With the stock market’s overall drop year-to-date, you may be on the prowl for some bargains. But as major indices like the S&P 500 continue to trade at elevated valuations, it remains difficult to find cheap stocks.
Not only that, many of the “cheap” (in terms of valuation) stocks are names that have a high risk of becoming value traps. That is, a stock that’s cheap, yet stays cheap. This is usually due to mediocre management, poor prospects or some sort of other negative factor that isn’t apparent when you stumble upon it on a stock screener.
However, even in today’s still-pricey stock market, there are quite a few value plays to consider. These plays range from widely-followed mega caps, all the way down to more under-the-radar small cap stocks. They also span across multiple sectors, from consumer staples to financial services to tech.
So, whether you’re bullish on the “value rotation” carrying on, or you simply like to focus on stocks with less premium valuations, what are some bargain basement names worth a look? These seven should be on your watchlist. Trading at low multiples, there’s plenty of treasure to be found with these cheap stocks:
- CoreCivic (NYSE:CXW)
- Donnelley Financial Solutions (NYSE:DFIN)
- Discovery Communications (NASDAQ:DISCA, DISCB, DISCK)
- Ford (NYSE:F)
- Meta Platforms (NASDAQ:FB)
- Lumen Technologies (NYSE:LUMN)
- Altria Group (NYSE:MO)
Bargain Cheap Stocks: CoreCivic (CXW)
My talk of avoiding “value traps” notwithstanding, I’ll admit that shares in private prison operator CoreCivic have been a bit of a value trap over the past few years.
CXW stock, along with its peer Geo Group (NYSE:GEO), have seen big drops since the late 2010s. It was at first due to concerns about a crackdown on privately-run prisons; then, by Executive Order President Joe Biden’s Administration phasing out their use on the U.S. federal level (with some exceptions). Both names have tried, but so far have failed, to make much of a recovery.
However, there is reason to believe the crowd has prematurely declared “game over” for the space. At least, that’s what contrarians such as Michael Burry (of “Big Short” fame) are banking on. CXW and GEO both remain big holdings of Burry. That said, there’s more backing up the bull case than just the fact Burry holds it in his portfolio.
Both companies continue to generate most of their revenue from either state and local contracts, or from contracts with the Department of Homeland Security, which isn’t affected by the order. The situation with Geo is a bit more iffy, yet assuming CoreCivic continues to de-lever, and uses its profits to buy back stock/pay out dividends, this stock (at around $9.65 per share today) could make a serious move back toward prior price levels.
Donnelley Financial Solutions (DFIN)
Knocked to single digits at the start of the pandemic, DFIN stock has gone on an incredible run since mid-2020. Shares in this financial services firm, which provides compliance and communication solutions for publicly-traded companies, were at one point up more than 10x from their 2020 lows.
More recently, though, they’ve taken a dive. At around $35.00 per share today, Donnelley Financial Solutions is down more than 30% from its high. This may be an opportunity for those who missed its initial hot run. Why? Although still up substantially over the past two years, it continues to be a bona fide value stock.
Trading for just 7.53x earnings, I’ll concede there’s a good reason why it’s firmly in the cheap stocks category. Its big jump in earnings between 2020 and 2021 isn’t set to repeat itself in 2022. During this timeframe, the boom in special purpose acquisition stock (SPAC) IPOs played a major role in its strong operating performance.
Even so, while the salad days for SPACs have long since passed, that’s not to say “the party’s over” here. As a Seeking Alpha commentator argued last month, the market may be overestimating how important SPAC IPOs were to its bottom line. If it can continue to grow the recurring revenue end of its business, this could more than makeup for a drop-off in transaction-based revenue — resulting in a market re-rating of shares.
Bargain Cheap Stocks: Discovery Communications (DISCA, DISCB, DISCK)
As you likely know, media conglomerate Discovery Communications is on the eve of closing a mega-merger with AT&T’s (NYSE:T) WarnerMedia unit. Shareholders have voted “yes” for the transaction. A month from now, the deal is set to close, with the combined company renamed Warner Bros. Discovery (WBD).
Per the terms of the deal, AT&T will receive a majority stake in the company, which it will then spin off to its shareholders. If that’s the case, why buy DISCA stock, and not T stock, before the merger? Good question. There is upside with both pieces of AT&T.
The post spin-off AT&T could see a bump up in price, as a singular focus on telecom could enable it to improve its operating performance. But if you’re looking for more concentrated upside potential, you may just want to buy Discovery directly. What do I mean by “more concentrated upside?”
The revenue and cost synergies by combining Discovery with Warner could result in this stock (at around $27 per share today), soaring to $45, or perhaps as much as $57 per share (per estimates from Bank of America analyst Jessica Reif Ehrlich). On the other hand, if you buy T stock instead, the total return from the WBD spinoff, plus upside from T, could be modest by comparison. Granted, it’s not a lock that WBD will be a big winner post-merger. Yet if you’re bullish on T stock mainly for this catalyst, you may want to just buy DISCA stock instead.
Cheap Stocks: Ford (F)
Ford’s big move into electric vehicles (EVs) last year sent F stock into hyperdrive. As recently as January, it was trading for above $25 per share, prices not seen in over 20 years.
However, more recently shares in the Detroit automaker have been in reverse. Dropping down to around $17.20 per share, blame a cooldown in “EV mania,” plus concerns of inflation and supply shocks affecting its future results, for its sharp decline. So, as sentiment turns negative, why buy today?
Although Ford and its peers face big challenges, things may be less dire than they seem. According to sell-side estimates, revenue and earnings are expected to see big improvement this year. Consensus calls for a 16% jump in revenue. Looking beyond the coming twelve months, as Louis Navellier wrote on March 7, its plans to create a separate operating unit for its EV business may help maximize its value over the long-term.
In short, I wouldn’t assume that F stock is on the verge of making a full retreat. Solid results, plus more progress with becoming a major producer of EVs, could enable it to avoid further declines. In turn, possibly making a move back to recent highs. Trading for just 7.6x earnings, keep it on your cheap stocks watchlist.
Bargain Cheap Stocks: Meta Platforms (FB)
The tech giant formerly known as Facebook Inc., the company not only made headlines with its big bet on the metaverse. It also kicked off a short-lived speculative frenzy in both metaverse stocks as well as metaverse-themed cryptocurrencies.
But since this company took on the Meta handle last fall, excitement over this transformation has vanished. Worse yet, there’s now the prospect of much slower revenue growth. News of this February (when management provided updated outlook) caused FB stock to plummet 26% in a single day.
Over the past month, it has continued to slide, although it started to trend higher more recently. Yet at around $215 per share today, versus around $323 per share before the guidance-driven plunge, this FAANG component has morphed into a value play. A value play that could bounce back. In time, the market could realize it overreacted to news of slowing revenue growth and a drop in daily active users (DAUs).
If this happens, FB stock, cheap at just 14.5x earnings, could start to recover. Admittedly, I would say that this is a name that’s barely out of “value trap” territory. As my InvestorPlace colleague, Dana Blankenhorn, has argued, CEO Mark Zuckerberg’s absolute control of the company could be bad for shareholders. Instead of pursuing avenues good for shareholder value (such as monetizing its cloud infrastructure), Meta could instead throw good money after bad business by carrying on with putting its plans to dominate the metaverse into reality.
Lumen Technologies (LUMN)
Telecom company Lumen is one of the cheap stocks I’ve owned personally for several years. Mostly, because investing in this publicly-traded entity in a way is like investing in a private equity deal. With its low valuation and high debt position, simply using its cash flow to de-lever, as well as continuing to pay out a high dividend (9.02% forward yield) could result in strong returns.
Of course, this has produced middling results so far. Even though the stock saw a boost in mid-2021, LUMN stock has given back its gains. But while it’s hard to deny that so far it’s been a value trap, that may not necessarily be the case moving forward.
Although earnings are set to decline this year (in large part due to pending asset sales), the company remains committed to maintaining the high dividend. The billions in proceeds from the asset sales will help with debt reduction.
These deals will also provide it with the capital needed to grow its next-generation services business lines. Namely, the expansion of its Quantum Fiber business. With big potential upside once the company moves along with its restructuring, consider Lumen Technologies stock a buy, after its recent drop in price.
Bargain Cheap Stocks: Altria Group (MO)
With interest rates rising, and the market cycling into value plays, it’s no surprise MO stock has held up well recently. Shares are in the green year-to-date, up around 12%. Yet, while it recently hit a new 52-week high, don’t assume it’s too late to dive into it.
Altria Group, parent company of tobacco giant Philip Morris USA, may not rank well on ESG ratings. That’s been a big factor in its underperformance in recent years. In addition, you may be concerned that this cigarette maker, despite its efforts to move “beyond smoking,” profits will decline due to this transition to non-tobacco, non-combustible nicotine products.
Be that as it may, that doesn’t necessarily mean MO stock will underperform going forward. With the flexibility to raise prices, the company could keep earnings steady, even as the percentage of Americans who smoke goes down. This high flexibility also extends to its ability to raise prices to keep up with inflation.
Add in share repurchases and Altria stands to continue growing its earnings in the years ahead — albeit, at a slight pace (mid single-digits). However, couple that with its high dividend yield (6.89%). The result is a cheap stock (trading for around 10.52x earnings) could provide steady returns for investors.
On the date of publication, Thomas Niel held long positions in CXW, GEO, LUMN and MO. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.