3 dirt-cheap stocks to buy now
With all the talk of shares being overvalued after this year's massive rally, you'd think there'd be almost no bargains out there.
By Tracey Ryniec
With all the talk of stocks being overvalued due to the massive rally this year, you'd think there'd be almost no dirt-cheap stocks. You know what I'm talking about. I mean really cheap. Stocks with single digit price-to-earnings ratios and price-to-book ratios that scream value.
But what if I told you that there are more dirt-cheap stocks out there than you realize. And as an added bonus, these dirt-cheap stocks also have a Zacks rank of #1 ("strong buy") or #2 ("buy"), which means they have rising earnings estimates.
Too good to be true?
Nope. You just have to know where to look.
Dirt-cheap stocks are not what you think
To find the dirt-cheap stocks in this market you have to get over your obsession with tech stocks, social media stocks and the well-known, expensive retailers.
Our dirt-cheap stocks are found outside of the mainstream. They're not the most followed on Stocktwits and they're not mentioned (usually!) at cocktail parties.
But that's what it takes to be a value investor. Sometimes you have to dig beneath the surface to find the stocks that the market is disregarding.
How to find dirt-cheap stocks
To find dirt-cheap stocks I first looked for a price-to-earnings ratio under 10. The S&P 500 ( $INX -0.48% ) is trading at 15.5 times its price-to-earnings ratio. So a price-to-earnings ratio under 10 would be cheap by comparison.
I also screened for a price-to-book ratio under 3.0. When a company has a price-to-book ratio under 3.0, it is usually considered undervalued.
I then added the important ingredient of a Zacks rank of #1 ("strong buy") or #2 ("buy") to make sure the earnings estimates are rising.
Remember, just because these stocks are dirt cheap fundamentally doesn't mean the shares aren't soaring along with the rest of the stock market. But share price doesn't determine cheapness. Earnings, and what you are willing to pay for them, do.
The 3 dirt-cheap stocks are:
- JP Morgan Chase ( JPM -0.77% )
- Lexmark International ( LXK +1.14% )
- MetLife ( MET -0.82% )
JP Morgan Chase ( JPM -0.77% )
Even though the financials have been one of the hottest sectors of the first half of 2013, there is still value to be found there. JP Morgan Chase is one of the largest full-service banks in the United States. It has already reported earnings and is expected to grow earnings by 14% this year on the back of a strong mortgage business.
Shares are trading near the 52-week high, but there is still a lot of value to be found.
Forward price-to-earnings ratio = 9.5
price-to-book ratio = 1.08
Zacks rank #2 ("buy")
Lexmark International ( LXK +1.14% )
Lexmark makes printers but has expanded into digital content and software. It recently announced it was selling its Inkjet business. In the second quarter, if you exclude Inkjet revenue, revenue rose 4%.
Shares soared to new 52-week highs on its July 23 earnings report. But, despite the hot stock price, it is still cheap.
Forward price-to-earnings ratio = 9.5
price-to-book ratio = 1.8
Zacks rank #2 ("buy")
MetLife ( MET -0.82% )
Everyone knows of MetLife from its Snoopy advertisements. It provides insurance, annuities and employee benefit programs to about 90 million customers worldwide. It is scheduled to report earnings on July 31.
I know I sound like a broken record, but once again, shares are at 52-week highs. Still, the stock is cheap.
Forward price-to-earnings ratio = 9.0
price-to-book ratio = 0.8
Zacks rank #2 ("buy")
Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor of the Turnaround Trader and Value Investor services. You can follow her on Twitter @TraceyRyniec.
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