Thanks to the growing popularity of meme trades and breathtaking rise in the major indices, it’s becoming increasingly difficult these days to find reasonably cheap stocks on a valuation basis. With the S&P 500 near all-time highs and up nearly 90% from the lows of 2020, it might look like there are no cheap stocks left in the market. But the recovery from the pandemic continues to create opportunities for value investors. Therefore, today we would like to take a look at some of the best cheap stocks to buy.
Many analysts are debating if we are in an overheated market. The S&P 500’s cyclically adjusted price-to-earnings (CAPE) ratio has reached its peak level since early 2000 — right before the dot-com bubble. It stands even higher than the level in 1929, the year of the famous stock market crash during the Great Depression. Analysts indicate that U.S. stocks would have to decline by almost 50% to return to their historic CAPE average.
Many cheap stocks these days are there for a good reason and should be avoided at all costs. In most cases, when stocks end up trading on the cheap side, it’s usually because the business has run into hard times. It’s crucial to note that we could see further volatility in the major indices close to their all-time highs on fundamentals that may not always warrant such high price tags. Therefore, investors should approach cheap stocks with caution and maintain a long-term mindset to investing.
With that information, here are seven cheap stocks that could deliver generous returns to value investors.
Cardinal Health (NYSE:CAH)
Celanese Corp (NYSE:CE)
Morgan Stanley (NYSE:MS)
Sempra Energy (NYSE:SRE)
SPDR S&P Semiconductor ETF (NYSEARCA:XSD)
Cheap Stocks: Cardinal Health (CAH)
Dublin, Ohio-based Cardinal Health is the third-largest global logistics provider engaged in wholesale pharmaceutical and medical products. The company distributes brand-name and generic pharmaceuticals and related services to hospitals, pharmacies, healthcare systems, and physician offices.
Cardinal Health reported third-quarter results in early May. Revenue was flat at $39.3 billion, in line with the third quarter of last year. Non-GAAP net earnings decreased 5% year-over-year (YOY) to $451 million in the quarter due to the negative impact from Covid-19. Non-GAAP diluted earnings per share (EPS) decreased 6% YOY to $1.53. Cash and equivalents surged 50% YoY to $3.5 billion.
“With our resilient business model and strong fundamentals, we are navigating the effects of the pandemic and finding opportunities to adapt, innovate and invest for future growth,” said CEO Mike Kaufmann.
The company has become a top distributor in the healthcare industry thanks to acquisitions over the past decade. For instance, at the end of 2020, Cardinal Health announced a $2.2 billion all-stock deal for Bindley Western Industries.
CAH is a dividend aristocrat stock, as it has increased dividend payments for more than 35 years. The shares currently boast a generous 3.5% dividend yield. It is an attractive stock for passive income seekers whose priority is recurring income.
The stock is up almost 6% year to date (YTD). It currently hovers at $56 territory, around the same price it was trading a year ago. Forward price-to-earnings (P/E) and price-to-sales (P/S) ratios stand at 9.22 and 0.11, respectively. Interested investors could consider buying CAH stock around these levels.
Irving, Texas-based Celanese is one of the world’s largest producers of chemicals in the acetyl chain, used in various end markets, including coatings and adhesives. The company also produces specialty polymers used in the automotive, medical and consumer end markets.
Celanese released first-quarter results in late April. Total revenue was $1.8 billion indicating 23% YOY growth. Net earnings increased 47% YoY to $323 million. Adjusted diluted EPS came in at $3.46. Cash and equivalents ended the quarter at $959 million.
“We expect second-quarter 2021 adjusted earnings of approximately $4.00 per share, which would be an all-time record,” CEO Lori Ryerkerk said. “Driven by this elevated performance across the first half, we now expect adjusted earnings of $12.50 to $13.50 per share in 2021, reflecting a moderation in Acetyl Chain industry utilization and pricing as the year progresses.”
The recovering global economy has led to robust demand for Celanese’s intermediate chemicals at a period when supply is tightening. This has led to soaring prices for many of its chemicals. While prices remain volatile, operating margins have been surging steadily over the past few years. Therefore, Celanese has solid potential for long-term profitability.
CE stock hovers around $150, up 15% YTD. This is a cyclical stock with a reasonable valuation, which makes it particularly attractive for long-term investors. Forward P/E and current P/S ratios stand at 11.45 and 2.86, respectively.
Cheap Stocks: HP (HPQ)
Palo Alto, California-based HP is a leading provider of computers, printers and printer supplies. The company’s two operating business segments are its personal systems, containing notebooks, desktops, workstations, and its printing segment, including supplies, consumer hardware, and commercial hardware.
HP announced Q2 2021 earnings in late May. Top line grew 27% YOY to $15.9 billion. Net income increased 61% YOY to $1.2 billion. Adjusted diluted EPS rose to 98 cents, compared to 53 cents in the prior-year quarter. Free cash flow in the second quarter stood at $1.3 billion.
“We delivered another strong quarter, with double-digit top and bottom-line growth,” CEO Enrique Lores said. “HP technology is increasingly at the heart of hybrid work, and we are benefitting from exceptional demand for our products and services.”
As work from home has become the new normal, demand for HP’s products has been soaring, evident from the impressive surge in Q2 revenues. For fiscal 2021, HP estimates GAAP diluted net EPS to be in the range of $3.24 to $3.34.
HPQ stock hovers around $29, up more than 2x from its low in March 2020. It has surged almost 19% YTD. Driven by expectations of steady demand growth, market analysts are bullish on the firm’s prospects, suggesting HPQ stock could rise about 20% to 25% to regain its recent peak of $36. HPQ shares trade at 8.33x consensus forward P/E. The stock’s P/S ratio stands at 0.62.
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Cincinnati-based Kroger is one of the leading grocers, operating supermarkets, multi-department stores, jewelry stores and convenience stores throughout the country. It had 2,742 supermarkets under several banners at the end of 2020.
Kroger reported first-quarter results in mid-June. Total sales were flat compared to the prior-year quarter at $41.3 billion. Excluding fuel, sales decreased 4% compared to a year ago. Adjusted net earnings stood at $918 million. Adjusted earnings per share beat market expectations, coming in at $1.19. Cash and equivalents ended the quarter at $2.3 billion.
“Kroger’s strong execution delivered identical sales results in the first quarter that exceeded our original expectations,” CEO Rodney McMullen said. “Customers are responding to the investments we have made in digital, as evidenced by our triple-digit growth in digital sales since the beginning of 2019.”
The company boasts solid fundamentals and a healthy cash flow. With its dividend yield of 1.82%, Kroger could also be attractive for dividend investors. In addition, the company recently announced a new $1 billion share-repurchase program.KR stock hovers around $40 territory, up almost 25% YTD.
Given its conservative valuation, KR stock offers solid value for investors. Walmart (NYSE:WMT) and Target (NYSE:TGT) shares trade at 0.69 and 1.20 times annual sales, compared to 0.23 for Kroger. Forward P/E ratio stands at 14.14.
Cheap Stocks: Morgan Stanley (MS)
Investment bank giant Morgan Stanley operates institutional securities, wealth management and investment management segments. The company had about $4 trillion of client assets and nearly 70,000 employees at the end of 2020. Approximately 40% of the company’s net revenue is derived from its institutional securities business.
Morgan Stanley announced Q1 2021 results in mid-April. The company reported a record net revenue of $15.7 billion, up 61% YOY. Its investment management and wealth management segments saw revenue from these segments grow 90% and 47%, respectively. Net income increased more than 140% YOY to $4.1 billion, or $2.19 per diluted share, compared with net income of $1.7 billion, or $1.01 per diluted share, for the prior-year period.
On the results, CEO James P. Gorman said, “The Firm delivered record results. The integrated Investment Bank continues to thrive. We closed the acquisition of Eaton Vance, which takes Investment Management to over $1.4 trillion of assets. Wealth Management brought in record flows of $105 billion.”
Morgan Stanley recently made significant acquisitions that led to robust growth in its investment and wealth advisory businesses. Its $13 billion E-Trade acquisition helped the company offer new complementary services through its online trading platform. In turbulent times, trading platforms benefit from increased trading activity, leading to surging transaction revenue.
MS stock hovers around $87, up 25% YTD. It gained more than 80% over the past 12 months. But it still trades at a relatively cheap multiple at 1.59x book value. Forward P/E ratio for MS stock stands at 13.72.
Sempra Energy (SRE)
San Diego-based Sempra Energy serves one of the largest utility customer bases in the U.S. It is an energy infrastructure company that serves more than 36 million consumers in California, Texas and Mexico. Its well-known subsidiaries include San Diego Gas & Electric, Southern California Gas Co. and Oncor Electric Delivery Company. In addition, the firm’s other affiliates own and operate liquified natural gas facilities in North America and infrastructure in Mexico.
Sempra Energy released first-quarter financial results in early May. Total revenue increased 7.6% YOY to $3.26 billion. Net income stood at $928 million. Driven by a solid top-line performance, adjusted earnings per share came in at $2.95, representing a 19% YOY increase. Cash and equivalents ended the quarter at $725 million.
On the results, CEO Jeffrey W. Martin stated, “Over the last several years, we have narrowed our market focus, expanded investment in our utilities and worked hard to improve safety and operating results… The company is well-positioned to deliver another strong year of financial performance.”
The company has attractive assets in key markets and a strong track record of steady shareholder returns. SRE stock is particularly a strong dividend play, making it an ideal candidate for income investors. It supports a 3.2% dividend yield, which comes with a payout ratio of about 50%.
The blue-chip company remains reasonably valued, with current stock price trading around $137. SRE stock is up 8% YTD. Forward P/E and current P/S ratios stand at 17.36 and 3.50, respectively. A decline toward the $130 level would improve the margin of safety.
Cheap Stocks: SPDR S&P Semiconductor ETF (XSD)
Chip industry observers highlight, “the market is projected to grow from USD 452.25 billion in 2021 to USD 803.15 billion in 2028 at a CAGR of 8.6% in the 2021-2028 period.”
Yet, the recent chip shortage has put many semiconductor shares under pressure. For instance, YTD, the Philadelphia Semiconductor Index is up about 12% and hit an all-time high in April. But over the past two months, the index has lost about 8%.
Therefore, our last discussion focuses on an exchange-traded fund (ETF), namely the SPDR S&P Semiconductor ETF. This equal-weighted ETF provides exposure to 41 chip stocks across a range of market capitalizations (caps). XSD, which tracks the S&P Semiconductors Select Industry, started trading in January 2006.
Nvidia (NASDAQ:NVDA), SiTime (NASDAQ:SITM), Marvell Technology (NASDAQ:MRVL), Maxim Integrated Products (NASDAQ:MXIM), Lattice Semiconductor (NASDAQ:LSCC) and NXP Semiconductors (NASDAQ:NXPI) lead the names in the roster. The top 10 holdings comprise about 30% of net assets of $954.6 million.
Over the past 52 weeks, XSD has returned more than 61%. However, YTD, it is up about 5%. In case of short-term weakness in the broader market, especially tech stocks, a decline toward $175 is possible. Yet, such a drop would provide a better entry point for buy-and-hold investors.
On the date of publication, Tezcan Gecgil 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.
Tezcan Gecgil, Ph.D., has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.
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