Finding value in today's market can be difficult, as stocks commonly trade for price-to-sales ratios in the double digits and their earnings multiples seem to be increasingly meaningless. But that doesn't mean there aren't cheap value stocks with bright futures out there.
Some of the unloved and absurdly cheap stocks that I see on the market are shipping giant FedEx ( FDX -1.12% ), automaker General Motors ( GM 0.33% ), and electronics retailer Best Buy ( BBY -4.31% ). They may have more going for them than you think.
Making e-commerce work
Shipping specialists like FedEx have been in a strange position as e-commerce has exploded in popularity: They're seeing rising volumes and demand as companies like Amazon grow, but Amazon is also creating a shipping and logistics competitor itself, which keeps margins low. However, some of that pressure seems to be subsiding now that more retailers have moved to online sales and Shopify's network of small retailers has grown rapidly. This disparate group of retailers won't have the ability to create a shipping network like Amazon can, which means they'll rely on a company like FedEx.
Operationally, FedEx is doing better than you might think. You can see below that revenue continues to rise, and despite a blip in late 2019, net income is strong as well.
Why do I think FedEx's stock is cheap? Based on analyst estimates, shares trade for just 14 times expected 2021 earnings at Monday's prices, and with online shopping and small vendors increasing, there's no end in sight to the company's demand growth.
Building the future of transportation
GM isn't the high-flying stock that its flashy rival Tesla is, but it's highly profitable and could have a lot of growth in its future. Based on analyst estimates, shares trade for just 7 times 2021 earnings at Friday's prices, an incredibly low multiple. And you can see below that GM's business has been steadily profitable over the last couple of years.
You can also see above that revenue has recently been in decline. That's typical for a cyclical business like auto sales, and GM has remained profitable in 2020 even as sales declined, a great sign for the business. And there could be some growth catalysts on the horizon.
To go along with its traditional auto business, GM also has a controlling interest in autonomous driving company Cruise. That stake alone could mean GM will disrupt transportation with an autonomous ridesharing platform already doing fully autonomous rides in California and expected to launch soon to customers in the U.S. This is a stock that trades at a discount to the market based on today's earnings and revenue, but its future may be even brighter with Cruise ramping up operations, and that's why I think GM is a cheap stock today.
Brick-and-mortar retail isn't dead
E-commerce giants like Amazon have taken a dent out of legacy retailers like Best Buy, but the latter has adapted and leaned into what it does well. Best Buy can offer services and a physical showroom and pickup location for hundreds of products, which customers still appreciate today. We're also seeing a pivot to digital sales, with a 174% increase in domestic comparable online sales in the third quarter of 2020, which includes both items delivered to customers and picked up at the store. Maybe old retailers can learn some new tricks?
The improvement in Best Buy's business hasn't just been during COVID-19 either. You can see below that Best Buy's revenue has actually been increasing over the past five years and net income is up sharply.
At recent prices, Best Buy's shares trade at just 17 times earnings, with a 0.6 price-to-sales ratio, compared to 92 and 4.6, respectively, for Amazon. So there's value in the company's shares, and with comparable sales up 23% last quarter, we could even argue this is a growth stock today.
I think there's going to be value in brick-and-mortar retailers that can provide digital services when customers need them. Best Buy seems to fit that profile, and that's why results continue to improve. As far as retailers go, this is an absurdly cheap stock.
Values still exist
These stocks may not come with high growth or flashy names, but they're steady operators that trade at decent price-to-sales and earnings multiples. And they have brighter futures than you might think, which is why I think they're absurdly cheap today.