Investing in cheap stocks can seem fail-proof. And to be sure, the underlying logic is sound.
Early investors should seek out equities that are fundamentally undervalued, and others will follow as the strength of said equities becomes more apparent. Then the underlying equity rises in price concurrently with demand and investors benefit via price appreciation.
But the world doesn’t work in such easily identifiable patterns. If it — or at least, the investment world as a microcosm of the larger world — did, then Benjamin Graham would be all the rage on Wall Street. Further, many of the growth stocks that dominate our daily media headlines wouldn’t receive much investment interest, because these stocks are anything but “cheap”.
Which leads me to my next point, or rather a question: how can investors objectively define a subjective term like cheap? After all, one consumer might consider a $40,000 vehicle cheap while another finds it prohibitively expensive.
In investing there are many metrics to separate stocks into neat piles, i.e. cheap or expensive. We use terms like value vs. growth, or undervalued and overvalued. But ultimately some sort of objective measure is applied in determining what defines a cheap stock.
Further, these metrics are usually only comparable within sectors, but not across them. For example, it would be unfair to compare the P/E ratio of a burgeoning tech company to that of an established financial company. And it wouldn’t be very informative for investors.
So, step one in identifying cheap stocks is fairly mechanical. Investors simply need to apply accepted value metrics within a given sector or industry category of stocks. Then we simply need to rank them in an ordered way. The result will be lists of cheap stocks ranked by various metrics.
The second step is subjective. Investors then need to determine which undervalued stocks will be recognized and rewarded by the markets. This step requires investors to make qualitative and subjective determinations. So even in value based investing we can’t escape qualitative judgments. There is no such thing in investing.
Here are 7 cheap stocks to buy for 2021 that deserve recognition:
- Humana (NYSE:HUM)
- Novo Nordisk (NYSE:NVO)
- Aflac (NYSE:AFL)
- Aarons Holdings Co. (NYSE:AAN)
- CVS Health (NYSE:CVS)
- IBM (NYSE:IBM)
- Intel (NASDAQ:INTC)
The stocks ahead were identified by value metrics but subjectively judged to have the right stuff for big gains in 2021. Let’s take a look.
Cheap Stocks To Buy For 2021: Humana (HUM)
Humana is a well known name in the healthcare industry. Based on P/E ratio, the company is among the top quintile of the industry. Value investors can use that metric to categorize HUM stock as cheap. Aside from that, there is a lot to like about the company and its strategy in the broader context of the healthcare plans industry.
The company has seen an increase in revenues throughout 2020. Both Q3 and the entire fiscal year to date have seen an increase in year-over-year revenues. The company has very strong capital allocation abilities as well. Its return on invested capital is 25.61%, which is very good in combination with its weighted average cost of capital of 6.2%.
Importantly, the company has also benefited from the pandemic, which allowed for accelerating certain initiatives. It has been clear for a while that telemedicine is an impending trend in healthcare that will only increase in popularity. The pandemic just accelerated development.
Humana expanded telehealth services and temporarily reimbursed certain patients for such services during the pandemic. This will provide a wealth of data and use cases the company will use to improve and iterate up.
All things considered, this stock is among the cheaper plays in the healthcare plan industry.
Novo Nordisk (NVO)
Novo Nordisk is among those stocks that fared quite well during the pandemic. NVO stock has risen 15.7% year-to-date, and was quick to rebound out of the pandemic trough to boot.
The company is reasonably well-regarded by Wall Street, which considers it overweight. Novo Nordisk isn’t in the very high percentiles when ranked by traditional value metrics such as PE ratio and PS ratio, for example. On both of those measures, the company is in the top third among industry peers.
Investors worry extreme value metrics, for example a P/E ratio higher than 95% of peers, indicate a company will never be well-regarded by markets. Therefore, some investors argue value metrics which are better than average, but not extreme, may be better. Investors who agree with that logic should take a look at Novo Nordisk.
The company produces therapeutic pharmaceuticals across a range of health issues from diabetes and growth disorders to hormone replacement and hemophilia.
Through the first three quarters of 2020 the company has increased both overall sales and operating profit by 7%. Free cash flow also jumped by 27% in the same period.
Aflac (AFL)
Aflac provides provisional insurance products and has operations in the U.S. and Japan. While the company has a strong P/E ratio, it can also be seen as a cheap stock given its dividend.
Despite the pandemic, the company has continued its 38 year tradition of increasing dividends. In fact, it recently announced that it will increase its dividend payable by 17.9% in Q1 2021.
The company is down about 15% from where it started the year. However, revenues through the first three quarters of the year were on par with the same period 2019. Investors who consider this in combination with its low P/E ratio and a corporate commitment to dividends should see a bullish case emerging.
Back in Q1 Aflac noted that Covid-19 could serve as a useful stress test for the company. Thus far, AFL has fared well, and its three-point model for dealing with the uncertainty presented by the pandemic has succeeded. Further, revenues have remained stable in both Japan and the U.S. from 2019 to 2020.
Aaron’s Holdings (AAN)
When consumers consider lease-to-own home furnishings and electronics, Aaron’s is probably top of mind. But when investors consider cheap stocks to purchase, Aaron’s is likely not the first name that springs to mind. But perhaps that should change.
One metric of the company that sticks out as being particularly strong is its EV-to-EBITDA ratio of 1.3. This ranks higher than 96% of industry peers. I already mentioned that value metrics far outside the norm can be tricky. And this one could potentially indicate that Aaron’s may not receive love from the markets any time soon. Yet, given that AAN stock has already retraced pandemic losses and is higher year-to-date, investors shouldn’t worry too much.
Perhaps that’s part of the reason the company has strong analyst support from Wall Street. Of the 10 covering AAN stock, 8 rate it a buy, and 2 as a hold. The stock also carries a modest 4.5 cent dividend. The dividend was increased by half a cent over last quarter, which represents a 12.5% increase.
CVS Health (CVS)
CVS stock carries P/E, P/B, and P/S ratios that are all in the top 20% of industry peers. And other fundamental financial indicators from this company which should excite investors as well. CVS revenues are up this year compared to last. That is true of both Q3 and year-to-date revenues in 2020 over 2019.
A bull thesis for CVS stock might go something like this. The company has strong valuation fundamentals and revenues that exceed those of last year. So given that the stock is still down 8.5% YTD, there’s plenty of room for it to rise much higher.
CVS has been central to the telehealth revolution, along with Humana, also on this list. Here is a good excerpt from the company site explaining the transformation:
“In the first quarter of 2020, virtual visits through MinuteClinic® locations grew about 600% over the same quarter in 2019. Aetna also experienced a dramatic increase in daily telehealth engagements. Going forward, telehealth will be an integrated part of an individual’s overall health care journey, says Pellegrini (a CVS telehealth executive), citing CVS Health’s unique combination of Aetna’s broad network of health care providers and its nearly 10,000 retail pharmacies in communities across the United States.”
IBM (IBM)
IBM is a stock that many pundits have been watching for a long time. The question is fairly simple: is this a relic of a bygone era, or a company poised to rise again? Investors who fall on either side of that argument will surely admit that the company does look like a bargain currently. Both IBM’s P/E ratio and EV-to-EBITDA are in the top third of industry peers.
Analysts consider EV-to-EBITDA to present a more complete picture of a company given it comprises more data. And the P/E ratio is the de facto measure of value in many circles. Regardless, IBM stock shows strongly on both measures, and taken together these indicate that the stock is presently cheap.
IBM is still down year-to-date. Some investors will see this as bad, while others recognize it as an opportunity. The company has been migrating toward a cloud model over previous, less-agile models. Markets still view IBM as a legacy IT player, but that could change. Wall Street remains uncertain, but as its IT cloud is further built out and more widely adopted, the company has a chance to regain its former strength.
Intel (INTC)
Intel is a great cheap stock in the red-hot semiconductor sector., competing with the likes of Nvidia (NASDAQ:NVDA) and AMD (NASDAQ:AMD). Intel has traditionally been the dominant name in the industry but was overtaken by Nvidia riding the graphics chip boom back in July.
One look at P/E ratios for these three companies today shows a stark contrast therebetween. INTC stock carries a 9.3 P/E ratio, better than 92% of the industry. By comparison, NVDA and AMD stock possess P/E ratios of 86.8 and 117.8, respectively, making them more expensive than 80 and 90% of their peers.
Many have counted Intel out after it fell behind Nvidia and then delayed 7 nanometer chip releases. Taiwan Semiconductor Manufacturing (NYSE:TSM) already produces 5 nanometer chips at large scale. That all made for a bad 2020 for INTC stock.
The company is focusing on addressing 30% of the semiconductor industry now rather than maintaining a dominant position in CPUs. As it redirects and realigns resources and assets toward that focus, expect INTC stock to rise.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.