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3 Cheap Stocks Worth Adding to Your Portfolio

By George Budwell, Tyler Crowe, and Steve Symington – Sep 27, 2016 at 10:06AM

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If you're looking for undervalued stocks, these three names may suit your needs.

In this record-setting bull market, there aren't too many bargains floating around at the moment. Nevertheless, our Foolish contributors think the three names below offer attractive valuations right now. Read on to discover which three stocks they think are deeply undervalued and why. 

Image source: Getty Images.

A few puffs left on the cigar

Tyler Crowe: I can fully accept that the long-term prospect of investing in coal does not look good today. Coal plants across the U.S. are shuttering as they end their economic lives, and the power plants replacing them are choosing other fuel sources, such as natural gas or wind and solar. That being said, coal is still a dominant power source, and there's still quite a bit of demand for the stuff for the next few years. When you also add in an expected decline in supply as bankrupt coal-producers shutter mines, it makes Alliance Resource Partners (ARLP -7.33%) look like a compelling investment at a very cheap price. 

Alliance avoided the fate of so many other coal producers because it didn't binge on acquisitions and debt at the top of the commodity cycle several years ago. It also helps that a majority of the company's mines are in the Illinois Basin, a source that has lower costs than the traditional Appalachian mines and lower transportation costs than mines in the Powder River Basin of Wyoming. This has allowed Alliance to slowly take share from those other producers and continue to generate profits, even with coal prices in the dumps.

Today, shares of Alliance have a dividend yield of more than 8%, which is a testament to Wall Street's aversion to coal stocks. While I don't think coal has much appeal as a multidecade investment anymore, someone looking to reap a high-yield investment for a few years should take a look at Alliance.

This under-the-radar biotech is targeting a $13 billion drug market

George Budwell: Although I freely admit that clinical-stage biotechs are next to impossible to value in an objective, quantitative manner, Trevena (TRVN -5.93%) comes across as woefully undervalued based on the commercial prospects of its late-stage acute pain medicine, Oliceridine. Oliceridine is presently in two phase 3 studies assessing its ability to reduce acute to moderate bouts of pain in the post-surgical setting compared to both placebo and the industry standard, morphine. These pivotal trials are on track to read out in early 2017. And if they're positive, Trevena plans to file for the drug's approval with the FDA by mid-2017. 

Why is this experimental pain medicine exciting from an investing standpoint? While the global acute pain market isn't exactly a fast-growing space, there is a dire unmet medical need for better pain-management options. Morphine, after all, comes with a host of problematic side effects and is known to be highly addictive. So a pain medicine that has similar efficacy levels to morphine and doesn't produce as many unwanted side effects could grab a significant chunk of this market, which is expected to grow to roughly $13 billion by 2023.

Fortunately, Oliceridine's mid-stage results suggest that it could indeed fill this unmet medical need -- and perhaps generate megablockbuster sales in the process. The market, however, apparently isn't a believer in this hyper-growth story just yet, given Trevena's paltry market cap of less than $365 million at the time of writing. 

Learning from the past

Steve Symington: Even with GoPro (GPRO -1.76%) down more than 50% over the past year, it might seem like a stretch to call shares of the action camera maker "cheap," considering it has incurred a net loss in each of its past three quarters.

Still, I think GoPro stock is cheap on the heels of its largest-ever introduction of new products earlier this week, which most notably included its new Karma Drone, two new HERO5 cameras, the new GoPro Plus cloud subscription service, and new editing apps to simplify the process of creating extraordinary content.

The HERO5 line should alleviate weakness in the wearable camera market stemming partly from GoPro's aging HERO4 devices. But I'm particularly excited by GoPro's entry into the fast-growing consumer drone market, which some analysts estimate will grow at a roughly 30% compound annual growth rate through 2024. 

And even though some industry watchers worry Karma is merely a "good enough" drone, its attractive price, which starts at $799, makes it a valid contender for many consumers, given differentiating features like its portable physical profile, built-in removable stabilizer, and general ease of use for novice and experienced drone enthusiasts alike. Speaking with Engadget recently, GoPro founder and CEO Nick Woodman said that after last year's painful launch of the HERO4 Session -- the price of which GoPro had to drop by $100 twice in five months before settling at $199 -- "We did not want to make the same mistake with Karma. And so that's why we took the extra time to make it an incredible experience and price it right so that we don't have any question marks hanging over it."

If GoPro really has learned from its mistakes with the launch of its newest products, I think investors will look back years from now and marvel at how cheap shares are today.

George Budwell has no position in any stocks mentioned. Steve Symington has no position in any stocks mentioned. Tyler Crowe has no position in any stocks mentioned. The Motley Fool owns shares of and recommends GoPro. The Motley Fool recommends Alliance Resource Partners. Try any of our Foolish newsletter services free for 30 days. 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

Alliance Resource Partners, L.P. Stock Quote
Alliance Resource Partners, L.P.
$21.48 (-7.33%) $-1.70
GoPro, Inc. Stock Quote
GoPro, Inc.
$5.03 (-1.76%) $0.09
Trevena, Inc. Stock Quote
Trevena, Inc.
$0.17 (-5.93%) $0.01

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

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