You’ve heard of Warren Buffett, right? Of course you have! He’s one of the most famous investors that has ever walked the face of the earth.
Do you know how he tackles the stock market?
Buffett and his mentor, Benjamin Graham, follow the principles of value investing. The idea is to buy stocks that are trading below their fair value, otherwise known as buying stocks at a discount. As market participants realize the discount, they begin to flood the stock, which then outperforms the overall market.
Value stocks are abundant in bear markets when prices take a downturn and fear takes control on Wall Street, but you can also find quality value stocks even when the bulls are running.
You own shares of Apple, Amazon, Tesla. Why not Banksy or Andy Warhol? Their works’ value doesn’t rise and fall with the stock market. And they’re a lot cooler than Jeff Bezos.
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Best Value Stocks to Buy This Year
Value stocks are cheap stocks. Not cheap stocks in the sense that the products they offer are cheap, but cheap in the sense that buying them is like presenting a coupon at checkout – you get more bang for your buck.
So, what are the best “cheap stocks” to buy now? Read on below to find out.
1. Amazon.com Inc. (NASDAQ: AMZN)
Best for strong growth opportunities.
- Market Cap: 1.173 trillion.
- Performance: Amazon has given up more than 32% year-to-date (YTD) and more than 37% year-over-year (YoY).
- Valuation Metrics: Price-to-earnings ratio (P/E ratio): About 55; price-to-book value (P/B ratio): About 9.3; price-to-sales ratio (P/S ratio): About 2.6.
- Dividend Yield: 0%.
- Analyst Opinions: 40 analysts rate the stock a Buy, one rates it a Hold, and there are no Sell ratings to speak of. Amazon’s average price target currently sits at $171.84, representing a more than 49% potential upside.
Amazon.com might be the last stock you expected to read about in an article about the best undervalued plays on Wall Street. After all, the e-Commerce giant is most well known as a growth stock, and one that has historically maintained a relatively high valuation at that.
Things have changed.
2022 hasn’t been the best year for Amazon.com or its investors. As inflation strikes and the Federal Reserve jumps into action with higher interest rates and quantitative tightening, investors fear consumer spending will fall. Of course, that’s not good news for Amazon.
As a result, the stock has given up around a third of its value YTD. Following the significant declines, the stock is poised for a strong recovery, one that all analysts who cover the stock point to with their positive ratings.
So, where’s the undervaluation in a stock trading with a P/E ratio of around 55?
The company’s P/B ratio is around 9.3 in an industry where the average is well over 12. Moreover, the average P/S ratio in online retail is around 4 and in software is around 12. Amazon.com’s P/S ratio is just about 2.6. Both of those figures point to a significant undervaluation.
Now may be a better time to buy Amazon.com than ever, even if it wasn’t undervalued. The company is making waves in the high-margin cloud computing industry, which has the potential to push the company’s revenue and earnings through the roof.
Some experts have even said that Amazon.com is so undervalued that when you buy shares, you’re essentially buying its cloud computing business and getting its e-Commerce business for free.
Perhaps that’s why the stock is the third most popular among exchange-traded funds (ETFs) and mutual funds.
2. Bank of America Corp. (NYSE: BAC)
Best for banking on increasing interest rates.
- Market Cap: $265.5 billion.
- Performance: Bank of America shares have fallen about 28% YTD and 13% YoY.
- Valuation Metrics: P/E ratio: About 10.5; P/B ratio: About 1.12; P/S ratio: About 3.
- Dividend Yield: 2.65%.
- Analyst Opinions: 11 analysts rate the stock a Buy, four rate it a Hold, and there are zero sell ratings. The average price target is $42.46, representing a more than 28% potential upside.
Although it may not be the most exciting stock on the market, if there’s ever a case for an undervalued stock, Bank of America is it. The company’s P/E, P/B, and P/S ratios are all significantly lower than the S&P 500 as well as averages in the financial sector.
The company is currently trading on the low end of its 52-week range and has displayed low valuation metrics for about two years. Many investors expect that to change very soon.
Those expectations may come to fruition.
The Federal Reserve is increasing its interest rates in an effort to combat historically high inflation levels. Higher rates may be concerning to consumers, but for banks, like Bank of America, higher interest rates are great news.
Banks make money by charging more to loan money than they do to borrow it. The spread between the cost for consumers to borrow money and the cost for banks to borrow it widens as the Federal Funds Rate increases, leading to increased profitability.
If you get in before the investing public realizes the undervaluation and the likely growth in profitability to come, there’s a strong chance you’ll be in for a big win. Add a meaningful 2.65% dividend yield as icing on the cake and Bank of America becomes a stock that’s hard to ignore.
3. Home Depot Inc. (NYSE: HD)
Best for high chances of a fast recovery.
- Market Cap: $306.5 billion.
- Performance: Home Depot shares are down about 17% YTD and 9% YoY.
- Valuation Metrics: P/E ratio: About 19; P/B ratio: About 1,240; P/S ratio: About 2.1.
- Dividend Yield: 2.56%.
- Analyst Opinions: 17 analysts rate the stock a Buy, six rate it a Hold, and there are no Sell ratings. The average price target is $348.81, representing a 16.85% potential upside over the next year.
Home Depot is a home improvement store, one that has prepared for the shift in the market that’s likely ahead as the Fed works to combat inflation. Rather than focusing its efforts on do-it-yourselfers, Home Depot has been working to bring more professionals in, and those efforts are paying off.
When the company reported first-quarter earnings, it announced that professional customers outpaced do-it-yourselfers, and building material sales growth was in the double digits.
The move seems to be paying off. Even in an inflationary environment, the company is producing meaningful revenue growth and earnings growth. Home Depot came in with $4.09 in earnings per share (EPS) in the first quarter, breaking its own record and beating analyst expectations. Revenue also came in well ahead of analyst expectations at $38.91 billion.
Unfortunately, the positive data, expectations for more of the same in the form of solid guidance, and strong fundamentals seem to have gone unnoticed in the company’s share price. The stock is still down around 17% year-to-date when all data suggests it should be heading up.
The good news is that this means the company’s blues are the result of it being dragged through the rut with the rest of the market. So, when the market begins to recover, chances are Home Depot will be one of the quickest to the top, making it a prize for value investors.
4. Chevron Corporation (NYSE: CVX)
Best for income investors looking for value too.
- Market Cap: $289.5 billion.
- Performance: CVX shares are up more than 23% YTD and 46% YoY.
- Valuation Metrics: P/E ratio: About 13.6; P/B ratio: About 1.9; P/S ratio: About 1.6.
- Dividend Yield: 3.86%.
- Analyst Opinions: 10 analysts rate the stock a Buy, six rate it a Hold, and one rates it a Sell. The average price target is $179.53, representing a potential upside of more than 21%.
If you’re looking for an opportunity to bank on meaningful dividends while taking advantage of an undervaluation, you might just be looking to the oil and gas behemoth that is Chevron. You may be surprised to see the stock that’s grown more than 20% this year alone on a list of undervalued plays, but it’s here for a reason.
Though Chevron is up more than 20% this year, it’s down around 20% from the highs it minted in early June, leaving plenty of room to run. Even with strong performance this year, the stock is trading with minimum P/B and P/S ratios.
CVX is also a compelling dividend stock. The stock currently pays a 3.86% dividend yield, making it a prime choice for income investors.
Although oil prices have been falling as inflation concerns have led to a belief that oil demand destruction is on the way, there’s a strong argument that this trend will reverse soon. Which means there’s a strong argument that CVX stock will climb to a fair value relatively soon.
The conflict between Russia and Ukraine is leading to trade tensions between Russia and the West. Russia has responded to sanctions by stating it will starve Europe of Russian oil, taking more supply off of the table and tilting supply and demand toward price growth.
As Europe finds itself with less available oil thanks to Russia’s actions, and winter takes hold in the Northern Hemisphere over the next few months, demand for oil is likely to climb. Chevron is in a prime position to take advantage of the trend, making it a perfect stock for the watchlist.
5. Advanced Micro Devices Inc. (NASDAQ: AMD)
Best for strong demand regardless of economic conditions.
- Market Cap: $138.1 billion.
- Performance: AMD shares are down more than 43% this year and more than 6% YoY.
- Valuation Metrics: P/E ratio: About 28.5; P/B ratio: About 2.6; P/S ratio: About 5.9.
- Dividend Yield: 0%.
- Analyst Opinions: 18 analysts rate the stock a Buy, eight rate it a Hold, and none rate it a Sell. The average price target is $127.43, representing a more than 49% potential upside over the next year.
AMD is another stock that you may be shocked to find on a list of value investments, but it definitely deserves its place. The stock is down more than 40% this year, leaving plenty of room for recovery. With the stock price declines in mind, the stock is trading with some of the lowest valuation metrics it has seen since its IPO.
Some may argue that tech isn’t exactly where you want to be in an inflationary environment or when economic conditions are a concern, but AMD is an exception to that rule. The company isn’t just a tech company; it’s one of the world’s leading semiconductor manufacturers. That’s an important distinction today.
Semiconductors have been in the midst of serious supply chain issues as more and more products begin to rely on them. You can find demand for semiconductors just about everywhere, from automobile and healthcare equipment manufacturers to cryptocurrency mining machines and gaming computers. Though no one knows where crypto is going next, semiconductors are likely to experience significant demand for some time to come.
To put into perspective how important these products are, look no further than the White House. The Biden Administration drafted the CHIPS Act in an effort to make these important pieces of technology more accessible. If that doesn’t point to strong and growing demand, I don’t know what does.
As a leader in the semiconductor industry, AMD stands to benefit greatly from a continued imbalance between supply and demand in the semiconductor industry. At the same time, recent market blues have struck the company, bringing its stock price down to a clear discount and opening the door to opportunity for savvy investors.
6. General Motors Company (NYSE: GM)
Best for one of the lowest valuations on the market.
- Market Cap: $48.6 billion.
- Performance: GM shares have fallen more than 45% YTD and more than 39% over the last year.
- Valuation Metrics: P/E ratio: About 5.8; P/B ratio: About 0.8; P/S ratio: About 0.4.
- Dividend Yield: 0%.
- Analyst Opinions: 11 analysts rate GM a Buy, two rate it a Hold, and one rates it a Sell. The average price target on the stock is $53.43 representing the potential for more than 60% gains in the year ahead.
If you’re looking for a legacy company with a jaw-droppingly low valuation, look no further than GM. The stock trades with P/E, P/B, and P/S ratios that represent a 50% or larger discount to the valuation metrics of the S&P 500.
Something must be fundamentally wrong with such a low valuation, right? Yes and no.
The company is facing some blues. Pandemic-related supply chain issues, a slowdown in Chinese sales, and higher component prices have all been causes for concern. But the company doesn’t seem concerned in the least.
General Motors hasn’t changed its guidance even as the roadblocks seem to pile up ahead. It expects earnings to come in at between $6.50 and $7.50 per share this year and plans on generating between $7 billion and $9 billion in free cash flow.
The company also hasn’t curbed its aggressive shift toward electric vehicles – a plan it expects to spend $35 billion on in the next three and a half years. Although the market is pricing in blues, I’m not hearing any B.B. King in the background, no matter how far I dig into the company’s fundamentals.
Sure, there are some headwinds to consider, but those headwinds have been more than priced in at this point.
Final Word
Value investing is one of the most effective ways to consistently beat average market returns. The stocks on this list are some of the best stocks in the value category, but they’re far from the only stocks trading at discounted valuations in today’s market.
As is always the case, the stocks on our list are a great place to start your search for quality investments, but they’re not perfect for everyone. It’s important to do your own research and consider how investments will fit into your unique portfolio allocation before making any investment.
Disclaimer: The author currently has no positions in any stock mentioned herein nor any intention to hold any positions within the next 72 hours. The views expressed are those of the author of the article and not necessarily those of other members of the Money Crashers team or Money Crashers as a whole. This article was written by Joshua Rodriguez, who shared his honest opinion of the companies mentioned. However, this article should not be viewed as a solicitation to purchase shares in any security and should only be used for entertainment and informational purposes. Investors should consult a financial advisor or do their own due diligence before making any investment decision.