Back to top

Image: Bigstock

Finding Cheap Stocks Has Never Been Easier

Read MoreHide Full Article

Everybody wants to buy stocks cheap, so they can hold them as they grow and make sizable gains on them. But many of us don’t have a clear idea of what constitutes a cheap stock.

Some of us think that as long as we’re paying a lower dollar amount, we’re buying a stock cheap. Also, we may at times have less to spare, or may think that the market’s just too risky to invest in. At times like this, we may want to put less money to work. But this is just one way of looking at it.   

The other way to look at the situation is in terms of what the stock is likely to yield in the future. So if a company is expected to grow revenue and earnings at 50% each, we should be willing to pay a larger amount for its shares than we would be willing to pay for a company that’s growing at 10%. That’s easy logic.

So there are two pieces to this. On the one side, we have the growth potential and on the other, we have the price action. Whenever there’s a mismatch in this, i.e. whenever the growth potential appears better than the price action, it’s an opportunity to buy. Conversely when the price action gets ahead of the growth potential it’s a risky bet.

Identifying the opportunities is a fairly easy task.

The number one reason for this mismatch is when analysts raise their estimates. Because when estimates increase, growth expectations increase. So there is a favorable mismatch leading to an opportunity. This opportunity is also not lost on investors, which is why share prices tend to move upward whenever estimates move north.

The latest Zacks Earnings Trends Report shows that between Jan 6 2021 and June 16 2021, the estimated aggregate earnings growth for the S&P 500 members (as a representative group) has gone from 41.6% to 60.5%. On a per share basis, that’s an increase of 17.5%.

Meanwhile, the year-to-date appreciation in the S&P 500 is 13.3%.

So there is obviously a mismatch, and therefore, opportunity.

But the best opportunities may not be in the S&P 500. A good way of identifying real winners is to screen for low P/E stocks with good growth potential and recent revision to estimates. Some of these are highlighted below-

Lennar Corporation (LEN - Free Report)

Lennar is involved in the construction and sale of single-family attached and detached homes, and the purchase, development and sale of residential land directly and through unconsolidated entities.

The Zacks Rank #1 (Strong Buy) rated stock has Value, Growth and Momentum Scores of B, C and A, respectively. It belongs to the Building Products - Home Builders industry, which is in the top 4% of Zacks-classified industries. Now as most of us already know, the residential construction market is extremely hot this year, driven by positive demographics and pandemic-related adjustments.

Stocks in the top 50% of Zacks-ranked industries typically outperform those in the bottom 50%, especially if the industries are within the top 10% and especially when the stocks have a buy rank. This is particularly positive for LEN.

This company also has other things going for it. For instance, analysts have raised its 2021 and 2022 estimates by an average 16.1% and 26.6%, respectively in the last four weeks. This works out to earnings growth of 73.4% this year and 3.6% in the next. Encouragingly, this is expected to come off revenue growth of 27.1% this year and 6.5% in the next.

Lennar’s average 4-quarter surprise of 27.2% indicates conservatism on the part of analysts. So recent upward revisions are unlikely to disappoint.

The company also pays a dividend that yields 1.02%.

Given the above, Lennar should have had a high valuation. But its P/E of 8.16X, which is at its lowest point over the past year, is well below the S&P 500’s 21.61X although leading the industry’s 7.86X. So the shares are really attractive at these levels.

Caleres, Inc. (CAL - Free Report)

Caleres designs, sources and markets footwear for men and women, selling through retail stores, ecommerce websites and at wholesale. It owns brands like Nike, Skechers, Bearpaw, Converse, Vans, New Balance, Adidas, Asics, Sperry and Sof Sole, LifeStride, Dr. Scholl's, Fergalicious, Naturalizer and Carlos.

The Zacks Rank #1 stock gets a C for Value, A for Growth and B for Momentum. It belongs to the Shoes and Retail Apparel industry (top 16%).

The pandemic has had a positive effect on the shoes business, as people focused on exercise and fitness in the interests of maintaining good health and also because it was one of the activities that could be done at home. Now, as the world gets ready to move out again, people are displaying an enthusiastic attitude toward apparel, shoes and personal care.

This consistent level of demand has thrown analyst estimates to the wind. While the company topped estimates at triple digit rates in each of the last three quarters, the last quarter’s 2,900% was the icing on the highest.

Naturally, the only analyst providing estimates continues to revise upward. So the last four weeks have taken the fiscal 2022 (ending Jan) estimate up 53.9% and the 2023 estimate up 54.7%. So earnings are now expected to grow 242.9% this year and 16.0% in the next. Expected revenue growth of 27.1% and 1.3% is also encouraging.

Caleres also pays a dividend that yields 1.05%.

The company’s P/E has moved around because of the loss it made in the pandemic-hit Jun 2020 quarter although the current value of 13.01X is lower than the average 30.10X for the industry, the 21.61X for the S&P 500 and the 16X average for our universe.

Costamare Inc. (CMRE - Free Report)

Costamare is a containership owner that has the bulk of its fleets under multi-year time charters with leading liner companies operating regularly-scheduled routes between large commercial ports. It also provides a range of shipping services, such as technical support and maintenance, insurance consulting, financial and accounting services.

The Zacks Rank #1 stock has a Value Score of B, Growth Score of D and Momentum Score of B. It is part of the Transportation – Shipping industry, which is at the top 29% of Zacks-ranked industries.

Costamare’s 2021 and 2022 estimates are up 16.7% and 22.9% in the last 4 weeks, representing EPS growth of 105.9% and 12.4% in the two years. The lone analyst providing estimates has been more or less on target in the recent past (the average 4-quarter surprise is just 1.83%). The revenue growth estimates are 40.1% for 2021 and 11.2% for 2022.

The company’s dividend yields 3.37%.

It currently trades at 5.44X earnings, which is below the industry’s 6.56X and the median value of 6.10X over the past year. The S&P 500 also has a much higher multiple as seen above.

Guess, Inc. (GES - Free Report)

Guess designs, markets, distributes and licenses casual apparel and accessories for men, women and children in accordance with American lifestyle and European fashion sensibilities.

The Zacks Rank #1 stock has Value, Growth and Momentum Scores of C, F and A, respectively. The Textile – Apparel industry of which it’s a part is at the top 10% of Zacks-ranked industries.

The 2022 (ending Jan) and 2023 earnings estimates are up 40.8% and 11.4%, respectively, representing EPS growth of 3,500.0% (partly because of easier comps) and 14.6%.

The company topped estimates at triple-digit rates in three of the last four quarters and at a high double-digit rate in the other quarter. The 4-quarter average is therefore 319.3%. So analyst estimates are still too conservative.

And the best part is that earnings aren’t the only thing growing in leaps and bounds. Revenue growth estimates for the two years are 35.2% and 6.4%, respectively.

The company’s dividend yields 1.76%.

Valuation also looks attractive. While the penny’s loss in the Jun 2020 quarter makes annual comparison a bit difficult, the 10.47X P/E looks cheap with respect to the related industry’s 21.3X, the S&P 500 and our coverage universe.

Global Ship Lease, Inc. (GSL - Free Report)

Global Ship Lease is a rapidly growing containership charter owner. Incorporated in the Marshall Islands, GSL commenced operations in December 2007. Its owned containerships are chartered out under long-term, fixed rate charters to world class container liner companies.

The Zacks Rank #1 stock has Value, Growth and momentum Scores of B, D and B, respectively. It is part of the Transportation – Shipping industry.

Containerships are growing faster than the rest of the market because of loading and unloading efficiencies they offer that therefore reduce the cost of the voyage.

In the last four weeks, GSL’s 2021 and 2022 earnings estimates are up 22.0% and 50.2%, respectively. This has led to earnings growth projections of 71.1% and 70.3% in the two years. The company has topped the Zacks Consensus Estimates in each of the last four quarters at an average rate of 20.2%. What’s more, the revenue growth estimates for both years are up a solid 32.7% and 36.1%.

Year-to-Date Price Performance

Zacks Investment ResearchImage Source: Zacks Investment Research

 

Breakout Biotech Stocks with Triple-Digit Profit Potential

The biotech sector is projected to surge beyond $775 billion by 2024 as scientists develop treatments for thousands of diseases. They’re also finding ways to edit the human genome to literally erase our vulnerability to these diseases.

Zacks has just released Century of Biology: 7 Biotech Stocks to Buy Right Now to help investors profit from 7 stocks poised for outperformance. Our recent biotech recommendations have produced gains of +50%, +83% and +164% in as little as 2 months. The stocks in this report could perform even better.

See these 7 breakthrough stocks now>>
 

Published in