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3 Top Cheap Stocks

By Timothy Green – Sep 17, 2016 at 8:05AM

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If you're on the hunt for value, you've hit the jackpot.

There's one thing in the world of investing that never goes out of style: buying shares of solid companies at a discount. Determining which companies are the best of the best is only half the battle, however. At the wrong price, even the greatest company can make for a lousy investment. A combination of quality and value is the key, but sometimes that's tough to find, especially when the market is trading near all-time highs.

The good news is that there's still solid value out there for those willing to look. Here are three stocks that caught my eye.

An innovative electric-car company

Image source: General Motors.

No, I'm not talking about Tesla. General Motors (GM 0.87%), a company not exactly known for innovation, recently revealed some details on its upcoming Chevy Bolt, an affordable, fully electric compact car that promises many of the things that Tesla is struggling to deliver. The Bolt, which will sell for around $30,000 after incentives when it launches later this year, gets 238 miles per charge, and has so far received rave reviews from those who got the chance to test it out.

For the foreseeable future, gas-powered automobiles will remain General Motors' bread and butter. But the Bolt shows that it doesn't take a hyped-up tech company to innovate in this industry. Manufacturing cars at volume is hard, and General Motors' decades of experience gives the company a major advantage.

General Motors stock currently trades at just 5.4 times the midpoint of the company's earnings guidance for this year, a valuation that reflects investors' fear that peaking auto sales in the U.S. will trigger a price war that decimates GM's earnings. Earnings may well decline going forward, but GM is a far more efficient company today than it was prior to the financial crisis. The company should be able to remain profitable in a wide variety of environments.

The market, I think, is being too pessimistic. Thankfully for opportunistic investors, rampant pessimism leads to low prices and low prices lead to exceptional returns.

A department store taking action

Image source: Mike Mozart via Flickr.

As an investment, department store Macy's (M 0.98%) has been a disaster over the past year, with the stock losing nearly 40% of its value. Years of solid comparable sales growth gave way to significant declines in recent quarters, and the company is now struggling to attract shoppers to its stores. Given this performance, it should be no surprise that Macy's stock is cheap. Based on the midpoint of the company's guidance for adjusted earnings this year, the PE ratio currently sits at just 11.

Macy's isn't sitting on its hands and hoping that things get better. The growth of e-commerce is putting pressure on the entire retail industry, and Macy's recently announced decisive action. The company plans to close roughly 100 of its full-line stores, representing about 15% of its entire store base. The era of simply building new stores in order to grow is over for established retailers.

The Macy's of the future will have fewer stores and be more heavily focused on being an omnichannel retailer. The company is adapting to a changing world, and while its plan doesn't guarantee a return to earnings growth, these steps are likely necessary for Macy's to have the opportunity to thrive in the long run. For investors willing to bet that Macy's can harness its brand and be successful in the age of e-commerce, the stock's price is right.

A leader in RF chips

Image source: Qorvo.

For any company that supplies chips for smartphones, the recent slowing of the smartphone market is bad news. Qorvo (QRVO -1.68%), a leading supplier of RF chips formed by the merger of RF Micro Devices and TriQuint Semiconductor last year, is no exception. The company's stock has been hammered over the past year or so, down about 36% since peaking in mid-2015. Profits are slumping as well, with non-GAAP net income falling by 15% year over year during the latest quarter.

On average, analysts expect Qorvo to produce $5.09 in non-GAAP EPS this year, putting the P/E ratio at just about 11. That's a pessimistic valuation that reflects the uncertainty in the smartphone market, but Qorvo has some long-term growth opportunities that could make the stock a great buy. The Internet of Things could greatly expand demand for RF chips as an increasing number of devices and objects connect to the internet. Smartphones may ultimately account for a small fraction of internet-connected devices in the long run.

Shares of semiconductor stocks can sometimes get frothy. Investors who bet on Qorvo soon after its formation got burned. But with the stock price driven down by uncertainty, Qorvo now looks like a cheap stock worth considering.

Timothy Green owns shares of General Motors. The Motley Fool owns shares of and recommends Tesla Motors. The Motley Fool recommends General Motors. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

General Motors Stock Quote
General Motors
$40.46 (0.87%) $0.35
Macy's Stock Quote
$23.65 (0.98%) $0.23
Qorvo Stock Quote
$95.94 (-1.68%) $-1.64

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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