There are stocks that are discounted, and those that are in bargain-basement territory. And then you have stocks that are so ridiculously cheap it boggles the mind. Even though the market is at all-time record highs, some companies have been marked down beyond all reason.
We asked three Motley Fool contributors to highlight a stock they see as too cheap to pass up. Below they discuss why shares of Ford (NYSE:F), First Solar (NASDAQ:FSLR), and American Outdoor Brands (NASDAQ:SWBI) are priced so ridiculously low.
The forgotten automaker
Travis Hoium (Ford): Auto stocks are in the dumps right now, and Ford is no different. The company has been overlooked as investors peer into the future of companies like Tesla with awe and think that Detroit has been left in the dust. But Ford isn't going to give up the auto market to newcomers quietly, and it has both a solid foundation to build on and a great pipeline for growth.
At the foundation, Ford's stock trades at under 12 times earnings and pays a 5.6% dividend yield. You can see below that its operations are putting up $20 billion in cash annually, putting Tesla's cash from operations to shame. This is built on Ford truck sales, which aren't going to be challenged by EVs in the next few years, giving the company time to adapt to the market's changes. Tesla, and others, may eventually try to go after the truck market, but by then Ford's EV platform will be more mature and it will be able to make products very loyal truck customers would adapt to.
What Ford has going for it is a cash flow machine that can fund new developments in EVs and autonomous driving. The company hasn't revealed all of its plans yet, but we know a hybrid F-150 is on the way in the next five years and management thinks it can make a fully autonomous vehicle for ride sharing by 2021. And its acquisition of Argo AI could create a stand-alone company that can develop and license technology for autonomous vehicles and other applications in the future.
The market is pricing Ford as if it's an automaker with essentially no growth in the future, and investors seem to think Tesla is more valuable right now. I don't think that takes into account decades of manufacturing experience, plus the effort the company has put into new technology that will drive the automaker's future. Right now, Ford is ridiculously cheap as a result of the market's pessimism.
Underappreciated value in the solar industry
Tyler Crowe (First Solar): Investing in the solar industry has been one heck of a roller-coaster ride over the past decade. Technology in the solar panel business has changed at an incredibly fast pace over the years. As a result, manufacturers need to spend bundles of cash on research and development as well as retooling their manufacturing facilities to accommodate these new advancements. On top of all the spending on those existing plants, manufacturers also need to expand production to meet growing demand consistently. The one problem with that is that demand growth doesn't follow a linear trajectory, and those swoons in demand can hurt panel pricing and result in substantial losses for short periods of time.
For these reasons, many investors who don't understand this dynamic have been burned at one time or another investing in solar (count me among them). For those who can understand these conditions and see solar panel manufacturers as cyclical stocks, First Solar looks incredibly cheap right now.
The solar industry in general is in the midst of a market swoon, and that situation is compounded for First Solar by its decision to retool facilities to manufacture its Series 6 panel, a product that management sees as a transformative step in solar panels. As a result, Wall Street's short-term thinking has pushed First Solar's stock to an insanely low enterprise-value-to-EBITDA ratio of only 2.9. Part of that low valuation is the fact that more than two-thirds of its market capitalization is in cash alone.
With $2.1 billion in net cash on hand -- that's cash minus debt -- First Solar has an incredible amount of wiggle room to work through this tough market and make the manufacturing adjustments for its next wave of technological innovations. That all seems to suggest that First Solar is incredibly cheap and worth a look today.
Rich Duprey (American Outdoor Brands): Because the market has misunderstood the nature of the firearms industry, American Outdoor Brands is a supremely undervalued stock. Even now that a light bulb seems to have gone on over the heads of many analysts, leading shares of the gunmaker to rise 27% since their low point this past March, the stock still represents a deeply discounted value.
American Outdoor's Smith & Wesson brand was in a no-win situation last year. If Hillary Clinton were to win the presidential election, the probability of highly restrictive gun ownership laws getting enacted would be great. While that would probably provide a short-term boost to sales, longer term it would be a negative for growth. If Donald Trump were to win, then the need to buy a gun now -- today! -- would be greatly diminished.
Well, Trump upset Clinton, and American Outdoor's stock, and that of industry peer Sturm, Ruger, tumbled in the aftermath. And then when FBI gun background check data came out showing that the monthly numbers were lower year over year, it seemed to confirm all that Wall Street had predicted.
What the market missed, though, was that background checks remain well ahead of 2015's numbers, and that had been a record year, too. American Outdoor Brands trades for just nine times earnings, 13 times earnings estimates, and at only a fraction of its expected growth rate. With its stock going for less than eight times the free cash flow it produces, the gunslinger is cheap no matter how you look at it.