At first glance, one associates “cheap stocks” with lower levels of growth. Typically, the proposition with a cheap, or value, stocks, is cut-and-dry. In exchange for lower growth prospects, you can buy it at a more than reasonable valuation. Yet, while this holds true in a typical market environment, today’s unique circumstances could be the exception that proves the rule.
How so? Many stocks, even if they’ve rebounded, still remain below their pre-pandemic price levels. But, with their earnings expected to surge dramatically in the return to the “old normal,” big earnings growth may be on the menu. Not only that, there are many more-than-reasonably priced stocks, with tailwinds that extend beyond the novel coronavirus and recovery. Think plays with indirect exposure to fast-growing industries like electric vehicles (EVs), and streaming.
So, which cheap stocks stand to see major earnings growth in the next year or two? These seven come to mind as cheap-but-growing opportunities:
- BorgWarner (NYSE:BWA)
- Dropbox (NASDAQ:DBX)
- General Motors (NYSE:GM)
- Micron Technology (NASDAQ:MU)
- PulteGroup (NYSE:PHM)
- Sprouts Farmers Market (NASDAQ:SFM)
- ViacomCBS (NASDAQ:VIAC)
Cheap Stocks: BorgWarner (BWA)
Auto parts giant BWA stock is up big from its 52-week lows. Sure, much of this is due to stocks hard-hit by Covid-19 making a dramatic recovery. But, the sudden acceleration in vehicle electrification has played a role as well.
As more upstart and incumbent automakers move into electric vehicles with full-force, they’re going to need parts. And, it’ll be companies like BorgWarner that will supply them. This indirect exposure to one of the largest megatrends out there will help boost earnings over the next few years.
In fact, it’s already started to do so. With the company targeting higher-than-expected organic growth thanks to its EV tailwinds, analysts like Morgan Stanley’s Adam Jonas have become more optimistic about its prospects. Yet, with such a big opportunity on the horizon, and after its 83.4% upward surge since last March, this is far from being priced for perfection.
Right now, you can buy BWA stock for just 11.4x forward earnings. Admittedly, given the cyclical nature of the auto parts business, a low price-to-earnings (P/E) ratio is justified. Yet, with earnings projected to grow nearly 20% in 2022, there’s still room for more gains at current prices (around $46 per share).
Despite its exposure to the stay-at-home economy trends that boosted tech stocks in 2020, Dropbox stock only recently has started to set the world on fire. Trading sideways for most of last year, the cloud storage play has gained about 38.9% over the past six months.
But, even as the stock market melt-up starts to cool, and investors give this sector and its rich valuations a double-take, DBX stock may be a place you can find growth at a more-than-reasonable price.
Sure, as a Seeking Alpha contributor put it on March 16, this isn’t a fast-growing company. Yet, it more than makes up for it with its cheap valuation. And, while its projected revenue growth in 2022 (around 9%) pales in comparison to most of its peers, earnings growth next year (13.4%) is more than nice, when you consider its lower valuation.
Add in its ability to generate free cash flow, and this remains a tech stock even a value investor could love. As the underlying trends remain in motion after the pandemic, Dropbox may have the ability to deliver continued solid returns. And, at 21x estimated 2021 earnings (relatively cheap compared to other cloud stocks), there’s minimal risk of multiple contraction.
General Motors (GM)
A few years back, you could say that legacy automakers like General Motors were at risk of becoming irrelevant as the EV megatrend took off. Sure, EV pure-plays like Tesla (NASDAQ:TSLA) seem like they have the ability to fully disrupt the old-school automakers.
But, as we’ve seen with Volkswagen’s (OTCMKTS:VWAGY) success with EVs, it’s clear the legacy names aren’t going down without a fight. And, with their incumbent status and existing infrastructure, they’re up for the challenge. And, GM is no exception. The automotive giant plans to be all-electric by 2035.
In short, it’s clear the company has done more to modernize itself beyond just updating its logo. And, while it’ll take several years to pay off, the shift to electrification could provide a nice tailwind for GM stock. Even after its rapid recovery (150.5% rebound) over the past year.
Trading for around 10.9x forward earnings, GM seems reasonably priced given its potential. Now, it makes sense for this highly cyclical company to sport a low P/E. But, with 20%+ earnings growth over the next year, plus its EV tailwinds, the stock at today’s prices (around $57 per share) may have more upside left on the table.
Cheap Stocks: Micron Technology (MU)
MU stock is another name that sports a low valuation due to cyclicality. But, as I recently broke it down, this memory chip maker has many things working in its favor right now. These factors could push the stock (now at around $88 per share) up toward triple-digit prices.
First, of course, is its high exposure to the recovery trade. That is, Wall Street’s recent bullishness for a massive post-Covid economic recovery in the second half of 2021. Many sectors, hit hard by the virus, are set to continue their recovery into 2022. Related to this is the second factor on the side of Micron: the global chip shortage.
The shortage of semiconductors, especially for areas like the automotive sector, has boosted near-term demand. This could help the company beat sell-side projections, which are already quite bullish. Wall Street estimates Micron’s earnings will surge more than 94% in fiscal 2022 (year ending August 2022), to $9.32 per share.
And, trading for just 9.5x this estimate, it’s clear continued positive news could send this cheaply-priced stock to new highs. Watch out for a sudden change in recent trends. But, as plenty of upside remains, keep this cheap stock with growth potential on your radar.
When the Covid-19 outbreak initially happened, no one could estimate that the housing market would get hot rather than face significant hurdles. But, while the pandemic and social distancing created some big headwinds for commercial real estate, the Federal Reserve’s aggressive response to the maelstrom (slashing interest rates to near-zero) fueled a boom (or possibly a bubble) in the residential real estate sector.
This has been seen in surging prices for single-family homes. But, it’s also affected home builders in a positive way. Thanks to this tailwind, prospects remain bright for PulteGroup stock. For 2020, earnings were up around 40%. And, for 2021, they’re set to rise by another 19.5%.
Sure, home building is another feast-or-famine cyclical industry. And, while the 104.7% rise in PHM stock over the past year captured much of this change in fundamentals, at just 8.5x forward earnings, there may be some value left on the table. Even as rising interest rate concerns cast doubt on how much longer the boom in the residential housing market can last.
There are some signs that the recent strength in home building is starting to fade. As of this writing, the stock’s also showing signs of pulling back below $50 per share. But, despite this temporary volatility, continued strength in the housing market could pave the way for further gains this year.
Sprouts Farmers Market (SFM)
This grocery store chain’s shares pulled back in mid-2020, as the early pandemic stockpiling trend that boosted the stock faded. But, SFM stock has started to bounce back in a big way. In the past month, shares are up more than 32%.
This may be due to short-squeezing (17.8% of its float has been sold short). Or a sudden revived interest in grocery plays. Yet, no matter the reason, Sprouts Farmers Market remains cheap relative to its potential growth. In early March, I made the case why shares could climb to $32.80 per share on earnings growth alone. Even if the stock doesn’t benefit from any multiple expansion.
But, with its forward P/E rising from 11.9x to 15x, a leveling up in its valuation has suddenly happened. Even so, more runway remains. As seen from its stunning earnings beat last quarter, projections for the coming year may be underestimating its true potential.
If Sprouts continues to hit the higher end of estimates (or even better), it’s clear there’s a pathway for shares in this growing company to continue on their way to $40 per share. Add in its longstanding status as a takeover target, and there are many factors that could help put more points into SFM stock.
Cheap Stocks: ViacomCBS (VIAC)
As you may know, VIAC stock has been hammered in recent days, due to the unwinding of Archegos Capital. The sudden liquidation of its positions is what’s largely behind the stock’s sudden drop, from over $100 per share, to around $44.
But, for investors who have yet to buy it, short-term volatility may be your friend here with ViacomCBS stock. While the aforementioned family office blow-up may have taken the wind out of what’s been a stock with incredible momentum, shares in the media conglomerate have fallen back to a more-than-reasonable valuation.
As we’ve seen in recent months, this company, previously viewed as a dinosaur in the age of Netflix (NASDAQ:NFLX), has reinvented itself as a streaming play. Sure, it’s status as a short-squeeze stock played a role in its massive run-up in early 2021. But, the tailwinds from its PlutoTV ad-supported streaming platform, and its Paramount+ subscription-based platform have been the driver in the dramatic change in investor sentiment for ViacomCBS shares.
Now, the dust may not have settled just yet with the Archegos incident. But, trading for just 11.9x forward earnings, and the potential for its streaming tailwinds to help it beat earnings projections in the next year, now may be the time to buy the dip with VIAC stock.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.