You've almost certainly heard the adage "you get what you pay for." It just means the higher price you typically pay for quality usually ends up paying for itself, whereas bargains commonly end up costing you more. The advice applies within the investing realm as well, although the message to investors is more likely to be the blunt warning "cheap stocks are cheap for a reason."
There are occasional exceptions to the rule, though. Sometimes, stocks are cheap for the wrong -- and temporary -- reasons. And every now and then, the exceptions are so extreme that investors would be wise to capitalize on any such mispricing while they can.
With that as the backdrop, here's a closer look at three of these exceptions that may have a place in investors' long-term portfolios.
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1. Lululemon
It's been a tough year for Lululemon Athletica (LULU +0.60%) shareholders. The stock's down nearly 60% from its January peak for a combination of reasons, including tariffs and increased competition. Mostly, though, consumers' interest in fitness that was rekindled during the COVID-19 pandemic continues to deteriorate (last fiscal year's per-share profit of $14.64 falling to a projected $13.03 this year is the undeniable evidence). The market's simply pricing this headwind into Lululemon shares.
NASDAQ: LULU
Key Data Points
The sellers, however, have overshot their target while overlooking a couple of important details about this company and the fitness apparel industry in general.
First, the current headwind is predictably cyclical. Consumers' interest in fitness reliably comes and goes; it will rebound soon enough. Second, Lululemon Athletica is once again strategizing on how and where it wants to focus. It's aggressively pursuing international growth, for instance, while the fickle North American market completes its downcycle.
The plan is working, too. Lululemon's second-quarter international sales grew 22% year over year versus a mere 1% improvement in its Americas revenue, extending a trend that's been in place since last year. It's enough to put the still-profitable company on pace for top-line growth of about 4% this fiscal year, with a slight improvement in the cards for next year, when earnings are expected to begin growing again.
These may not be the kind of numbers Lululemon regularly reported when it was a younger company in a different environment. With the stock priced at only about 13 times this year's expected profits, however, the market's underestimating the amount of potential this aging but well-loved brand still has.
2. Uber
Uber Technologies' (UBER 0.17%) shares haven't exactly been poor performers of late. But given the top-line growth rate of 18% expected for this year and the 15% improvement anticipated for next year, Uber stock's lethargy since the middle of this year is a bit surprising. Making this stagnation even more surprising is that shares are priced at less than 20 times this year's projected full-year profits. What gives?
NYSE: UBER
Key Data Points
In investors' defense, not only do analysts agree that earnings are likely to shrink in 2026 (after this year's "Only on Uber" overhaul of how the company compensates its drivers followed by the beginning of more significant investments an autonomous vehicles next year), but the analyst community as a whole also isn't in agreement as to the degree of toll these measures will take on the bottom line or for how long. This leaves most people a bit in the dark, unsure what Uber shares are arguably worth.
Now, take a step back and look at the bigger picture. Uber Technologies is plugged into a megatrend that isn't apt to slow down for years, if not decades. That's the sociocultural shift away from driving -- or even owning a car -- and toward ride-hailing or outsourced delivery service. An outlook from Precedence Research suggests the global ride-hailing industry is poised to grow at an average annualized pace of more than 18% through 2034, while the online food-delivery market that Uber Eats serves is apt to grow by more than 10% per year for the same timeframe.
Given Uber's dominance of at least the North American market, the profitability turnaround anticipated for 2026 will likely persist for many more years past that point. This, of course, should lift Uber shares out of their current funk.
3. Verizon
Finally, add Verizon Communications (VZ 0.20%) to your list of absurdly cheap stocks that are too compelling at their present price for buy-and-hold investors to pass up. A word of caution here: Verizon is unlikely ever to dish out a great deal of capital gains. Indeed, the stock would do well to simply outpace inflation.
NYSE: VZ
Key Data Points
Blame the nature and age of the business mostly. The country's wireless industry is almost fully saturated, with Pew Research reporting that 98% of U.S. adults already own a mobile phone. The only growth this company is going to achieve will come from population growth (which averages less than 1% per year, according to the Census Bureau) and price increases, and the crowded market's other wireless service providers, like AT&T and T-Mobile, are, of course, going to keep those price hikes in check.
But that's OK. While Verizon may not be much of a growth investment, it more than makes up for it as an income investment. The stock's forward-looking dividend yield right now stands at an impressive 6.8%. That's based on a dividend, by the way, that's now been raised for 19 years in a row. Just a few years away from becoming dividend royalty, the company's unlikely to let the streak end now.
Of course, it's not like the wireless business itself that generates reliable recurring revenue is ever going to hit a wall. Americans are pretty well addicted to the mini mobile computers they carry with them everywhere they go.
So, exactly how cheap is the stock? It's currently priced at less than 9 times this year's projected profits of $4.70 per share. Even with Verizon's minimal growth potential, that ultra-low valuation doesn't leave room for any real downside risk for the stock's price itself.
