Black Friday is a “thing” because people love bargains. The allure of a bargain is hard to resist, on or off Wall Street. When it comes to stocks, what exactly makes a stock “cheap,” and how can investors identify good bargains? My experience taught me that value, like beauty, is subjective and in the eye of the beholder. Let’s explore this concept and look at three stocks that currently appear undervalued.
The Value Investor’s Mindset
Value investing, popularized by Benjamin Graham and Warren Buffett, is about finding stocks trading below their intrinsic value. This approach requires patience, as it can take time for the market to recognize a stock’s true value.
Value Is Subjective
There are many (different) ways to define value on Wall Street. A common mistake is to look at the absolute price per share. A stock trading at $5 isn’t necessarily cheaper than one trading at $500. According to to a source at CheapBargainStocks.com, a website that helps people find undervalued stocks, value investors look at the stock’s value relative to the company’s fundamentals.
Here are four metrics that value help investors gauge whether a stock is cheap:
- Price-to-Earnings (P/E) Ratio: This compares a company’s stock price to its earnings per share. A lower P/E ratio might indicate a cheaper stock, but not always. It’s important to compare this to the broader market, the industry average, and the company’s growth prospects.
- Price-to-Book (P/B) Ratio: This measures a company’s market value relative to its book value. If the P/B ratio is under 1 it can suggest a stock is undervalued, but it’s crucial to understand why the market is discounting the company’s assets.
- Price-to-Sales (P/S) Ratio: This compares a company’s stock price to its revenue. It’s particularly useful for evaluating companies that aren’t yet profitable.
- Dividend Yield: For income-focused investors, a high dividend yield relative to peers might indicate a cheap stock, assuming the dividend is sustainable.
There are more, these are just a few of the metrics people use to determine if a stock is cheap. It’s crucial to remember that a stock isn’t necessarily a good investment just because these metrics suggest it’s cheap. Sometimes, stocks are cheap for good reasons – perhaps the company faces significant challenges or operates in a declining industry. I spoke to a long time value investor and he said, “The key is to find stocks that are cheap relative to their intrinsic value and future prospects.”
3 Potentially Undervalued Stocks
With these principles in mind, let’s look at three stocks that appear cheap and sport a P/E ratio below 10 and are expected to grow in the future.
Tenet Healthcare Corporation: Ticker THC
P/E Ratio 4.5
Company Profile:
Tenet Healthcare Corporation operates as a diversified healthcare services company in the United States. The company operates through two segments: Hospital Operations and Services, and Ambulatory Care. Its general hospitals offer acute care services, operating and recovery rooms, radiology and respiratory therapy services, clinical laboratories, and pharmacies. The company also provides intensive and critical care, and/or coronary care units; cardiovascular, digestive disease, neurosciences, musculoskeletal, and obstetrics services; outpatient services, including physical therapy; tertiary care services, such as cardiothoracic surgery, complex spinal surgery, neonatal intensive care, and neurosurgery services; quaternary care services in heart and kidney transplants; and limb salvaging vascular procedure, acute level 1 trauma, intravascular stroke care, minimally invasive cardiac valve replacement, imaging, surgical robotic, and telemedicine access services. In addition, it offers a range of procedures and services, such as orthopedics, total joint replacement, and spinal and other musculoskeletal procedures; gastroenterology; pain management; otolaryngology; ophthalmology; and urology. It operates hospitals, ambulatory surgery centers, imaging centers, surgical hospitals, off-campus emergency departments, and micro-hospitals. Tenet Healthcare Corporation was founded in 1967 and is headquartered in Dallas, Texas.
General Motors: Ticker GM
P/E Ratio 5.92
Company Profile:
General Motors Company designs, builds, and sells trucks, crossovers, cars, and automobile parts; and provide software-enabled services and subscriptions worldwide. The company operates through GM North America, GM International, Cruise, and GM Financial segments. It markets its vehicles primarily under the Buick, Cadillac, Chevrolet, GMC, Baojun, and Wuling brand names. In addition, the company sells trucks, crossovers, cars, and automobile parts through retail dealers, and distributors and dealers, as well as to fleet customers, including daily rental car companies, commercial fleet customers, leasing companies, and governments. Further, it offers range of after-sale services through dealer network, such as maintenance, light repairs, collision repairs, vehicle accessories, and extended service warranties. Additionally, the company provides automotive financing; and software-enabled services and subscriptions. General Motors Company was founded in 1908 and is headquartered in Detroit, Michigan.
Crocs, Inc: Ticker CROX
P/E Ratio 7.69
Company Profile:
Crocs, Inc., together with its subsidiaries, designs, develops, manufactures, markets, distributes, and sells casual lifestyle footwear and accessories for men, women, and children under Crocs and HEYDUDE Brand in the United States and internationally. The company offers various footwear products, including clogs, sandals, slides, flips, wedges, platforms, socks, boots, charms, flip flops, sneakers, and slippers. It sells its products through wholesalers, retail stores, e-commerce sites, third-party marketplaces, and kiosks/store-in-store locations. Crocs, Inc. was founded in 1999 and is headquartered in Broomfield, Colorado.
The Importance of Due Diligence
It is important to do your own due diligence. No investment advice is given here. Everything is for general and informational purposes only. That said, even though these stocks might appear cheap based on various metrics, it’s crucial for investors to conduct their own research before making any investment decisions. Cheap stocks can be value traps. A value trap is a company that appears to be undervalued but faces fundamental challenges that justify their low prices. When evaluating potentially cheap stocks, consider some of these metrics:
- Competitive Position: Does the company have a sustainable competitive advantage?
- Financial Health: Is the balance sheet strong? Is the company generating consistent cash flow?
- Growth Prospects: What are the company’s opportunities for future growth?
- Management Quality: Is the leadership team capable and aligned with shareholder interests?
- Industry Trends: How is the broader industry performing? Is the company well-positioned for future changes?
Remember, a stock’s cheapness alone doesn’t guarantee future returns. Some growth investors like stocks with high P/E ratios because their stocks are growing so fast that the P/E ratio keeps getting higher. The goal is to something that works for you and to make sure your approach respects your risk tolerance. I like to say there are an infinite number of ways to make money, your job is to find one that works for you.