Stocks can be cheap for a number of reasons and not all cheap stocks always offer value. Therefore, investors need to do due diligence to find bargain stocks that could also bring solid returns. Today’s article introduces seven of the best cheap stocks that also offer value.
Over 80 years ago, economist Benjamin Graham, who later inspired Warren Buffett, among others, first put forward the idea of investing in shares that sold at a discount to their intrinsic value.
Markets have had an incredible run-up since the lows hit in mid-March. Thus, it may feel as it there are no bargains to be found in the universe of robust shares. However, our markets are large and diverse enough to offer solid companies that are selling at discounts. Many such companies typically offer stable dividends, too.
Investors should ideally not overpay for a firm’s growth potential. With that information, here are seven of the best cheap stocks for December:
- AT&T (NYSE:T)
- Cisco (NASDAQ:CSCO)
- CVS Health (NYSE:CVS)
- FedEx (NYSE:FDX)
- Fulgent Genetics (NASDAQ:FLGT)
- International Game Technology (NYSE:IGT)
- PPL (NYSE:PPL)
AT&T (T)
52-Week range: $ 26.08 – $39.55
Dividend yield: 7.12%
Our first stock on this list of cheap stocks is Dallas, Texas-based tech group AT&T, which has global operations in telecommunications, media and entertainment. So far in 2020, T shares are down over 25%, pushing the dividend yield to over 7%. A juicy payout is an important reason for the continued interest in the stock.
AT&T reported Q3 earnings in late October. Consolidated revenues of $42.3 billion showed a decline of 5.1% YoY. Five main segments contribute to revenues:
- Mobility (revenue up 1.1% YoY);
- Entertainment Group (revenue down 10.2% YoY);
- Business Wireline (revenue down 2.5% YoY);
- WarnerMedia (revenue down 10% YoY);
- Latin America (revenue down 19.3% YoY).
Quarterly adjusted net income of $2.8 billion means EPS of 76 cents. In the year-ago quarter, comparable metrics had been $3.7 billion and 94 cents. Free cash flow was $8.3 billion.
CEO John Stankey said, “Our strong cash flow in the quarter positions us to continue investing in our growth areas and pay down debt. We now expect 2020 free cash flow of $26 billion or higher with a full-year dividend payout ratio in the high 50s%.”
We believe the shares offer an opportunity for both capital appreciation and passive income.
Cisco (CSCO)
52-Week range: $32.40 – $50.28
Dividend yield: 3.38%
San Jose, California-based Cisco focuses on networking, communications, security, collaboration, and the cloud. The tech giant helps customers transport data, voice and video traffic.
The group reported FY21 Q1 in November. Revenue was $11.9 billion, a 9% decrease of YoY compared to $13.2 billion. Non-GAAP net income was $3.211 billion, representing a diluted non-GAAP EPS of 76 cents. Last year, the respective numbers had been $3.6 billion and 84 cents. Net cash flow provided by operating activities in the quarter was $4.1 billion.
Chuck Robbins, chairman and CEO, was pleased with results. CFO Kelly Kramer commented:
Our Q1 results reflect good execution with strong margins in a challenging environment. We continued to transform our business through more software offerings and subscriptions, driving 10% year over year growth in remaining performance obligations. We delivered strong growth in operating cash flow and returned $2.3 billion to shareholders.
In past quarters, Cisco has, at times, found it difficult to grow its top line and its stock price has reflected the growth challenge. Nonetheless, transformation efforts are well underway as management diversifies into software and cloud support services.
Future quarters are likely to see top-line increases from recurring, high-margin, cloud-related and subscription services.
CVS Health (CVS)
52-Week range: $52.04 – $77.03
Dividend yield: 2.92%
Rhode Island-based is an integrated pharmacy healthcare company. As the parent company of CVS Pharmacy, it is the largest pharmacy services group stateside. Since this spring, it has been offering Covid-19 testing in 4,000 CVS Pharmacy locations.
CVS Health operates through three segments: Pharmacy Services, Retail/LTC and Health Care Benefits. In early November, it released Q3 results. Revenue totaled $67.1 billion, up 3.5% YoY. The increase was driven by growth in the Health Care Benefits and Retail/LTC segments.
Adjusted earnings per share was $1.66. A year ago, it was $1.84, a 21% decrease from $1.17 during the same period of the previous year. Net income also decreased 20.3% to $1.22 billion.
Management increased the full year 2020 adjusted EPS guidance range to $7.35-$7.45 from $7.14-$7.27. Cash flow from operations guidance range was also increased to $12.75 billion-$13.25 billion from $11 billion-$11.5 billion.
As of this writing, forward P/E and P/S ratios are 8.79 and 0.33, respectively. We find CVS shares undervalued and would look to buy the dips in this integrated healthcare powerhouse.
FedEx (FDX)
52-Week range: $88.69 – $293.30
Dividend yield: 0.89%
Memphis, Tennessee-based FedEx offers transportation and logistics services worldwide.
FedEx delivered robust FY21 Q1 results in mid-September. Total non-GAAP revenue for was $19.3 billion and increased 13.5% YoY. Adjusted non-GAAP income was $1.28 billion and increased 60% compared to same period FY20 ($800 million). Non-GAAP diluted EPS came at $4.87.
Management highlighted, “Operating results increased due to volume growth in FedEx International Priority and U.S. domestic residential package services, yield improvement at FedEx Ground and FedEx Freight, and one additional operating weekday. These factors were partially offset by costs to support strong demand and to expand services.”
Put another way, the effect of the pandemic has so far been mixed on the results. Investors also noted various ongoing costs related to the integration of TNT Express, which FedEx acquired in mid-2016. These costs affect the GAAP results reported and will continue to do so for several more quarters.
The company is likely to benefit from sales around the holiday season as well as international shipments. If you believe that increased e-commerce activity will continue to affect parcel carriers like FedEx positively, you should keep the shares on your shopping list of cheap stocks.
Fulgent Genetics (FLGT)
52-Week range: $6.70 – $52.47
Dividend yield: N/A
Founded in 2011, California-based Fulgent Genetics develops flexible and affordable genetic testing, such as cancer, neo-natal, and pre-natal screening. Its tests can also be customized as per customer requirements by combining next generation sequencing (NGS) with its technology platform. In recent weeks, it also started offering FDA-authorized Covid-19 testing solutions to businesses and schools.
Fulgent Genetics released Q3 results in early November. Record revenue of $101.7 million meant an increase of 883% YoY. Non-GAAP income for FY20 Q3 was $49 million and non-GAAP diluted EPS were $2.08 per share.
Paul Kim, CFO, cited, “Our third quarter results represent a meaningful inflection point in our business, with our test volume growing almost 5,000% year over year and revenue growing almost 900% … finally, we recorded deferred revenue of approximately $18 million as of September 30, 2020.”
Investors were pleased with these robust top-line and bottom-line metrics. FLGT stock is up significantly from the lows seen in early spring. However, the business is not yet richly valued and we would look to buy the dips in this genetic screening company. In the coming quarters, Fulgent Genetics could also become a takeover candidate.
International Game Technology (IGT)
52-Week range: $3.59 – $15.56
Dividend yield: 5.96%
The next stock on this list of cheap stocks comes from the other side of the Atlantic. London-headquartered International Game Technology manufactures and sells computerized gaming equipment and software, including slot machines, interactive gaming machines, and lottery technology. The company works with governments and regulators in over 100 countries.
The group announced Q3 results in November. Consolidated revenue was $982 million and decreased 15% YoY. International Game Technology reports revenue in two segments:
- Global Lottery (quarterly revenue up 3% YoY);
- Global Gaming (quarterly revenue down 31% YoY).
Adjusted net income was $54 million and increased 25%. Adjusted net income per diluted share were 26 cents compared to 21 cents in the prior year. The company also delivered $220 million in positive free cash flow in the quarter.
CFO Max Chiara commented: “Robust cash flow generation during the quarter and year-to-date periods have enabled us to improve our liquidity and reduce net debt… [T]he improvement in our profitability should support our continued focus on reducing debt.”
During the quarter, the group signed 2-year contract extension with New York Lottery. The continued re-opening of casinos and betting establishments should provide further tailwinds for the shares. However, a potential pullback toward $11 would improve the margin of safety.
PPL (PPL)
52-Week range: $18.12 – $36.83
Dividend yield: 5.41%
Headquartered in Allentown, Pennsylvania, PPL Corporation is a utility group providing energy services to more than 10 million customers in the U.S. and the U.K. The company generates electricity from power plants in Kentucky.
PPL released Q3 results in early November. Revenues was $1.89 billion, a 2.5% decline from $1.93 billion during Q3 2019. Three segments contribute to revenues, namely U.K. Regulated, Kentucky Regulated and Pennsylvania Regulated segments. Adjusting earnings were $450 million, or 58 cents per share. A year ago, they had been $445 million, or 61 cents per share.
Vincent Sorg, president and CEO said:
While COVID-19 and milder weather through the first half of the year have impacted PPL’s ongoing earnings, we are on track to achieve the low end of our earnings guidance and have narrowed our 2020 guidance range to $2.40 to $2.50 per share from the prior range of $2.40 to $2.60 per share.
Earlier in the year, management announced plans to sell the U.K. business, a large contributor to the operations. Such a sale would enable PPL to pay down long-term debt or buy U.S.-based assets. Therefore, potential investors may want to keep an eye on the developments. Nonetheless, we like the shares for the long-run.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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.