It's been a historically rough start to the year for Wall Street. Through the first six months of 2022, the widely followed S&P 500 produced the worst first-half performance since 1970. What's more, the growth-dependent Nasdaq Composite tumbled, at one point, by more than 30%. Both indexes have been firmly entrenched in a bear market.
Although bear markets can be scary given the unpredictability and velocity associated with downside moves, history clearly shows they're also the ideal time for patient investors to put their capital to work. Over time, every notable decline in the S&P 500 and Nasdaq has been erased by a bull market rally.
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It's an especially good time to hunt for stocks that've found their way to the clearance rack. Stock market plunges have a way of pushing stock valuations into bargain basement territory. What follows are three of the cheapest stocks you can confidently buy right now, even if the stock market plunges.
General Motors
The first extremely cheap stock investors can stomp the accelerator on is automaker General Motors (GM 1.20%). According to Wall Street's consensus estimate for 2023, shares of GM can be purchased for just a little over five times forecast earnings.
Like most auto stocks, General Motors finds itself trying to chug uphill against a mountain of headwinds. The auto industry has been hit with semiconductor chip shortages, part shortages tied to the ongoing global pandemic, and historically high inflation, which is forcing companies to either eat higher costs or pass along hefty price increases to consumers. In many instances, automakers have been forced to slow or halt production on certain vehicle lines during the pandemic -- and this includes GM.
But the important thing to note about each and every one of these headwinds is that they're not long-term issues and they don't adversely affect General Motors' long-term growth strategy.
There's no denying that GM is staking its future on clean-energy vehicles. The company has increased its investments in electric vehicles (EVs), autonomous research, and batteries, to an aggregate of $35 billion through 2025. The expectation, according to CEO Mary Barra, is to have two battery plants up and running by the end of 2023, with the North American market delivering at least 1 million EVs annually by the end of 2025.
What's noteworthy is that GM will be laser-focused on promoting EV trucks. In a case of "bigger is better," trucks generate significantly juicier vehicle margins than sedans. Focusing on these higher margins, and leaning on historically high gas and diesel costs at the pump as an impetus, GM has a strong case to promote EV trucks to consumers and businesses.
I'd also remind investors not to forget about China. While General Motors is a fixture in the U.S. market, it delivered 2.9 million vehicles (mostly combustion engine) with its joint-venture partner in back-to-back years (2020 and 2021) in China. Considering that China is the world's largest auto market, and GM has a sizable presence and significant infrastructure already in place, it could very well become a leading international EV player.
Even though auto stocks are valued at low price-to-earnings ratios, GM isn't getting the respect its growing business deserves at just five times forward-year earnings.
Alliance Resource Partners
A second ultra-cheap stock that investors can confidently buy if the stock market plunges is coal producer Alliance Resource Partners (ARLP 1.51%). I'll give you a moment to gather yourself, because I really did just say "coal producer."
Based on Wall Street's consensus estimate, Alliance Resource Partners is on track to earn $4.50 per share in 2023. This would place it at a forward price-to-earnings multiple of a little over four. That's historically cheap for any stock or industry.
The obvious concern for coal producers is that most countries are emphasizing clean-energy initiatives. Coal doesn't exactly fit in with these clean-energy goals. The demand drop-off for energy commodities during the initial stages of the pandemic didn't help coal stocks, either. Since most coal companies are buried in debt, this demand cliff was difficult for many to deal with.
However, Alliance Resource Partners is a different breed of coal company. Its management team has historically been conservative with regard to expansion opportunities. As a result, Alliance Resource has a reasonably low debt-to-equity ratio of 36% while much of the industry is still trying to dig itself out of a debt-driven hole.
Another reason to appreciate Alliance Resource Partners is its forward-looking operating model. The company regularly locks in price and volume commitments up to three or four years in advance. More than 90% of its estimated production for 2022 is already locked in, with 19.9 million tons committed for 2023, as of the company's first-quarter report.
Were this not enough, Alliance Resource also owns oil and natural gas royalty assets. Very simply, if the price of oil and gas rises, the company should generate higher royalty revenue. A combination of reduced capital investments during the pandemic and Russia's invasion of Ukraine has sent crude and natural gas prices soaring.
Alliance Resource Partners is currently yielding a hearty 7%, and the company anticipates increasing its quarterly payout by at least 10% per quarter for the remainder of the year.
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American Eagle Outfitters
The third and final cheap stock you can buy right now, even if the stock market is plunging, is specialty retailer American Eagle Outfitters (AEO 1.37%). Based on Wall Street's earnings consensus for American Eagle, the company is valued at roughly 7 times next year's forecast earnings.
Like most retail stocks, American Eagle has been put through the wringer. Supply chain disruptions have created inventory issues, while historically high inflation has eaten into retail operating margins at seemingly every step. For most retailers, this has resulted in rising inventory and lower profits.
But as is the theme with the three cheap stocks I'm discussing here, American Eagle Outfitters isn't your typical retailer. To begin with, the company's management team has done a far better job of managing inventory than arguably any other non-department-store retailer. Historically, discounting has been dealt with swiftly, which is what's led to the company selling more full-price merchandise.
Price point and branding are additional reasons American Eagle Outfitters is such a smart buy. Whereas mall-based retailers like Aeropostale cheapen their brands with steep discounts, and Abercrombie & Fitch can price consumers out of a purchase, American Eagle is right in the price point sweet spot. Consumers can have the brands they desire without it costing an arm and a leg.
The pandemic put American Eagle's omnichannel sales platform in the spotlight, too. Compared to pre-pandemic levels (2019), store revenue grew just 1% in the fiscal first quarter (ended April 30, 2022). By comparison, digital revenue skyrocketed 48% over the same time frame. Investing in its direct-to-consumer platform has really paid off.
Lastly, investors will appreciate the rapid growth of intimate apparel brand Aerie, which has delivered a three-year compound annual growth rate of 27%, as of the first quarter of 2022. American Eagle realizes that Aerie is its near-term ticket to outperforming and hasn't been shy about increasing its brick-and-mortar and direct-to-consumer footprint.
With a trusted management team and a 5.9% dividend yield, American Eagle is a borderline small-cap stock ($2.1 billion market cap) that can make patient investors a lot richer.
