The stock market is historically expensive right now -- even after the broad plunge during October. In fact, the 10-year average price-to-earnings ratio of the S&P 500 has only been higher than it is today twice before: right before the Great Depression in 1929 and in the run-up to the dot-com bubble during the late 1990s.
But here's some good news: There are always stocks on sale. We asked three contributors at The Motley Fool to weigh in with the most absurdly cheap stock on their radar. Here's why they chose Renewable Energy Group (REGI), Allergan (AGN), and General Motors (GM -0.14%).
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This business reached escape velocity
Maxx Chatsko (Renewable Energy Group): Shares of the nation's largest biodiesel producer have gained more than 140% in the last year, but they're still absurdly cheap. How can that be?
In past years, Renewable Energy Group needed the blender's tax credit (BTC), a federal subsidy for biodiesel producers, to achieve profitable operations. The problem is that the BTC has become a political football, which has resulted in the subsidy expiring in 2010, 2014, 2015, 2017, and again in 2018. While it was retroactively reinstated each year (it remains lapsed year to date), the uncertainty has not been welcomed by Wall Street. Thus, shares have always traded at a steep discount to book value, earnings, and several other metrics.
That all changed in 2018. Renewable Energy Group has outgrown its dependence on the BTC, posting profits in each of the last three quarters without any help from federal subsidies. That's earned the respect of Wall Street and handed the business a $1 billion market cap. But despite the 140% surge in share price in the last year, the stock still trades at just 1.3 times book value, a PEG ratio of 0.27 (values less than 1.0 indicate higher growth potential), and an EV-to-EBITDA ratio of just 3.6. The business also exited September with nearly $210 million in cash.
Those metrics are all pretty cheap, but they could get even cheaper if the BTC for 2018 is retroactively reinstated. If that occurs, then Renewable Energy Group estimates it will receive an additional $179 million in profit for biodiesel output from the first nine months of 2018. Similar scenarios have played out in the past (the company recorded a $205 million profit in the first quarter of 2018 when the prior year's subsidy was retroactively reinstated). If it happens again, then this energy stock is trading at around four times future earnings. That's absurdly cheap by any standard.
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This beaten-down biopharma is downright cheap
Todd Campbell (Allergan): Allergan is knee deep in a restructuring that's eliminating debt and positioning it to offset the risk of slowing sales tied to patent expiration on key drugs.
The company's progress so far is encouraging, but investors aren't convinced yet that the Botox maker is out of the woods, and as a result, its shares are arguably trading at bargain-basement levels.
Patent expirations are putting about 12% of the company's sales at risk between now and 2020, but management believes growth by other drugs can offset any decline in sales caused by patent losses, especially if the FDA cooperates with approvals next year. Allergan expects to file Vraylar, an existing schizophrenia drug, for use in major depression soon. Meanwhile, applications for ubrogepant in acute migraine and abicipar in age-related macular degeneration are on deck in 2019.
Importantly, the tens of billions in debt Allergan got saddled with when it combined with Actavis is becoming less burdensome. Because it has sold off assets and used its cash flow to reduce its obligations, its interest expense is falling. Last quarter, current and long-term debt and leases fell to $23.6 billion from $30.1 billion one year ago, and as a result, its interest expense was $220 million in Q3, down from $265 million last year.
Research and selling, general, and administrative expenses have also fallen in the past year, and that cost cutting, plus share buybacks that have reduced its share count, allowed its non-GAAP income per share to grow 2.4% year over year to $4.25 last quarter despite revenue slipping 3% in the period.
Overall, Allergan thinks it can deliver 5% compound annual sales growth through 2022, and I expect its earnings will increase faster than that because of its debt and cost reductions. If I'm right, buying shares when the company's price-to-book ratio, or market cap divided by total assets minus total liabilities, is near all-time lows at just 0.74 could be profitable.
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The secret leader in the future of transportation
Travis Hoium (General Motors): There isn't a lot of love on the stock market for automakers these days. Some investors don't like how capital intensive the business is, others think it's going to be disrupted by upstarts like Tesla, and others don't like the growth and profit profile of the business. But I think General Motors, with its $50.7 billion market cap, is absurdly cheap given the way the company is positioned in the auto market.
GM's core business is traditional auto manufacturing with a heavy focus on trucks and SUVs. But it's the future that I'm most excited about. GM was an early electric vehicle manufacturer and launched the cost-effective Chevy Bolt before the Tesla Model 3 was launched (Model 3 now sells in much higher volume). In autonomous vehicles, GM owns Cruise Automation, a leader in self-driving technology, which just raised $2.25 billion from SoftBank's Vision Fund at an $11.5 billion valuation. The company intends to launch a self-driving ride-sharing service next year and could sell technology to other automakers, among many other strategic options. Strategically, GM is in great shape.
Even if we look at existing operations, GM is expected to earn an adjusted $6.27 per share this year, putting the stock's P/E ratio at just 5.7 times. A low P/E ratio, strong position in EVs, and a self-driving technology business that could be worth tens of billions if it IPOs in the next few years are just what I want to see in an auto stock today.
