The only thing better than buying stocks of great companies is buying them when their shares are trading at bargain-basement prices. Those times don't come around much, and with the S&P 500 at or near all-time highs, it's hard to find. If you dig into some individual companies, though, you can find some pretty great bargains. Here's a look at three stocks that are trading for dirt-cheap valuations today.
Cheap vs. value
Cheap stocks are all over the place, but that doesn't necessarily mean they're a value for investors. For a cheap stock to be worth buying, the company behind it needs to show that it actually has the ability to generate returns at the same time that the stock price is low. So, rather than waste our time on companies that have little to no profitability, let's whittle down the field by only looking at companies with returns on equity greater than 10%.
With that in mind, here are four companies with extremely cheap stock prices.
An automotive stalwart selling for a song
One company that pops out as extremely cheap right off the bat is Ford Motor Company (NYSE:F). The company currently trades at the low price to earnings ratio of 5.75 times -- this is even coming off second-quarter earnings reports where it knocked the cover off the ball.
The argument could be made that Ford is selling for cheap because it's enjoying some favorable market conditions right now that may not last. Cheap gasoline has translated to customers willing to spend on SUVs and light duty trucks. These types of vehicles carry much larger sticker prices than the average passenger car, and both companies enjoy better margins on the sales of these gas guzzlers. As gas prices rise, there is a very real chance that this boom in SUV and truck sales cold stall out.
Even if this is true, there are other reasons to think Ford is selling for cheap. Today, shares of Ford Motor have a price to tangible book value of 1.6 times compared to the company's 20 year historical valuation of 4.02 times. For capital-intense businesses in cyclical industries like manufacturers, price to tangible book can be a better valuation metric because it values the company on the underlying business that generates earnings rather than a 12-month snapshot of earnings.
With shares trading so well below their historical average, it's possible they're still cheap at what may be a high in the cycle. If you need another incentive, shares of Ford currently have a dividend yield of 4.9%.
Can you undervalue the sun?
The solar energy industry has been growing at a breakneck pace lately, but you wouldn't be able to tell from companies within the industry. Part of the reason few companies have really taken off with the trend is because of the fast development of technology and the pricing pressure companies put on each other. Then there's the added fact that many companies have flown too close to the sun, financially speaking, and have gotten burned when they hit a bump in the road. One company that has risen above the fray in the industry is First Solar (NASDAQ:FSLR).
Even though the company has been able to generate an average return on equity in the double digits for the past three years, the company currently trades for just 6.4 times earnings, which in and of itself sounds incredibly cheap. When you look at price to tangible book, though, things look even more attractive. Today, shares of First Solar trade at a price to tangible book of 0.8 times. What that says is that Wall Street thinks this company is worth less than if it were to sell every asset it has, pay off its obligations, and pay out shareholders.
Even if you have your concerns that First Solar may not have the same rates of growth left in it over the next several years, the company has shown that it can generate decent rates of return. At today's share price, it's hard to find a better bargain.
A more refined bargain
One industry that has taken it on the chin rather hard as of late is oil refiners. The price spread between a barrel of crude oil and what the gasoline & diesel refiners make on it has narrowed this year, and it's weighing on results. Like making cars, refining crude oil is a cyclical industry, and based on the share price Tesoro (NYSE:ANDV) trades for, you could argue pretty easily that this is a low point in the cycle -- and therefore a great time to buy.
Shares of Tesoro trade at 7.3 times earnings today, a little higher than the rest of the bunch, here, but that's also coming off of two quarters of declining refining margins. Still, the company has been able to make up for these declines by expanding its footprint in other business segments, including logistics and retail sales. It's also worth mentioning that Tesoro has been generating cash at high rates that it has used to buy back 14% of its shares outstanding and increase its dividend by more than 300% over the past five years.
Results may be a little ugly for a few quarters, but that's part of the deal when it comes to buying cyclical stocks during the down times. At today's stock price, it looks like it will be worth the wait.