- Investors should no longer ignore value stocks.
- Steel in the United States (X): This steel producer is trading at 75% of its tangible book value, paying a dividend of 0.8% and trading for 2x its forward earnings.
- Olympic steel (ZEUS): Another steelmaker trading at 96% of tangible book value, 4x forward earnings with a yield of 0.6%.
- LyondellBasell Industries (LYB): This chemical company is trading on a forward P/E ratio of 6x, good growth and a yield of 4.10%.
- Avnet (AVT): This electronics distributor has a forward P/E of 6.8, good earnings growth and a dividend yield of 2.23%.
- Northrim BanCorp (NRIM): This mid-cap Alaskan bank has a P/E of 8.6x, a dividend yield of 3.93% and has consistently increased its dividend over the past 12 years.
- First Financial (THFF): This Midwestern bank is trading just 125% above its tangible book value, 8.5x forward P/E and a dividend yield of 2.49%.
Sometimes the best time to buy downtrodden stocks is when they are falling, even if they are already cheap. And these six value stocks are so cheap relative to their value metrics, like price-to-earnings (P/E) and price-to-book (P/BV), that they’re too low even for most value investors. Traditionally, invest in value involves picking stocks near their lows in terms of price-to-asset ratios or low P/E ratios. So I think investors should buy these cheap stocks now when they are cheap despite the risk that their price could go down further.
Additionally, these stocks all pay dividends, allowing investors to get paid while they wait for their prices to rise.
The cheapest of these stocks is trading at just 2x forward earnings forecasts. The chart on the right shows the ranking of these six stocks by P/E.
Let’s dive in and look at these six valuable stocks:
|X||Steel in the United States||$24.59|
United States Steel (X)
Market capitalization: $6.2 billion
Steel in the United States (NYSE:X) is a manufacturer of too cheap flat rolled and tubular steel. It trades at 75% of tangible book value and just 2x forward earnings, according to Refinitiv’s analyst survey (seen on Yahoo Finance statistics tab).
This is due to excessive market concern over a global slump in economic activity, including steel products. The worst future bad news is already in the stock price.
However, the problem is that the company is not in bad financial shape. For example, its debt ratio is only 43% (still on the Yahoo finance statistics page), and its free cash generation is always positive. In fact, in the last quarter (Q1), US Steel achieved $771 million operating cash flow (CFFO). After deducting $349 million in capital expenditures (capex), it still achieved free cash flow (FCF) of $422 million.
This means that its cash balance is not going to continue to decline and, more importantly, its FCF ratio is now very attractive at 27.2% (i.e. ($422 x 4) / $6.2 billion of dollars). That’s a huge FCF yield. Its dividend yield of 0.82% and the buyback of $122 million of its shares in the first quarter make X stock one of the most advantageous stocks.
Olympic Steel (ZEUS)
Market capitalization: $363.6 million
Olympic steel (NASDAQ:ZEUS) is an Ohio-based steel producer like US Steel. It’s cheap too. It trades for only 4.1 times future earnings and only 96% of its tangible book value. Additionally, the stock pays a slightly higher yield of 0.64%.
However, Olympic Steel has a higher debt ratio of over 73% and also generates negative FCF. This makes its cheap valuation somewhat suspect. For example, if it continues to burn cash like this, it will have to sell assets or borrow more money, or even raise equity.
Because of this, it might now be as good a value stock as United States Steel, but it’s still “statistically cheap” in terms of typical value-based measures.
LyondellBasell Industries (LYB)
Market capitalization: $35.3 billion
LyondellBasell Industries (NYSE:LYB) is a Houston-based global chemical producer. The appeal of this stock is that it trades on a forward price/earnings ratio of 6x, shows good earnings growth and has a dividend yield of 4.10%. For example, earnings per share (EPS) should increase from $16.80 this year to $16.98 next year.
However, the company’s financial situation is not particularly exciting. Its debt ratio is greater than 100%, which means that debt exceeds its equity (i.e. debt exceeds assets by the amount of equity).
Nevertheless, the share’s cash flow generation is strong. Last quarter, it produced $1.5 billion in CFFO and after capital expenditure of $446 million, the company’s FCF was over $1 billion ($1.06 billion). Therefore, its annual FCF of $4.2 billion represents 12% of its market value of $35.3 billion. This is a huge FCF yield which represents and makes it one of the cheapest large cap value stocks.
Market capitalization: $4.5 billion
Electronic distributor Avnet (NASDAQ:AVT) pays a dividend of $1.04 per year, giving the stock a dividend yield of 2.2%. The company has paid an annual dividend for the past eight years. Additionally, at $46.30 per share, the stock is trading on a forward P/E of just over 6.8.
Profits are expected to increase by $2.71 earnings per share (EPS) in 2021 at $6.85 this year and $6.82 next year. This is mainly due to the higher price of chips and other technology-related items, as well as higher logistics-related revenue.
Avnet’s total debt ratio is only 38%, which secures its financial situation. Additionally, the company produced $232 million in FCF last quarter. This shows that he is not burning his cash balance. This is again a very conservative financial trait for the company.
With these stats, Avnet is a cheap stock and one of the best value stocks.
Northrim BanCorp (NRIM)
Market capitalization: $228 million
Northrim BanCorp (NASDAQ:NRIM) is a community bank and mortgage company in Anchorage, Alaska. Value investors like it because it has a P/E of 8.6x, good growth prospects and a dividend yield of 3.93%. In addition, the bank has consistently increased its dividend over the past 12 years and has paid a dividend in each of the past 26 years.
In addition, the company’s latest financial statements show that it has a tangible book value (TBV) of $194.4 million. Compared to its market value of $228 million, this means that its market value is only 17% higher than the TBV. This makes it a very cheap stock.
Additionally, analysts expect earnings to rise from $4.57 this year to $6 next year. Assuming there is no major recession that could challenge this forecast, this gives the company good earnings growth. Moreover, the cheap valuation and dividend yield make NRIM stock one of the best value stocks.
First Financial (THFF)
Market capitalization: $541.5 million
First Financial (NASDAQ:THFFlisten)) is a Midwestern bank, operating in 78 branches in Indiana, Illinois, Kentucky and Tennessee. That’s attractive because the stock is trading just 125% above its tangible book value, 8.5 times the forward P/E and a dividend yield of 2.49%.
For example, its tangible book value as of March 31 was $431 million, compared to a market capitalization of $541.5 million. This means that its stock price is only 25% higher than the tangible value of its net earning assets (after deducting all liabilities).
This Midwestern bank makes money with commercial and residential loans. It has paid a dividend in each of the past 27 years. It has also increased the dividend in each of the past six years. This gives investors confidence that the company should be able to withstand any type of future economic downturn.
Ultimately, much of the predicted bad news is already in the stock price. This makes THFF stock one of the most profitable stocks going forward.
As of the date of publication, Mark Hake did not hold (either directly or indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.