benefiting from the late January “short squeeze mania,” which helped push the stock from around $10 per share, up to more than $16 per share, the telecom services stock has pulled back a bit, and now trades for around $12.87 per share.
But, while its up more than 31.8% year-to-date, the ship hasn’t sailed yet for this deep value play. Not only does it still sport a very low earnings multiple (8.2x). Even with its overleveraged balance sheet (around $33 billion), the company is still able to pay a massive dividend out to investors. Shares have a forward yield of 7.8%.
In short, Lumen has two ways to reward shareholders who hold it for the long haul. First, via the dividend, this is another “pay as you wait” situation. Second, if the company succeeds in reducing its debt, and pivoting the business to fiber optics solutions, the business could see a material increase in its underlying value.
That’s not to say it’s not without its risks. But, as one of the few large-cap “deep value” plays out there, consider it worthy of a small position.
Altria Group (MO)
The parent company of Phillip Morris USA (makers of Marlboro cigarettes), MO stock has been in a slump since 2017. With the mixed success of its investments in electronic cigarette maker Juul, and cannabis company Cronos Group (NASDAQ:CRON), the company has a hard time convincing investors it can “move beyond smoking,” and still be a highly-profitable company over the long-term.
After decades of strong performance (despite big declines in U.S. smoking rates), Altria’s had a tough time winning back enthusiasm from investors. Its sluggish earnings growth may be a factor. So too could be the rise of Environment, Social, and Governance (or ESG) investing.
But, no matter the reason for this stock’s under performance, trading for just 9.7x forward earnings, this remains a great cheap stock for contrarian investors. The question, however, is whether Altria can finally make a move that allows its stock price to bounce back to prior-year price levels.
MO stock trades for around $45 per share. But, back in 2017, shares traded for around $75 per share. Getting back to this high water mark may not be attainable. But, a continued move higher, as investors appreciate this sin stock’s high dividend (7.7% forward yield) and low valuation, could be in the cards.
Trending lower, investors are taking a wait-and-see approach with PFE stock. The pharma giant may have found success with its Covid-19 vaccine, which it co-developed, along with BioNTech (NASDAQ:BNTX). But, the company needs to see its earnings grow before Wall Street is impressed enough to give the stock a higher valuation.
Can Pfizer finally get out of its earnings growth slump? As a Motley Fool contributor recently discussed, pulling this off is going to be a challenge. Namely, due to high competition, not just for its Covid-19 vaccine, but for other candidates in its pipeline as well.
But, if Pfizer does pulls this off, this cheap stock (forward P/E of 10x) could see tremendous multiple expansion. Perhaps not up to the 20x+ multiples we see with pharma stocks like Eli Lilly (NYSE:LLY). But, a move toward 13.5x-15x could be possible, implying potential 35% to 50% upside from today’s prices.
In short, it’s understandable why most are skittish about PFE stock. Yet, with uncertainty more than priced-in, those jumping in now could see solid returns, if its results come in far above today’s muted expectations. Shares could continue to slide in the near term, but long term, this could be a winner for your portfolio.
Sprouts Farmers Market (SFM)
After talking about some of the more higher-profile cheap stocks, let’s look at one that’s lesser-known. Sprouts Farmers Market operates 341 health food grocery stores in 22 states. But while it doesn’t hold a candle to Amazon’s (NASDAQ:AMZN) Whole Foods Market, investors may have good reason to consider this a solid opportunity.
Why? For starters, its low valuation. Sure, its current forward P/E ratio (11.9x) stocks isn’t that cheap, compared to the forward earnings multiples of other grocery store chains. And, yes, earnings are expected to pullback in 2021, as this year has fewer of the tailwinds (such as mass stockpiling) that bolstered the sector when Covid-19 first hit.
Yet, while it’s sold off since the summer (when it hit prices nearing $28 per share), shares may be a good deal at current prices (around $21.80 per share). After digesting the possible big earnings decline between 2020 and 2021, the company is set to grow earnings by around 8% in 2022. If it comes in at the high estimates for that year ($2.77 per share), and it maintains its current forward multiple, shares could be back at around $32.80 per share within a year.
In other words, upside of around 50%. But, that’s not all! Given that rivals like The Fresh Market have been snapped up by private equity in recent years, perhaps SFM stock could too be a takeover target. Cheaply priced, and the potential to get acquired as the grocery sector consolidates, consider this value stock a buy at today’s prices.
Cheap Stocks: Verizon Communications (VZ)
As InvestorPlace’s Josh Enomoto wrote Feb. 16, VZ stock has been a disappointment for investors, but could start to perform well, thanks to the 5G rollout. But, ahead of its this catalyst starting to make an impact, now may be the time to enter a position.
Why? Trading for 10.8x forward earnings, it’s cheap, considering you could call it a defensive stock. Admittedly, it’s not the cheapest major telecom stock out there. Rival AT&T (NYSE:T) trades for an even lower valuation (9x forward earnings).
But, unlike Ma Bell, Verizon isn’t as weighed down by a massive debt load, which AT&T has from its late 2010s acquisition spree of content companies like Time Warner. Also, this telecom company doesn’t have to deal with the defeats its main public peer is currently experiencing, such as selling a portion of its DirecTV unit, at a valuation far below what it paid for it.
It goes without saying, but don’t expect to get rich off of VZ stock. Shares could trend higher as the 5G catalyst plays out. But, don’t expect the stock to make jaw-dropping gains from here. Even so, if you are looking for a stable stock, offering a decent dividend (forward yield of 4.6%), this may be a great investment for cautious investors.
On the date of publication, Thomas Niel held long positions in LUMN and MO stock.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.