Some low-priced stocks are cheap for good reason. The company may be in financial trouble, the business model isn't working, or perhaps a new rival is disrupting the whole industry. In other cases, great businesses are paired with low share prices for downright flimsy reasons. The market often focuses on short-term concerns even if the company's long-term prospects look great, and some discounts are based on pure misunderstandings. Telling these awesome investment opportunities apart from the well-deserved price drops will help you build wealth in the long run.
On that note, let me show you a couple of stocks that really should be trading at higher share prices. Here's why Toll Brothers (TOL -0.38%) and Roku (ROKU 1.75%) look like fantastic investments today.
As a leading home builder across more than 50 local markets in 24 states, Toll Brothers is poised to take advantage of the rising demand for new homes. The COVID-19 crisis crushed that market at first but the thirst for new dwellings has returned with a vengeance. The coronavirus-driven remote work policies threw more fuel on the fire. Many Americans are suddenly free to live far away from work, separating the two locations in a brand new way. Hence, lots of people are moving out of high-priced industry centers and into where they always wanted to live, often in the pleasant climates of the South or Southwest.
Toll Brothers had started to expand into desirable target markets before COVID-19 came along, locking down attractive land prices in strong growth areas. The company's portfolio of "affordable luxury" homes is marketed to Millennials and Generation Z on the move, tapping right into the demographic shifts that were ushered in by the coronavirus.
Business is booming. In its most recent earnings report, Toll Brothers saw home sales clock in at a second-quarter record of $1.84 billion. That's up 21% year over year. Earnings nearly doubled over the same period, from $0.59 to $1.01 per share. Importantly, the company is racking up new contracts much faster than it is collecting higher revenues. The number of contracted homes rose 85% year over year and signed contract values jumped 97% higher. These are not just second-quarter records but all-time highs.
You can invest in this well-positioned home builder at extremely affordable share prices. The stock is trading at just 6.7 times free cash flow and 6.9 times forward earnings. Analysts expect Toll Brothers' earnings to rise at an average annual rate of nearly 18% over the next five years. This cheap stock can make you a lot of money in the long run.
Roku, for real
Yes, you heard me right. No, that's not a typo. I really do mean to say that the world leader in media-streaming technologies strikes me as undervalued right now, even though the stock is trading at 284 times free cash flow and 324 times forward earnings.
The company is leaning away from the low-margin hardware sector to focus full-blast on the more profitable licensing of software and services, as well as ad-powered revenue from Roku's own original content efforts. Profit margins are expanding almost as fast as the customer count. Looking ahead, the company is planning to launch a suite of smart home devices.
All of Roku's long-term strategies rest on the idea that streaming media will continue to disrupt linear TV (and, to a lesser extent, the silver-screen cinema sector) for many years to come. Apart from Roku's in-house content, it really doesn't matter who comes out on top in the global streaming wars. When millions of consumers around the world are using their Roku-powered devices to stream the latest blockbuster TV show or movie, this company doesn't care whether the content was created by Netflix, Amazon, or some as-yet-unheard-of media producer. Roku wins either way, as long as the market itself keeps growing.
So Roku's stock may not look cheap in a traditional sense, but you get what you pay for. In my eyes, Roku remains one of the most tempting investing opportunities on the market, and I would like to add a few more shares to my own Roku holdings. The trick is that I must stop writing about it so I can squeeze in a trade under the Fool's stone-cold trading and disclosure policies. You, dear reader, are not bound by these restrictions and should consider making a move right away. You'll thank me in a couple of years.