Concerns about rising bond yields, higher interest rates, and the market's frothy valuations recently sparked a broad sell-off in tech stocks and a rotation into cheaper value stocks.
But instead of panicking and dumping all their tech stocks, investors should take a breath and spot the cheap plays in this pricey sector. Today, we'll review three oft-overlooked companies that have promising growth potential, trade at low P/E ratios, and can be bought for less than $20 a share.
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1. Infinera
Infinera's (INFN +0.00%) optical products enable carriers to expand the bandwidth of their current networks without laying down additional fiber. It accomplishes this by splitting existing signals across additional wavelengths.
Current-generation fiber networks transfer data at 100G to 200G speeds across long distances and 400G to 600G speeds across shorter distances. Many service providers are currently testing out 800G connections.
Infinera, Ciena (CIEN +0.57%), and Huawei are the three leading players in the 800G market. But blacklists, sanctions, and security concerns are preventing many carriers from purchasing Huawei's products -- which leaves Infinera and Ciena as the top choices outside of China.
Most carriers don't want to put all their eggs in a single basket, so they'll likely split their 800G contracts between Infinera and Ciena. Infinera recently turned in a mixed fourth-quarter report that missed analysts' revenue expectations, but its growth should accelerate in the second half of the year as it starts shipping its 800G ICE6 products.
Infinera's revenue rose 3% in fiscal 2020 with a narrower net loss. But in fiscal 2021, analysts expect its revenue to grow 5% with a return to profitability. Based on those estimates, Infinera trades at 22 times forward earnings and 1.2 times this year's sales -- which are reasonably low valuations for a stock on the cusp of a cyclical turnaround.
2. Ericsson
Ericsson (ERIC +0.26%) is the world's third-largest telecom equipment maker in the world after Huawei and Nokia (NOK +1.11%). All three companies are currently helping carriers expand their new 5G networks, but Ericsson is arguably stronger than its two larger rivals for several reasons.
Image source: Getty Images.
Huawei's 5G equipment business faces the same blacklists and sanctions that are hurting its 800G business. Meanwhile, Nokia's $16.6 billion acquisition of Alcatel-Lucent back in 2016 caused it to focus too much on cutting costs. As a result, it fell behind Huawei and Ericsson in 5G investments and is still grappling with those consequences today.
Nokia also lost several major 5G contracts in China amid the trade war and suspended its dividend to free up more cash for its 5G investments. Nokia's CEO Rajeev Suri also resigned last year.
By comparison, Ericsson retained its contracts in China, continued to pay its dividend, and didn't abruptly switch its CEO in the middle of an unprecedented crisis.
This year, analysts expect Ericsson's revenue and earnings to rise 15% and 16%, respectively, as it sells more 5G products and benefits from Huawei's regulatory challenges and Nokia's execution issues. Those are solid growth rates for a stock that trades at just 14 times forward earnings. Ericsson also pays a decent forward yield of 1.7%.
3. LG Display
LG Display (LPL 2.13%) is one of the world's largest producers of LCD and OLED display panels. The South Korean company's long list of customers includes Apple and Huawei, and its top competitor is Samsung.
LG Display struggled with sluggish sales of smartphones and TVs in 2019. However, its revenue rose 3% in 2020, as stay-at-home trends boosted prices for new panels for PC monitors, mobile devices, and TVs. Its orders from Apple also accelerated as the tech giant ramped up its production of the iPhone 12 -- its first family of 5G devices.
More importantly, LG posted a net profit in the third quarter of 2020, marking its first profitable quarter in seven quarters, and stayed in the black during the fourth quarter. It attributed that bottom-line growth to higher market prices and the full-scale production of OLED screens at its new plant in Guangzhou, China -- which significantly boosted its economies of scale.
Wall Street expects LG Display's revenue to rise 14% and for it to post a full-year profit. Based on those projections, the stock trades at less than 10 times forward earnings.
The bottom line
Investors should never consider stocks to be "cheap" based on their prices alone -- that's what price-to-earnings and price-to-sales ratios are for. But if you're looking for lower-priced stocks that can be more easily purchased in round lots instead of odd lots, these three stocks should easily fit the bill.
