There are a lot of factors that determine if a stock is "cheap," relative to its peers, or the market as a whole. Take these three stocks for example, all are cheap, but for different reasons. Microsoft (MSFT -1.27%) is coming off a successful fiscal 2015 Q1, and its stock price is up over 23% for the year. Yet Microsoft remains cheap for mid- to long-term investors. Unlike Microsoft, IBM (IBM 0.06%) stock continues to get battered after reporting a disappointing Q3 last week, which has opened the door for disciplined investors. Google (GOOG -1.10%) (GOOGL -1.23%) may seem like an odd choice for a list of cheap stocks, but it's share price is actually down this year, despite growing both its top and bottom lines.
What's Google doing on this list?
Shareholders of the search and digital advertising king aren't used to ho-hum years, but that's what 2014 has been so far. The question is: Why do investors have such a blase attitude toward Google? Hard to imagine that a 20% jump in revenues year over year and a nearly 13% increase in non-GAAP -- excluding one-time items -- earnings per share would elicit little more than a yawn from investors, but that's all Google got for its 2014 Q3 results.
The more concrete questions surrounding Google's business include a decrease in operating income as a percentage of revenues, its on-going battle with declining cost-per-click (CPC) rates, and concerns that its search business won't keep up with the shift to mobile. Less concrete are grumblings that Google is spending too much time on driverless cars and glasses rather than its core businesses. But it's a safe bet Google will successfully make changes where needed, and get back to what it does best: provide shareholder value.
Don't let Google's relatively high price-to-earnings ratio (P/E), compared to Microsoft or IBM's for example, scare you. At just over 18 times future earnings for a fast-moving growth stock, Google can still be had on the cheap.
Microsoft hitting on all cylinders
After years of languishing in no-man's land, Microsoft's share price is just beginning its run out of obscurity, and will likely make up for the prior decade of ho-hum results. Why? That's what should really have Microsoft investors salivating: there's a laundry list of reasons, many of which were demonstrated in its recently released fiscal 2015 Q1 financial results.
Microsoft's slow transition to mobile and cloud computing meant it has spent much of the past couple of years playing catch-up. What we saw last week is Microsoft's gaining ground. Cloud revenues, one of CEO Satya Nadella's two "mobile-first, cloud-first" pillars, again performed spectacularly, up 128% compared to last year. On the mobile front, Microsoft's Pro 3 boosted Surface revenues to $908 million, up from just $400 million in fiscal 2014's Q1. The surprising, at least to some, stabilization of the PC market was the icing on the cake following Microsoft's solid mobile and cloud results.
Though Microsoft's P/E of 18 is about the norm among its peers, based on future earnings its trading at a mere 14.6. With growth coming, even Microsoft's cheap forward P/E may prove too high.
IBM, after the sell-off
Much like Microsoft, IBM is in the midst of change. Gone are the days of hardware, IBM's former bread-and-butter. Going forward, CEO Ginni Rometty and team have mobile, cloud, big data, and business intelligence squarely in their sights. Problem is, IBM has been much slower in executing its transition, and after last week's disappointing 2014 Q3 earnings announcement, investors are running out of patience. But if you believe IBM can execute on its "strategic imperatives," its drop in share price represents an opportunity for disciplined investors: and there are reasons for optimism.
The last three months alone, IBM has shed over 16% of its market value, and Q3 added fuel to what was already a pretty good sized fire. But a look at the results of Rometty's strategic imperatives provides a glimmer of hope. The more than 50% increase in cloud revenues, to an annual run rate over $3 billion, is a significant step in the right direction. Add to that mobile-related revenue doubling in the quarter, security sales up over 20% and improved BI results, and that light at the end of IBM's tunnel may not be a train, after all.
After its recent sell-off, IBM is trading at a dirt cheap multiple of just 9.6 times future earnings. And to make the wait a bit easier for investors, IBM shareholders, like Microsoft's, also have the benefit of a 2.7% dividend yield.
