Finding high-quality cheap stocks to invest in right now is difficult with most major indices at all-time highs. However, if you look hard enough you can still find high-quality cheap stocks to invest in. This is because in the short run the stock market can misprice the stock price of certain businesses.
With value investing you are looking for companies that are temporary mispriced and trading lower than the intrinsic value of the business. In these cases value investors will buy the stock of the company and wait for the market to realize its mistake and take the stock price higher until it is in line with its true value. Sometimes this happens over weeks or months and sometimes it may take years, depending on the circumstances.
Finding cheap stocks to invest in can lower your investment risk because while a cheap stock can always become cheaper, by buying stocks that are cheap you are lowering your risk.
But let’s make sure we agree on what we mean about a “cheap” stock. Defining cheap does not mean buying a low-priced stock, like a penny stock. It also does not necessarily mean buying a stock that has a low market capitalization.
When we are talking about cheap stocks to invest in right now, we are talking about stocks that are cheap relative to the earnings or cash flow that they produce. The average stock within the S&P 500 index trades for more than 20 times 2021 earnings estimates. We would define a cheap stock as any business that trades for less then the market averages of 20 times earnings. But I would pay particular attention to those business who’s stocks trade for less than 12 times earnings.
But we would never buy a stock just based on its price-earnings multiple. Here at Wealthplicity we have developed a multi-step filter to screen for only the highest quality stocks on the market today that are trading at a value that makes them attractive for investment. Specifically, we will only recommend stocks that meet all the following criteria:
Although you may do well investing in businesses that only meet some of the above criteria, we suggest limiting your investment dollars to only the businesses that meet ALL of these criteria.
Viacom (ticker VIAC)
Viacom is a major media and entertainment company with a sizable market capitalization of more than $26 billion. Some of the assets they own include Paramount Pictures and the CBS television network.
The media and entertainment industry is doing quite nicely and Viacom’s brands are successful in that niche.
They generate massive profits and cash flow annually. And what makes Viacom cheap is that it trades for just about 9 times 2021 earnings, which is less than half the market multiple of more than 20 times earnings.
Although Viacom has a steady business and is a massive profit generator, its stock price has been quite volatile in 2021. Starting the year at around $50 a share, it got as high as $100 a share, before collapsing and stabilizing at its current $40 a share stock price. We don’t expect the stock price to go much lower then where it is today and could easily get up in the $60 to $70 range by the end of 2021.
And finally, the fact that VIAC pays a 2.4% dividend means you get paid while you wait for the stock price to get to a more reasonable higher level, given the consistent profits that are generated by this blue chip business.
Walgreens (ticker WBA)
Walgreens is a is a major international pharmacy with a sizable market capitalization of more than $40 billion. There are more than 13,000 retail store locations with approximately 60% of them in the United States, 20% in the United Kingdom and 20% in the rest of the world.
The pharmacy industry is doing quite well as more and more prescriptions are filled. And when customers get their prescriptions filled at Walgreen they also spend money in the front of the store, leading to a great and successful business model.
Walgreens also generates massive profits and cash flow annually. Yet despite that consistent profit and cash flow generation, Walgreens is cheap in that (similar to Viacom above) it trades for just about 9 times 2021 earnings.
The fact that Walgreens pays a 4.1% dividend means you get paid very handsomely on a quarterly basis from a high-quality business that is consistently generating massive profits.
The Walgreens stock price has fluctuated between $33 and $56 a share in the last twelve months putting its current $46 stock price right in the middle of that range. This is a good time to pick up a few shares of a high-quality name trading at a dirt-cheap price to earnings multiple.
Lennar (ticker LEN)
Lennar is one of the largest publicly traded home builders in the United States with a sizable market capitalization of more than $30 billion. They build and sell new homes for all types of home buyers including first time home buyers, families moving up to a more expensive home, as well as luxury home buyers.
The real estate business is booming right now with home supply not being able to keep up with demand. With real estate being such a cyclical business, we would generally not recommend home builders this late in the current economic boom. But we believe you will do well with an investment in Lennar because there is such a post-pandemic boom for real estate of any kind, that there are many more years of high demand for new homes.
Lennar also generates massive profits and cash flow annually. Yet despite that consistent profit and cash flow generation, Lennar is cheap in that (similar to Viacom and Walgreens above) it trades for just about 8.5 times 2021 earnings.
Lennar pays a modest dividend of approximately 1%, such that you get a little bit of current income while you wait for the stock price to reflect the power of the strong business they operate in.
What Do These Three Stocks Have in Common
Now that we’ve introduced you to our mini sampler of three cheap stocks to invest in right now, let’s review what they have in common. Remember we are talking about Viacom, Walgreens and Lennar.
All of them are substantial businesses with a market capitalization in the tens of billions of dollars. No penny stocks here as they are too risky for us.
All three are part of successful industries that should continue growing in the future. We doubt entertainment, pharmacies or home building is going to go away any time in the future.
The three business in our cheap stocks to invest in mini sampler all are generating massive cash flow on an annual basis. No risky turnaround situations here with massive debt overhanging the business. Nope, just strong businesses that for different reasons are trading at a low price to earnings multiple making them cheap.
Finally, all three of our highlighted cheap stocks to invest in right now have strong, experienced management teams that will guide them through whatever is thrown at them in the years ahead.
Despite the market trading at all time highs right now, there are always cheap stocks to invest in.
Sometimes a stock is cheap on a price to earnings ratio for a good reason, like a new competitor coming into the market that has the potential to disrupt a business. But sometimes a stock is cheap for a less serious short-term blip like missing a quarterly earnings report.
Value investors looking for cheap stocks to buy right now will be able to evaluate the business that have the potential to succeed. These situations will result in explosive profits as the stock price rises back to the higher intrinsic value of the business over time.
Use the three examples above to help jumpstart your search for high quality cheap stocks to invest in right now.