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3 Top Cheap Stocks to Buy Now

By Andrew Tonner – Updated Jan 28, 2020 at 9:07AM

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Investors should consider these three values at a time when cheap stocks are in short supply.

With the current bull market entering its eighth year and the S&P 500 trading well above its historic average, it's becoming increasingly difficult to find and buy cheap stocks today -- challenging, but not impossible.

In fact, some of businesses' biggest names trade at significant discounts to the market, including companies like Warren Buffett's Berkshire Hathaway (BRK.A -0.03%) (BRK.B -0.30%), Cisco Systems (CSCO -0.05%), and International Business Machines (IBM 0.06%). As such, let's dive into what specifically makes these value stocks particularly intriguing investing opportunities today.

Berkshire Hathaway

A monument to the powers of savvy capital allocation, Warren Buffett's Berkshire Hathaway has produced so impressive a track record of investment excellence that it may never be seen again. Since 1965, Berkshire shares have appreciated at an average annual rate of 20.1% per year, which translates to a 1,972,000% increase in value. 

Today, Berkshire also mirrors its octogenarian CEO in some respects. Like Buffett, Berkshire has grown mature, its days of torrent growth largely in its rear-view mirror. However, the company controls an enviable assortment of high-quality businesses that will continue to throw off substantial amounts of free cash. Though Buffet and his longtime business partner are irreplaceable, The Oracle of Omaha has cultivated a deep bench of managers that should be able to skillfully tend to the company's operational and investing needs. At just 16 times last year's earnings, Berkshire shares remain a highly attractive option amid a generally expensive market.

Cisco Systems

Like Berkshire, Silicon Valley stalwart Cisco Systems also trades hands at just 16 times earnings. Also like Berkshire, Cisco is a mature and hugely profitable, although Cisco's growth concerns are slightly more acute than Berkshire's.

Analysts see Cisco's sales declining 1.8% this year, and then increasing 2.3% in 2018, the net effect of which results in no change over this period. The company's recent second-quarter result certainly didn't offer much in the way of hope, either. Here's a quick snapshot of how some of Cisco's main financial drivers fared during this period.

Image from Cisco's most recent earnings report

Image source: Cisco Systems Investor Relations. 

Revenue trended downward, as analysts expected, and the company's guidance also called for a 2% sales decline in the current quarter. However, the $3.8 billion in operating cash flow indeed speaks to one area where I think Cisco is quite interesting as an investment.

As I detailed in another recent piece, Cisco has jumped headfirst into its newfound role as a dividend stock. The company's shares currently yield 3.2%, well above the S&P 500's 1.9% payout. Moreover, the company raised its dividend 11.5% as part of its recent earnings report, which gives the company an implied forward dividend yield of 3.6%. However, what I like most about Cisco as an income investment is the aggressive pace at which it has grown its payouts, which it has increased at an average annual rate of 27% per year since it initiated dividend payments in 2011. So, while Cisco's forward growth path isn't clear, the company can still drive returns via its aggressive capital return, especially when its dividends are reinvested.

Several traders look at stocks on their computer terminals

Image source: Getty Images.

International Business Machines

IBM shares received a 6% haircut earlier this month, when the company's first-quarter earnings disappointed Wall Street. The IT giant beat profit expectations but saw its $18.2 billion in sales miss estimates by just $190 million. This marks the 20th straight quarter of declining revenue for Big Blue, which probably doesn't make for much of a selling point as far as IBM's bull thesis is concerned. However, the market's strongly negative reaction reiterates the disconnect between the Street's view on IBM and the reality that its long-term business overhaul continues to take shape.

For the quarter, revenue from IBM's strategic imperatives increased 12% year over year. Over the past 12 months, sales from IBM's next-generation businesses -- including cloud computing, cognitive solutions, security, etc. -- have growth to represent 42% of IBM's sales. Furthermore, the company reiterated its full-year earnings per share (EPS) and cash flow guidance, making the market's dour reaction to its earnings seem all the more overblown.

It's simply a given at this point that it will take years for IBM to fully realize its strategic overhaul. The evidence clearly shows that the company will be able to do so, which wasn't necessarily the case as recently as two years ago. The company's shares currently trade hands at 13 times earnings, half that of the wider market. Moreover, the company's impressive 3.2% dividend yield and strong track record of capital return should help compensate shareholders as IBM's revival continues to play out, making IBM an intriguing stock for income-oriented value investors today.

Andrew Tonner has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool recommends Cisco Systems. The Motley Fool has a disclosure policy.

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