In a stock market that seemingly hits new highs daily, finding stocks that offer a good value becomes increasingly difficult. Still, you can't base an investment decision on stock price alone, as oftentimes, a cheap stock is cheap for a reason.
Yet combining a good business and a good valuation means investors can have a winning combination on their hands. Here, we'll pluck out Best Buy (NYSE:BBY), Cirrus Logic (NASDAQ:CRUS), and Dick's Sporting Goods (NYSE:DKS) from the universe of stocks as being representative of stocks that are ridiculously cheap.
While the concept of showrooming -- visiting a local store to see and test a product before buying it online -- almost doomed Best Buy, it turned that liability into a competitive advantage by investing heavily in its own digital efforts. Today, online sales are among its strongest attributes, with comparable online sales surging 22.5% in the first quarter, not much different from the 23.5% gain it registered a year ago.
Coupled with hewing away $1.35 billion in costs over the past few years as part of its Renew Blue Initiative that created a firmer, more stable financial position, no one talks about Best Buy as being the next Circuit City or Radio Shack implosion. Indeed, in areas such as appliances, it is expected to soon surpass Sears Holdings (NASDAQ:SHLDQ) as the third biggest major appliance retailer.
Now, Best Buy's stock has definitely raced ahead as investors bet that the consumer electronics giant's recovery would take hold. Its stock is up more than 80% over the past year and had been even higher until it recently gave back a few points in recent weeks. Even so, Best Buy trades at only 13 times earnings, 15 times next year's estimates, and just a fraction of its long-term earnings growth estimates. Add in a valuation that puts it at less than 13 times the free cash flow it produces, and you have a cheap stock that's ridiculously cheap.
Audio-chip specialist Cirrus Logic has had a similarly strong run-up over the past year, with its shares gaining 63% in the past 12 months but also pulling back from recent highs. While that was partially the result of investor worry about just how much Cirrus still generates from sales of Apple (NASDAQ:AAPL) iPhones, the decline from 85% to 78% indicates it will undoubtedly start getting more money from Samsung and its Galaxy S8.
But with Cirrus anticipating its technology to start trickling down to mid-tier phones as well, the chipmaker could see a profusion of sales in its future. Sure, having the best-selling, top-of-the-line smartphone makers as your prime moneymakers is good, but tastes can sometimes be fickle and one or the other will fall out of favor. A broad swath of the buying public owns these other feature-rich, lower price phones, and tapping into that market can be a huge benefit.
Moreover, not only is Cirrus introducing its chipsets to new clients in smartphones, but it's also looking to apply them to completely different markets, such as smart-home systems and infotainment platforms in cars.
Cirrus Logic also has a very discounted valuation considering the gains its stock has already made, as well as those sure to come. Like Best Buy, it stock trades at a discount across measures such as its market multiple, earnings estimates and their growth, and its free cash flow.
Dick's Sporting Goods
Like the other stocks discussed here, Dick's Sporting Goods stock is also deeply depressed on valuation, but it also hasn't had the same kind of performance as the other two, and that makes it the riskiest of the three. Its shares have fallen 7% in the past year, but they've lost almost 40% of their value from recent highs.
That's because investors remain concerned about the bricks-and-mortar retail space. Amazon.com has, of course, upended much of the landscape, but Wal-Mart and other mass-merchandise retailers have made significant headway in the sporting-goods space, too. Add in bankruptcies from Gander Mountain and Sports Authority, as well as the retail woes at Cabela's and its pending buyout by Bass Pro Shops, and you have a lot of uncertainty circling the leading industry player.
Yet that's the very key to the company's future. While other lesser retailers may be stumbling, Dick's Sporting Goods remains on firm financial footing. Much as Best Buy became the last man standing in consumer electronics following the demise of its rivals, and ultimately ended up better for it, Dick's Sporting Goods could fare equally well, though it may have to go through some pain in the meantime.
Still, analysts are expecting it to grow earnings at 12% annually for the next five years, and it trades at a bargain-basement price of just 11 times its free cash flow. Dick's isn't immune to the vortex swirling around retail, but it's not in danger of being sucked into it, either.