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3 Stocks That Are Absurdly Cheap Right Now

By Matthew DiLallo – Updated May 7, 2020 at 5:48PM

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These cash flow streams are trading for $0.50 on the dollar.

Crashing crude oil prices have weighed on most energy stocks, including pipeline companies that are relatively immune to fluctuations in volumes and pricing. Because of that, many sell for dirt-cheap prices these days. Three that stand out are Kinder Morgan (KMI 3.33%)Williams Companies (WMB 4.35%), and ONEOK (OKE 5.17%).

A minor bump in the road

Shares of Kinder Morgan have tumbled about 30% this year and currently trade for around $15 apiece. Weighing on the stock is the impact the oil market downturn will have on the company's cash flow. In Kinder Morgan's estimation, the current challenges facing its customers will ding its cash flow by about 10% this year, compared to its initial forecast.

A hand drawing a scale with the word "price" on one side and "value" on the other

Image source: Getty Images.

However, this new outlook has Kinder Morgan on track to produce about $4.6 billion, or $2.02 per share, in cash. That's enough money to cover its dividend -- which now yields more than 7% -- as well as its expansion-related spending. Further, it implies that Kinder Morgan trades at around seven times cash flow. That's an absurdly cheap level historically, as pipeline companies tend to fetch a mid-teens multiple of their cash flow since they typically generate relatively steady earnings in both good times and challenging market conditions.

Still on track for a low-end result

Williams Companies' stock has fallen more than 20% this year and currently sells for less than $19 a piece. Like Kinder Morgan, the main factor weighing on Williams is the impact the downturn will have on its earnings.

Williams, however, is weathering the current market storm relatively well. It recently reported its first-quarter results and updated the market on its full-year outlook. In Williams' view, its earnings and cash flow should still be within its initial guidance range despite all the turbulence in the oil market, albeit at the lower end. That implies Williams should generate at least $3.05 billion, or $2.50 per share, in cash, which is enough to cover its 8.5% yielding dividend by a comfortable 1.56 times. Further, given the current stock price, Williams trades at just 7.5 times cash flow.

While a further deterioration in market conditions could cause it to report even lower results, shares are still incredibly cheap.  

Weathering the storm better than the market feared

ONEOK has been one of the hardest-hit pipeline stocks by the oil market downturn as its shares have plummeted more than 60% and trade at around $29 a piece. Driving the downdraft is the concern that many of ONEOK's customers will need to shut-in wells that are no longer profitable at lower oil prices.

On one hand, those volume issues will have some impact on ONEOK's results. The company downgraded its earnings growth forecast from 25% above last year's level to just a 9% increase. However, using its revised outlook, ONEOK would still produce between $1.785 billion to $2.185 billion ($4.32 to $5.29 per share) in cash flow, which is enough money to cover its nearly 13%-yielding payout by about 1.3 times. Meanwhile, using the midpoint of that updated outlook, ONEOK trades at a mere six times its projected cash flow.

While the company could potentially need to adjust its guidance again if market conditions keep getting worse, the market seems to have more than priced in a worst-case scenario.   

Cheap stocks with monster yields

Investors bailed on pipeline stocks this year, causing their share prices to plummet. Because of that, most trade at dirt-cheap prices. That makes them ideal targets for not only value investors, but also yield-seekers since most pay attractive dividends that they can easily fund even though their cash flow will take a slight hit from the downturn.

Matthew DiLallo owns shares of Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool recommends ONEOK. The Motley Fool has a disclosure policy.

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Stocks Mentioned

The Williams Companies, Inc. Stock Quote
The Williams Companies, Inc.
$30.71 (4.35%) $1.28
Kinder Morgan, Inc. Stock Quote
Kinder Morgan, Inc.
$17.67 (3.33%) $0.57
ONEOK, Inc. Stock Quote
$56.32 (5.17%) $2.77

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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