It's easy to find $20 stocks right now. The COVID-19 crisis took the wind out of Wall Street's sails in 2020, and bargain stocks are plentiful.
You do need to be careful out there, though. Not every low-priced stock is a good investment, and some of them are financial landmines trading at cheap stock prices for good reason.
Here are three high-quality companies that will bounce back from the coronavirus situation with a vengeance. You can't go wrong with immersive cinema veteran IMAX (IMAX -1.09%), data center networking equipment expert Extreme Networks (EXTR 1.80%), and office furniture maker Steelcase (SCS 3.29%).
Larger than life
This is a dark time for movie theater operators. As TV screens keep growing larger and better, fueled by a plethora of high-quality streaming video services, many moviegoers choose to sit out the big-screen experience in favor of their own living rooms. MoviePass shook the industry in 2017, showing the world that a well-designed subscription service with a solid financial model could turn the ticket-selling experience upside down. The revolutionary service didn't last long, lacking that solid financial model I mentioned above, but every major movie theater chain now offers some sort of ticket subscription service. Oh, and then the coronavirus came along, forcing every theater to close down for several weeks.
This perfect storm drove AMC Entertainment (AMC 8.33%) shares 91% lower over the last three years while Cinemark (CNK -1.02%) fell 70% and IMAX took a 66% haircut:
I wouldn't touch Cinemark with a 10-foot pole, and AMC may declare bankruptcy before the coronavirus crisis is over. Why, then, do I see serious value in the equally diminished IMAX stock?
We're really comparing fresh apples to rotten tomatoes here.
AMC is unprofitable and running out of cash reserves. Cinemark leans on meager free cash flows and a somewhat healthier balance sheet, but sales are growing slowly and its earnings are shrinking. Meanwhile, IMAX was strongly profitable in 2019, expanding around the world, and widening its profit margins. Unlike its sector peers, IMAX also holds more cash ($159 million) than debt ($25 million) on its balance sheet.
This company is prepared to tackle a couple of lean years and come back swinging on the other side. IMAX shares are trading at 7.3 times cash flows and 14 times trailing earnings today, an unreasonable discount for a high-quality company. And the company's unique focus on immersive experiences has carved out a defensible niche within the movie industry. This is the only stock I would be willing to own in the movie theater category, and it's a steal at $10.73 per share.
Look out for an extreme rebound
Extreme Networks was doing fine before the coronavirus crisis arrived, posting solid cash flows and growing sales despite the ongoing Chinese-American trade war. Virus fears drove Extreme's share prices 61% lower year to date, and you can buy the stock for just $2.86 per share today.
To put that number into perspective, Extreme is trading at less than 5 times forward earnings estimates and 8.6 times free cash flows.
COVID-19 is limiting the company's financial results in the short term. In a guidance update earlier this week, Extreme lowered its third-quarter revenue target from $260 million to $210 million. Management now sees an adjusted loss of roughly $0.14 per share. The original guidance for this metric pointed to positive earnings in the neighborhood of $0.13 per share.
So the market is tough at the moment, but Extreme Networks is taking action. The company is already running its Asian manufacturing facilities at 90% capacity and 70% in the rest of the world. Management expects to be running at full capacity again by mid-May. In late February, the overall productivity stopped at just 40%.
The company has also tightened up its cost controls, tapped into some unused credit facilities, and refinanced most of its debt at lower interest rates. Fiscal efficiency might not be the most exciting selling point in the world, but Extreme Networks is building a leaner, meaner operating model here that should serve it well once the virus crisis has passed.
Image source: Getty Images.
My case for Steelcase
Businesses are not investing heavily in office furniture at the moment. The coronavirus stay-at-home orders are making office workers around the globe get their work done from home, and many companies are conserving their cash during the health crisis anyhow.
That didn't stop Steelcase from beating analyst expectations and management's guidance in the fourth quarter of 2020, which ended on February 28. And the company's business has not frozen up in the quarantine era.
"Importantly, we saw delays, but not many order cancellations nor longer-term project cancellations," Steelcase CEO Jim Keane said in the fourth-quarter earnings call. "Now we're starting to ship some of those orders we had to delay. And what's interesting, I think, is we continue to quote on new business, and we continue to be awarded new business that will be installed later in the year."
It's important to note that this call took place on March 24, with COVID-19 already raging across America and affecting every part of Steelcase's global business. Keane's assessment of the market situation was not made in the early days when the novel coronavirus was seen as a Chinese problem rather than a global pandemic.
Just like Extreme Networks, Steelcase has implemented a cost-saving program and tapped into previously unused cash reserves. The company is positioned for success during the coronavirus crisis and will have a more efficient business structure going forward. Market makers have largely ignored these strong long-term signs and focused on order delays and general weakness in the near future, driving Steelcase's share price 49% lower in 202. The stock now trades at 9 times trailing earnings, priced at $10.45 per share.
It's a deal, it's a steal, it's a no-brainer buy.
