On average, the last quarter of the year has been the best for the markets since 1928. Of course, a probable tapering by the Federal Reserve could cause some jitters. But as the economy recovers, the markets will likely remain in an uptrend. Still, I would be cautiously optimistic. It makes sense to book profits on stocks that have surged and are trading at stretched valuations. Those funds can then be allocated to cheap stocks or value stocks.
Back in July, Morgan Stanley observed that, after the pandemic-driven meltdown, growth stocks have performed well in the ensuing market rally. However, the firm also noted that “economic strength and rising inflation will likely favor both value and cyclical stocks.”
Cyclical stocks have already seen some rally in the last few months. As such, this article will focus on cheap stocks in general and value stocks from the cyclical category. Further, we will use the price-earnings (P/E) ratio as a basic filter. All of the picks on this list trade at a forward P/E of less than 10. As markets look for value, these names could rally in the foreseeable future.
So, let’s take a deeper look into the fundamentals of these cheap stocks.
- Costamare (NYSE:CMRE)
- AT&T (NYSE:T)
- Ford (NYSE:F)
- Equinor (NYSE:EQNR)
- British American Tobacco (NYSE:BTI)
- Vale (NYSE:VALE)
- TotalEnergies (NYSE:TTE)
Cheap Stocks to Buy: Costamare (CMRE)
Even after upside of 129% in the last 12 months, CMRE stock tops my list of cheap stocks to buy for October. The stock still trades at a forward P/E of 6.87 and offers investors a dividend yield of 2.92%.
Costamare is also poised for steady earnings with its robust contract backlog in the containership segment. With the economic recovery, its containership ship segment has witnessed a 450% increase in charter rates on a year-over-year (YOY) basis. As of late July, the company had contracted revenue of $3.3 billion and a remaining time charter duration of 4.3 years (Page 11).
This company has also diversified in the dry bulk segment and its timing has been favorable. The dry bulk index is at a multi-year high and Costamare will have a fleet of 37 dry bulk vessels by the end of 2021.
Of course, it’s worth noting that Costamare has a relatively high leverage, with net-debt-to-adjusted-EBITDA of 4.5 as of the second quarter. However, with an adjusted EBITDA interest coverage ratio at 6.19, debt servicing is likely to be smooth. At the same time, the company’s new vessels will add to its EBITDA and cash flow in the coming quarters.
Overall, CMRE stock is worth accumulating on declines. As the dry bulk segment impacts revenue and cash flows, the stock will likely trend higher.
At a forward P/E of 8.41, this pick of the cheap stocks looks like another quality name to buy for a sharp reversal. True, T stock might have disappointed income investors with the guidance of cutting dividends to half after the business demerger. However, I believe that the value unlocking from the demerger will more than offset the dividend cut.
It’s worth noting that, between 2016 and 2020, AT&T has invested $105 billion in the wireless and wireline segment. These investments will likely yield results in the coming years as 5G adoption accelerates. As a matter of fact, the company has already witnessed healthy subscriber additions in the wireless and fiber segment.
The outlook for the media division also seems positive. AT&T already has more than 67 million HBO MAX and HBO subscribers globally. Now, the company has guided for 70 million to 73 million subscribers by the end of 2021. The Warner Media and Discovery (NASDAQ:DISCA, NASDAQ:DISCK) deal will also create one of the largest investors in new content. Discovery President and CEO David Zaslav is targeting 400 million subscribers for the combined entity in the coming years.
Overall, the selling in T stock seems overdone. This company is positioned to deleverage in the coming years. Further, 5G will likely be a game-changer.
Cheap Stocks to Buy: Ford (F)
Next up on this list of cheap stocks, F stock has been in an uptrend in the last 12 months. However, this name still looks like a bargain with a forward P/E of 9.09. Plus, with Ford making a big push into electric vehicles (EVs), the outlook seems bright.
In the United States, Ford reported 117% growth in EV sales for June 2021. Further, for the first half of 2021, the company sold 56,570 electric vehicles.
China is another big EV market for Ford. In Q2, the company opened 10 direct-to-customer electric vehicle storefronts. It revealed six new vehicles in the quarter as well. As these vehicles go into production and later the delivery phase, growth will likely accelerate.
It’s also worth noting that Ford had some $25 billion in cash as of Q2 as well as a total liquidity buffer of $41 billion. This will allow Ford ample flexibility to make big investments in the coming years.
Recently, the company announced a “mega campus” in Tennessee and twin battery plants in Kentucky. An investment of $11.4 billion is planned for the “production of new electric vehicles and advanced lithium-ion batteries” by 2025.
Finally, Europe is another big market for Ford. The company plans to go completely electric there by 2030. All in all, with an ambitious transformation plan and an exciting vehicle pipeline, F stock looks attractive.
With oil trading near $80 per barrel, EQNR stock is an attractive pick among cheap stocks. Right now, the stock trades at a forward P/E of 9.52 and seems positioned for further upside.
A big reason to consider Equinor among the oil stocks are low break-even assets. In the Norwegian Continental Shelf (NCS), the break-even of assets discovered in the last two years is $30 per barrel. The company also expects production growth at a compound annual growth rate (CAGR) of 2% from the NCS over the next five years (Page 15).
In terms of cash flow potential, Equinor expects to deliver an average of $4.5 billion in annual free cash flow (FCF) over the next decade. This is with an assumption of $60 per barrel of oil. Clearly, the company’s assets have the potential to deliver robust FCF. This should ensure that EQNR stock is one of the better dividend growth stocks in the oil and gas sector.
Another point worth noting, however, is that Equinor plans to divert excess cash flows toward renewable energy. Over the next five years, the company plans for $23 billion in renewables investments (Page 28). The company also expects to deliver 40% reduction in net carbon intensity by 2035 (Page 55).
Cheap Stocks to Buy: British American Tobacco (BTI)
BTI stock is another name that trades at a low multiple. Currently, this name has a forward P/E of 7.91. Additionally, the stock offers investors an extremely attractive dividend yield of 8.48%.
Similar to Altria (NYSE:MO), this company faces uncertainty related to e-cigarettes. In a recent statement, the company opined that these “innovative products may be potentially less harmful than traditional tobacco products.” Further confirmation of this from the U.S. Food and Drug Administration (FDA) could be a big upside catalyst.
Moreover, British American has already undertaken a business transformation. As of June, the company reported 16.1 million non-combustible product customers (Page 9). In the prior-year comparable period, the number of customers was 11.6 million. The company’s new category revenue growth for the same period was 50%. Clearly, growth seems to be gaining traction in this segment.
One last point to note, though, is that BTI’s cigarette business is still the cash cow. Strong cash flow will ensure that it can sustain the dividend. At the same time, the company has ample financial flexibility to invest in its non-combustible segment.
Next up on this list of cheap stocks, VALE stock seems like a screaming buy at a forward P/E of 2.88.
True, concerns related to the spill-over impact of the Evergrande crisis resulted in a sharp correction for the stock. Additionally, iron ore prices tumbled below $100 per ton as China pursued curbs for the steel industry. Plus, VALE stock was also recently jittery after 35 employees became trapped in a Canadian mine.
However, even with these factors, the correction seems overdone. Considering the valuation, the stock might be poised for a sharp rally. Additionally, VALE also offers a dividend of $2.27 with a yield of 15.95%.
For Q2 2021, Vale reported $11.2 billion in pro-forma adjusted EBITDA. Further, FCF for the period was a little over $6.5 billion. Additionally, Vale expects iron ore capacity at 343 metric tons for 2021. For the next year, the company expects capacity to increase to 400 metric tons, with a longer-term plan for 450 metric tons.
Finally, even if iron ore prices sink from current levels, Vale is positioned to deliver healthy cash flows. Dividends are therefore sustainable. It’s also worth noting that for Q2 2020, the company’s net debt was $6.3 billion. As of Q2 2021, net debt has declined to negative $738 million (Page 8). So, credit metrics have improved significantly as well.
Cheap Stocks to Buy: TotalEnergies (TTE)
In the last six months, TTE stock has been relatively sideways. Now a breakout on the upside seems imminent. But aside from being one the top cheap stocks, TTE is also attractive for income investors. Currently, it has a dividend yield of 6.53%.
TotalEnergies is another beneficiary of higher oil prices. For the first half of 2021, the company generated $13.1 billion in operating cash flows. Between 2022 and 2025, it also has plans for an annual investment of $13 billion to $15 billion toward maintaining and growing its activities.
The upstream segment is likely to fund these investments. Additionally, if oil remains firm, dividend growth seems likely. The company also plans to buyback $1.5 billion of its shares in Q4 2021. Aggressive share repurchases are likely to continue.
Lastly, though, it’s worth noting that TotalEnergies has made a significant shift toward renewables. In the coming years, 50% of its growth investments will be targeted at the development of new energies while the other 50% will be significantly focused on liquified natural gas (LNG).
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. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.