Even in the most expensive stock market in history, it’s still possible to find bargains.
January 2020 has been one for the record books.
On Jan. 15, the Dow Jones Industrial Average passed 29,000 for the first time, and it remained above that benchmark for more than a week before it slumped back below it on Friday.
And yet, even with the stock market as a whole near record highs, there are plenty of individual stocks that are still trading at bargain-basement valuations. Here are three such stocks, each of which cost less than the market average price-to-earnings ratio of 24.8, paying more than the average 1.9% dividend yield, and growing faster than the average long-term projected growth rate of 9.3%: Alaska Air Group (NYSE:ALK), Ally Financial (NYSE:ALLY), and Wabash National (NYSE:WNC).
Alaska Air Group
The second-highest-rated airline in America according to The Wall Street Journal — and the absolute best airline in the country for transforming frequent flyer miles into free domestic flights and first-class seats — Alaska Air Group is also arguably one of the cheapest value stocks on the market today.
It’s trading at just 13.3 times earnings and with a dividend that yields 2.1%. Now, based on those numbers, for the shares to be considered a fair value, you’d ordinarily expect to find analysts forecasting about 11% annual growth for Alaska Air. But analysts surveyed by S&P Global Market Intelligence predict that the airline will grow its earnings nearly twice as fast as that — better than 20% annually over the next five years.
Strong growth rates and a low price relative to earnings give Alaska Air stock a bargain-basement PEG ratio of just 0.66, and a total return ratio of 0.6 — well below the standard value investing target of a stock trading for less than a “1.0” ratio. This cheapness may be a hangover from investors upset at Alaska Air’s sharp decline in profit margins in 2018. But margins are already on the upswing again today. Given the stock’s very moderate debt for its size, strong earnings, and strong free cash flow, I think this cheapness is a mistake — and an opportunity to buy.
Granted, for Alaska Air stock to be as cheap as it looks, earnings will need to grow as fast as analysts are projecting. The good news here is that so far, it appears to be doing just that. For three quarters running, Alaska Air has announced upward revisions to earnings guidance, with rising revenue and falling costs (especially, fuel costs) contributing to a 48% increase in profit last quarter alone. Strong earnings, a low stock price, and great growth all add up to a very attractive PEG ratio.
Given how well the business has been doing lately, I think Alaska Air’s stock is bound to rise sooner or later. The best time to buy though, of course, is before that happens, and while the stock is still absurdly cheap.
When investors think of bank stocks, names such as Bank of America, Citigroup, or JP Morgan may be the first ones that come to mind. But if you’re looking for bank stocks that are bargains right now, Ally Financial should probably be at the top of your list.
Priced at just 7.4 times earnings, Ally Financial stock is valued about 25% cheaper than the cheapest of its better-known banking brethren (Citigroup — P/E 9.8). Perhaps this is because investors fear the effects of declining consumer confidence on new car sales. (Ally, historically the vehicle financing arm of GM, continues to derive the majority of its revenue and profit from automotive finance operations).
And yet, if there’s a downturn in consumer sentiment, Ally seems to be weathering with trend well. With a 12.4% return on equity, Ally Financial is arguably a better run and more profitable bank than Citi (10%) — and better than Bank of America (10.3%), too. (Maybe it’s not better than JP Morgan, with its 14.1% ROE. Then again, JP Morgan is trading at a much higher P/E ratio than Ally).
Ally stock isn’t just a relative bargain, though. It’s cheap when judged on its own merits. Analysts forecast the bank will produce annualized earnings growth of about 12% over the next five years — the same as it achieved last quarter. As a pure PEG ratio, that works out to just 0.62. Factor in the dividend yield, and Ally’s total return ratio drops to a mere 0.52.
When you consider that 1.0 is the usual standard for a fair total return ratio, I wouldn’t rule out the possibility that this stock could double in price.
Last but not least, we come to Wabash National — which kind of sounds like it should be the name of a bank, but is in fact a manufacturer of semi-truck trailers.
It’s not a sexy business, admittedly, and investors haven’t been too excited about Wabash stock lately; it has lagged the S&P’s performance by more than 40 percentage points over the last 52 weeks. Yet this stock has its attractions.
The company is profitable for one thing, earning about $83 million over the last 12 reported months. It’s growing sales at a modest 5% rate. And even Wabash National’s profits rebounded strongly last quarter, as expanding margins helped to produce a 446% improvement in profit in comparison to Q3 2018.
Granted, Wabash isn’t expected to maintain anything like that wildfire growth rate over the long term, but analysts think a very respectable 15% rate of annualized profit growth over the next five years is not out of the question, with trailer average selling prices on the rise and Wabash working to sqeeze efficiencies out of its supply chain. Combined with a low P/E of just 8.3, that gives the company a PEG ratio of only 0.55. (Factor in the 2.6% dividend yield, and the total return ratio is just 0.47).
Long story short, investors who’ve given Wabash National short shrift this year may be surprised to see just how much this stock could grow in price, now that its profits have begun rising again.
Author: Rich Smith
Source: Fool: 3 Value Stocks That Are Absurdly Cheap Right Now