It's like getting a VIP ticket to a concert, but you only paid for a cheap seat way in the back.
Buying stocks of great companies when they're undervalued is smart because you're getting in on a winning investment at a discounted price. Famous investors like Warren Buffett have built their fortunes by following this strategy. You know Buffett's legendary mantra by heart, of course: "Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble."
By buying in at a lower price, you have the potential to see a big return on your investment as the company grows and becomes more successful.
Then again, the other half of Buffett's strategy is arguably even more important: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
If you aren't absolutely certain that the bargain-bin stocks you're buying are of top-shelf quality, you might as well never hit that "buy" button in the first place.
It may be easy to find deeply discounted tickers in this market, but you'll find it much tougher to pair those fire sales with fantastic business plans. So I've done that legwork for you. Read on to see why you should consider grabbing shares of Procter & Gamble (PG 0.32%), Calix (CALX -0.17%), and SoundHound AI (SOUN 2.27%) while they're inexpensive.
Procter & Gamble: The unshakable household name
Consumer goods giant Procter & Gamble needs no introduction. The company behind Pampers diapers, Gillette razors, Tide detergent, and Crest toothpaste has a place in every household.
This stock has a shareholder-friendly habit of delivering strong business results and stock returns even in a challenging economy. Belt-tightening consumers still need their everyday staple goods, and Procter & Gamble is the king of that particular castle.
Still, the company must face the same inflationary cost increases as everyone else, and John Q Public might settle for a smaller pack of Ivory soaps when times are hard. The company has been raising prices to keep up its revenue streams despite lower unit volumes, and some investors are uncomfortable with that tactic.
So Procter & Gamble keeps delivering on its promises and Wall Street's financial expectations. Yet, share prices stand 15% below the all-time highs of early 2022, including an 8% price drop in the last three weeks.
That may not sound like much of a deal, but Procter & Gamble stock rarely retreats too far from the record prices it reaches on a regular basis. That's especially true if you reinvest the generous dividend in more Procter & Gamble stock along the way.
PG Total Return Price data by YCharts
So it's always great to get your hands on this robust long-term winner at anything less than full price. Procter & Gamble is a wealth-building machine in the long run, currently available at a modest discount.
You know what to do.
Calix: Better broadband, greater growth
The Calix opportunity is a very different beast.
This provider of software-based broadband network services doesn't own a plethora of ultra-familiar brand names, but your local broadband provider may very well rely on its systems management tools. The article you're reading right now may very well have passed through some Calix gear on its way to your desktop or the smartphone in your hand.
The company helps broadband companies deliver better-quality connections and customer service at a reasonable price. In the just=reported fourth quarter of 2022, this approach drove sales 39% higher year over year in the face of macroeconomic headwinds such as inflation and component shortages. In fact, CEO Carl Russo sees opportunity in the rapidly changing market.
"This growth continues to be driven by broadband service providers that are providing broadband as a service rather than just the dumb pipe," Russo said in October's third-quarter earnings call. "We expect this trend to continue, and many of our aggressive [broadband service company] customers are using the economic slowdown as an opportunity to gain share by delivering an exceptional subscriber experience to those who have never received one."
I love that approach. Build a better customer experience and the sales will come.
Yet, Calix shares have fallen back by 22% since mid-December 2022. The price drop was based on the market's general distaste for high-octane growth stocks in this inflation-stained economy.
But the high federal interest rates that are designed to control the inflationary trend will hurt only if your company needs to drive its business with borrowed money. Calix's financial platform is squeaky clean with zero long-term debt and positive free cash flows. This company's investors can shrug off the rising fed rates and focus on Calix's strong organic growth instead.
SoundHound AI: Automated business services and a stock on fire sale
Finally, you may have noticed that artificial intelligence (AI) is a hot property nowadays. SoundHounds taps into that trend as it provides AI-powered speech recognition, transcription, and computer-generated speech for an impressive range of well-known clients. The conversational experience you get from a SoundHound-powered voice control system is a valuable selling point.
Now, the company is still tiny and unprofitable. SoundHound shares joined the public stock market as recently as April 2022, though the business has been around since 2005. Furthermore, that market debut was performed through a special purpose acquisition company (SPAC) -- a strategy that has generated massive volatility but not much shareholder value in recent years.
So investors are holding the SPAC-style entrance against SoundHound, driving the stock too low, too fast. Share prices are down by 64% in the last 6 months and 81% from the first market day's closing bell.
I agree that you shouldn't bet the entire farm on SoundHound, or any other single stock, but this company has been around the block a few times and should be able to generate lots of new business with the SPAC-based funding effort. Third-quarter sales rose by 178% year over year because of free-flowing royalty revenues, while the backlog of order bookings leapt 239% higher. SoundHound counts nearly two dozen auto makers among its clients, outlining a massive target market on a global scale.
The company recently landed $25 million in private equity funding to hold down the fort until business operations start to generate cash profits -- currently expected before the end of 2023.
This is a riskier investment than Procter & Gamble or Calix, but also a more exciting one in many ways. It's AI in the service of an improved consumer experience, and SoundHound controls a tiny sliver of a ginormous market today. So a small investment in SoundHound at these rock-bottom prices could serve you well in the long run.
