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These 3 Value Stocks Are Absurdly Cheap Right Now

By Rekha Khandelwal - Dec 8, 2020 at 7:37AM

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The dirt-cheap valuation of these stocks doesn't make sense.

Despite the effects of the coronavirus pandemic, the stock market has continued its bull run this year. The S&P 500 Index is up 13% year to date as of this writing. But it does not mean that all the stocks are trading at a premium. Several stocks have been left out of the gains for one reason or another. Three such value stocks that are ludicrously cheap right now are International Business Machines ( IBM 1.66% ), Valero Energy ( VLO -2.05% ), and Kroger ( KR -2.73% ). Let's see why the market may be wrong about its assessment of these stocks.

International Business Machines: Set for a turnaround

IBM's super cheap valuation is a rarity in the sector it operates in. The company's lackluster performance -- not over months, but years -- has resulted in the stock's steady fall. IBM stock is nearly 43% off its highs in 2013. The company's declining sales and income have kept investors away from the technology giant.

IBM Revenue (Quarterly) Chart
Data source: YCharts.

Though the company's share buybacks over the last two decades have kept its EPS growth positive, investors weren't impressed.

IBM Shares Outstanding Chart
Data source: YCharts.

The above graph shows the impact of IBM's massive share buybacks on its number of shares outstanding. While the company's performance over the last several years was tepid, it is really its future plans that make it attractive.

With the acquisition of Red Hat, IBM has taken a major step toward establishing itself in the growing hybrid cloud and AI market. According to IBM, the open hybrid cloud platform has a massive market size of $1 trillion. At the same time, IBM is separating its low-growth managed infrastructure services into a separate company. Having led IBM's cloud unit, new CEO Arvind Krishna largely drove the Red Hat acquisition and is now laser-focused on driving the company's transformation

IBM's huge strategic shift sets it up for growth once again. With a P/E of just 14 times, the stock looks a like a bargain, even if earnings grow only modestly. Moreover, with a yield above 5%, the stock is attractive for income-seeking investors, too.

Valero Energy: Sector headwinds marring the refiner

Oil and gas stocks continue to face significant headwinds. Global oversupply, coupled with reduced demand, took a toll on energy companies' performance. Valero Energy was no exception. Squeezed refining margins hit the company's profits as well as its stock price. The stock is down 40% from its January-highs, and offers a generous yield of 6.6%.

A balance with words VALUE and PRICE on the two sides.

Image source: Getty Images.

Gasoline demand has recovered from its April lows, but remains lower compared to pre-pandemic levels. The demand should continue to improve over time, though the pace remains uncertain. In case of sustained lower demand, the sector could see closures of high-cost refineries, until the demand and supply fall in sync.

Valero's lower operating expenses compared to its peers positions it better not only for an eventual recovery, but also for the near term. The refiner is also making strides in the renewable diesel segment in response to the growing market demand. Though small currently, this could be a key revenue generator for Valero in the long run. Value investors will surely find this out-of-favor stock attractive.

Kroger: Growth amid pandemic storms

Kroger is trading cheaply compared to its peers, as well as compared to its own historical valuation. The stock's P/E of 9.4 times is lower than its 10-year average P/E. It is also far lower compared to Costco Wholesale's 41 times or both Walmart's and Target's more than 20 times.

KR PE Ratio Chart
Data source: YCharts.

Kroger's sluggish revenue growth compared to its peers in recent years can be blamed for the stock's lower valuation. Investors' biggest concern is that the company might lose market share to its faster-growing peers as well as online retailers, primarily Amazon.

KR Revenue (Quarterly YoY Growth) Chart
Data source: YCharts.

However, Kroger's performance so far this year doesn't seem to support this claim. For the nine months ended Nov. 7, Kroger's revenue grew 9% and in the latest quarter it grew 6.3% year over year. Comparable sales in the third quarter grew 10.9%. Kroger's sales growth rate exceeded that of Walmart in the latest quarter which, at a minimum, hints that it likely didn't lose market share to its top rival.

Like its peers, the surge in Kroger's sales was attributed to the pandemic, which resulted in people eating out less and buying more groceries for cooking at home. Demand for cleaning supplies surged as well. Kroger is also faring well on the online front, with its digital sales growing 108% in the latest quarter.

Indeed, its sales growth rate may fall from the current high levels once the pandemic-related surge subsides. However, the retailer has done a decent job thus far in the rapidly evolving retail space. In addition to a super-cheap valuation, the stock also offers a more than modest dividend yield of 2.2%.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

International Business Machines Corporation Stock Quote
International Business Machines Corporation
IBM
$118.84 (1.66%) $1.94
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$137.51 (1.51%) $2.04
Target Corporation Stock Quote
Target Corporation
TGT
$247.57 (0.84%) $2.07
The Kroger Co. Stock Quote
The Kroger Co.
KR
$43.43 (-2.73%) $-1.22
Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
COST
$528.93 (0.65%) $3.42
Valero Energy Corporation Stock Quote
Valero Energy Corporation
VLO
$69.71 (-2.05%) $-1.46
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$3,389.79 (-1.38%) $-47.57

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

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