These are the most interesting times on Wall Street. We’ve never had this set of circumstances, so no one can claim to be an expert. In addition, the indices are at all-time highs, so it’s hard to find cheap stocks to buy. This is a near perfect Goldilocks situation because of all the stimulus. There is inflation, but those in charge of watching it – the Federal Reserve – said they will ignore it. Stocks are in a bullish mode as a result and the bears went into hibernation.
As if this wasn’t confusing enough, we have the shenanigans with meme stocks. Each of them like AMC (NYSE:AMC), Rocket (NYSE:RKT) and GameStop (NYSE:GME) are insignificant, but the collective is large enough to influence sentiment. Fundamental investing is, therefore, hostage to these headline hogs. There is also a frequent rotation trade between the Nasdaq and the small-caps.
This is all to say that picking cheap stocks is trickier than ever. A solution is to become more of a trader than a pure investor. Then we can find stocks that are relatively cheap either to themselves or to their sectors.
Investors should reduce their conviction levels. Under normal circumstances, I am choosy enough with my entries to be confident. I force myself these days to demote my conviction a notch just to be on the safe side.
Today’s three cheap stocks are:
Cheap Stocks: ViacomCBS (VIAC)
On the the face of it and from recent history, VIAC stock is in dire straits. After all, it is down 50% in three months when the S&P 500 is up almost 11%. In reality, the stock is still up 50% in 12 months. What’s happening is investors are chasing memes to extremes. For the last 10 months, traditional investing concepts all but disappeared. VIAC fell victim to its effects in a very strange way.
There was no reason to chase the stock up 175% in two months this year. This put it on a pedestal for an easy set-up for a crash. The catalyst materialized in March. The Reddit shenanigans forced Archegos Fund to liquidate. They held a lot of VIAC stock, so this cost investors a fortune. VIAC lost 60% of its value in less than a month – most of it in four days.
Luckily, it found footing since the April lows. Moreover, the bulls established a slight ascending trend of higher-lows. The company financials were never in question. This was a perfect example of a broken stock of a healthy company. Someone made a mistake and they had to sell this stock in droves. They held enough of it to cause a collapse. It will take time to heal ViacomCBS stock as the company continues its successful operations.
Fundamentally, it is dirt cheap with a single digit price-to-earnings ratio. Owners of the stock now are very realistic with their expectations. The price-to-sales is 1, so they give one year’s worth of sales in its stock price. It is hard to disappoint somebody with a very humble forecast.
Having this little froth translates into small downside risk versus the potential upside bounty. If the bulls can break out from $44 per share they would have a 10% runway ahead. I doubt it will go back to the March highs and it shouldn’t. That rally was wrong, so the correction from it was too violent. I also expect the stock to meander higher but not above $55 per share. Meanwhile, owning it has its rewards in the form of a 2.3% dividend.
Chipotle (CMG)
Chipotle’s financial performance is truly astonishing. In a past life I did financial planning and analysis for hundreds of restaurants. I can attest that what they do with their comp sales is truly impressive. That’s why CMG stock trades like a high-tech company. Their advantage could be very simple. They have an extremely fast throughput, where guests are out in minutes. This optimizes their store outputs.
On the other hand, trading CMG stock is far from simple. First, there’s the hindrance of the high ticket price. At $1,330 per share it is out of reach of many investors. I am not saying that it’s expensive, it’s simply has a high price tag. Valuation is not a problem because its price-to-sales is only 6. That’s the most important metric for a growth company, and it’s cheaper than Apple.
Critics complain about its 94 price-to-earnings ratio but that’s secondary. They can grow into profitability later, for now the main job is to grow sales. Two high-profile cases of this are Amazon (NASDAQ:AMZN) and AMD (NASDAQ:AMD). They sported 3-digit P/Es for a while and now both are bargains. The same can happen to CMG stock.
Now that we know that the fundamentals are strong, let’s look at the chart. The stock has struggled this year but in the past 12 months it’s up 27% and in line with the S&P 500. Over five years it’s twice as strong as the benchmark. Clearly whatever is ailing it is still fresh.
This year alone, the stock has had four 20% stints and in both directions. It’s currently closer to the bottom end of that range, so it makes sense we list it with cheap stocks. The options markets offer alternatives that are cheaper than paying $1,330 up front. Investors should look into selling puts to own shares if possible. Selling bull put spreads in smaller accounts would also do the trick. Both of those strategies do not need rallies to win, and they leave room error.
If it falls below $1,300, it would trigger a bearish pattern that could bring it down $100 lower. Either of those levels are buying opportunities with the proper stop losses.
Cheap Stocks: Zillow Group (ZG)
For our third pick of the day, we are taking a trip to Main Street – literally. Zillow, at these levels, belongs to the list of cheap stocks for the summer. For the last 12 months, ZG stock looks strong up 88%. In reality, it has been a difficult year for it. ZG stock has fallen 46% since February but there’s more to the story.
We’ve already mentioned the negative effects of meme trading, ZG could be one of the victims. Buying it all the way up to $200 per share was wrong four months ago. This sharp correction is merely bringing it back to reality. When a pendulum swings this far, it tends to overshoot on the other end as well.
Thanks to the extremely low rates, the real-estate market is very healthy. Evidence of this is Zillow’s very strong income statement. Management more than tripled total revenue since 2017. Moreover, they now have a positive net income line with a price to sales of only 8.7. This is cheaper than Facebook (NASDAQ:FB) and Microsoft (NASDAQ:MSFT). Value is not the reason this stock is falling.
For the last few weeks, the bulls are attempting to stabilize inside of a $15 range. The breakout in December happened from $110 per share. It is only fitting that it serves as support since May. This makes perfect sense technically and the bulls can build upon it. So far, they’ve established a small ascending higher-low trend. The next trick is to break out from $120 for share. It won’t be easy, but if they do, they have room to tack on another 10% from there. Breaking out from above that level will be difficult and will require more good news from the company.
Overall the bulls are still in charge of ZG stock. That’s why they are trying to buy the dip. While it is not out of the woods yet, there’s enough evidence on the chart to warrant an attempt soon. This is a perfect example of strong fundamentals empowering basic technical know-how for decisions to buy. There is risk if the bears are able to break below the $105 support. This could trigger a bearish pattern with very ominous consequences. This should only happen if the entire stock market is having a tizzy. Left alone, Zillow has strong enough fundamentals to encourage buyers to step in.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.
