The stock sell-off we have experienced in recent weeks has probably led some to look for bargains on the stock market. As most investors know, a low nominal stock price does not necessarily mean a stock has become a bargain. A lower stock price can change the value proposition of many stock investments.
Moreover, the economic downturn induced by coronavirus has altered the dynamics of our economy. This has become most apparent in the country's changing consumption patterns.
Furthermore, the crisis has changed the U.S.'s relationship with China. Both of these changes will bring new opportunities in some areas, while closing the door in others. This includes many stocks that trade in the single digits. Given this new reality, investors should consider taking a look at Nokia (NYSE:NOK), PBF Energy (NYSE:PBF), and Zynga (NASDAQ:ZNGA).
For those that have watched Nokia stock over the last few years, it feels like it will never live up to its potential. After it lost its cellphone business to the smartphone, it redefined itself as a 5G equipment company.
However, amid slower-than-expected 5G equipment sales, the stock has struggled. Also, the stock fell below the $5 per share level when the company announced a suspension of its dividend last year. It has not recovered since then.
In recent months, investors sold off the stock as it lost its contract with China Mobile. Many saw this as a politically motivated move. Many feel that dropping Nokia, who owns Alcatel-Lucent, was revenge for alienating Huawei. Also, the economic and personal toll of COVID-19 has created a further backlash against China, something that could spell trouble for Huawei.
However, this could become a blessing in disguise for Nokia investors. With Huawei out of the picture in North America and Europe, Nokia could land more 5G contracts. Moreover, with 5G technology needing exponentially more cells than the previous 4G technology, it could bring that much more benefit to Nokia.
Nokia stock also trades at levels that could appeal to new buyers. The stock price of around $3.50 per share as of the time of this writing takes the current price-to-sales (P/S) ratio to about 0.8. With revised guidance, it remains uncertain whether the company can earn a profit this year. Still, analysts predict the rate of earnings growth will about 14.5% per year over the next five years. Given this profit growth rate and the sudden reduction in competition, Nokia stock could finally find itself in a position to return to growth.
Considering that oil prices have fallen below $20 per barrel during the COVID-19 crisis, an energy stock may seem like a strange pick. Admittedly, since people have few places to drive, even a refiner like PBF has struggled in these times. The challenges led to the company suspending its dividend and announcing that it would sell $530 million worth of assets.
However, investors should remember that refining is a different business than exploration and production. It does not depend heavily on prices. Outside of events such as a pandemic-induced shutdown, demand for gasoline tends to remain relatively steady. Amid the 2008 financial crisis, refinery output only fell about 6% between 2006 and 2009 before recovering. Given the shutdowns across the country, the U.S. has experienced unprecedented drops in gasoline demand. Nonetheless, PBF Energy will probably only experience a brief period of struggle, especially compared to its upstream counterparts.
To be sure, going from a profit of $0.90 per share last year to a forecasted loss of $4.62 for the current year may also make investors uneasy. However, the recent decline has left the company with a trailing P/E ratio of just 4.3. The P/S ratio has also fallen to an unusually low 0.06.
Further, seeing this stock under $10 per share is unusual. As recently as mid-February, PBF Energy stock traded at almost $30 per share. As society begins the process of returning to normal, and people resume driving, both refining and company profits should return. As long as 2021 profits can come close to the current forecast, PBF Energy stock likely will not remain below $10 per share for long.
Zynga stock struggled for years after the hype surrounding its IPO died down. This left the stock mired in single-digit status. Ending its special relationship with Facebook in 2012 did little to change this dynamic.
However, the prospects for the company improved once former Electronic Arts Frank Gibeau took over in 2016. He strengthened the so-called "forever franchises" such as Words with Friends and Zynga Poker and began new franchises such as Merge Magic!
Under his leadership, the company turned profitable and, at least in 2018, cash flow positive. This helped to take Zynga stock out of penny stock status.
Like most stocks, Zynga stock fell during the recent sell-off. However, with the lockdown, people have had more time for Zynga games. Now, the stock has already shot past its mid-February peak and trades at a 52-week high of around $7.50 per share. This has taken the forward P/E ratio to around 47.2. The valuation appears a bit elevated, given the projected average earnings growth rate of approximately 13.9% per year over the next five years.
However, profit levels for 2021 of $0.32 per share would indicate a 2021 forward P/E of around 23.2 at current prices. That would eventually take the five-year price-to-earnings-to-growth (PEG) ratio to just under 1.7.
Hence, even if Zynga has moved ahead of itself, earnings growth will probably catch up to the stock price soon. While the picture for Zynga stock may appear uncertain shorter term, Zynga appears poised to break out above $10 per share at some point and eventually establish new all-time highs.