The COVID-19 pandemic made bargain-bin values out of many great stocks in 2020, and bargains are still easy to find after a dramatic recovery in May and June.
A low share price alone isn't a reliable sign of strong shareholder value but these low prices offer a good entry point for beginning investors who may not be ready to sink $500 or more into a single share of companies like Tesla or Intuitive Surgical. Stocks trading under $20 per share are also appealing because many of them traded much higher than that in the past, setting up opportunities for a rebound in markets like the current one.
Here are three high-quality companies that should bounce back from the brutal spring with a vengeance. Read on to see why you should take a closer look at IT consulting giant Infosys (NYSE:INFY), fast-food chain Del Taco Restaurants (NASDAQ:TACO), and Industrial Internet of Things (IIoT) veteran Digi International (NASDAQ:DGII).
The Mexican food vendor was doing a lot of things right when the COVID-19 calamity turned the market upside down. Del Taco introduced a value menu in January and a delivery partnership with Postmates last September. The chain has featured vegan burritos and vegetarian tacos with Beyond Meat (NASDAQ:BYND) proteins since the spring of 2019, making the company an early adopter in the plant-based proteins space. And the company isn't sitting still. Just this week, Del Taco introduced fresh guacamole as an add-on ingredient to any item or a stand-alone snack.
The company is working through the coronavirus crisis with admirable efficiency. Armed with the menu additions and delivery partnership listed above, Del Taco turned a systemwide 23% comps drop in April into a flat year-over-year comparison in June. Del Taco is only using 62% of its available revolving credit facilities.
Despite these positive recovery trends, Del Taco's shares trade 56% below their yearly highs at $5.91 per share. That's a steal, especially if Del Taco can continue to deliver solid comparable-store sales in the third quarter.
This stock will cost you just $10.79 per share as it trades 43% below 52-week highs. Your average Wall Street analyst believes that Digi's stock should be worth approximately $18 per share, and for good reason.
It turns out that helping other companies automate their industrial work processes and manage the resulting workflows is a sought-after service in times like these.
"Digi's core value proposition of enabling automated remote work has never been more relevant," CEO Ron Konezny said in May's second quarter earnings call. "Whether it'd be in the form of secure work from home, business continuity or resilient cloud and edge compute, machine-to-machine communications, or automated condition monitoring, Digi's importance is increasingly highlighted in these times of limited personal mobility and social distancing."
The company posted 12% year-over-year revenue growth in that quarter along with solid bottom-line profits and $9.4 million of cash from operations. Recurring revenues from subscription-style support services are becoming a larger part of Digi's overall business, accounting for approximately $16 million of sales on an annualized basis. That's up from $13.8 million a year earlier, which works out to a 16% increase.
The COVID-19 crisis is barely a speed bump for Digi, and the company will arguably benefit from the pandemic in the long run. These low share prices will be remembered as a big mistake in a couple of years because Digi's stock should bounce back with gusto over the next few quarters.
As a consulting and outsourcing giant with a global business reach, Infosys is insulated against economic downturns like the one that was triggered by the COVID-19 pandemic. Sure, the company will see some order weakness in the short term as clients in every industry batten down the hatches to ride out the coronavirus storm. In the long run, Infosys gets to make up for that lost business when the same clients start running their business as usual again -- having adjusted business processes and IT systems to fit the new market reality. Infosys can help with that.
In particular, Infosys finds itself helping a lot of clients set up and manage cloud computing tools and remote-work systems at the moment.
"We see increased interest from our clients in cloud virtualization, workforce transformation, and cost reduction programs," said CEO Salil Parekh in a late-April fourth quarter earnings call. "Our discussions with clients indicate they would like to consolidate their work with a strong player like us, with exceptional service delivery, agility to reach 93% remote working, and an extremely strong balance sheet. I think those trends will hold us in good stead in the medium term."
Yet, Infosys trades at just $9.53 per share after dropping 21% below the stock's 52-week highs. Investors who sold their Infosys stock during the COVID-19 meltdown will be kicking themselves over that decision later on. This stock deserves valuation multiples far above the current 19 times trailing earnings and 16 times forward estimates.