It’s not easy to find dirt cheap stocks in today’s market.
Valuations got stretched to near-record levels in 2020. Profits tumbled even as stocks shot to record highs, thanks to a surge of interest from retail investors, euphoria around tech stocks, loose monetary policy from the Federal Reserve, and hopes for a strong economic recovery once the pandemic ends. The price-to-earnings ratio for the S&P 500 now stands at 37.6, compared to just above 20 at the start of 2020.
Despite those lofty price tags, there are still some bargains to be found in today’s market. Let’s take a look at why AutoZone (NYSE: AZO), General Motors (NYSE: GM), and Alibaba Group Holdings (NYSE: BABA) are all cheap stocks that could soar.
Auto parts retailers like AutoZone are typically big winners coming out of recessions, as cash-strapped Americans avoid buying new cars, and instead spend on repairs to keep their old cars running. That trend led to a surge in comparable-store sales at AutoZone during the two previous recessions, and the retailer is likely to see a similar tailwind this time around.
In fact, AutoZone is already delivering strong growth. Used car sales have skyrocketed during the crisis, and Americans, with activities and hobbies limited by the pandemic, have chosen to spend time and money on their cars.
Comps at AutoZone jumped 12.3% in its most recent quarter, which ended Nov. 21, and earnings per share rose 30% to $18.61.
With another stimulus package just passed, AutoZone is likely to see another wave of spending in its stores over the coming months. You might think a stock experiencing such a sales boom and a tailwind after the reopening would be expensive, but AutoZone is trading at a P/E of just 15. The company also just increased its stock repurchase authorization by $1.5 billion, indicating it plans to take advantage of the stock’s discount.
There’s no question that electric vehicle (EV) stocks were among the biggest winners of 2020. Shares of manufacturers like Tesla and NIO have skyrocketed, finishing the year up 750% and 1,100%, respectively, while others like Workhorse Group have been big winners as well.
In fact, the Chinese EV maker NIO now has a bigger market cap than GM, one of the biggest auto manufacturers in the world, and Tesla’s market value is now 10 times the size of GM’s.
Whether or not there’s a bubble in EVs, one thing is clear: It won’t be a winner-take-all market. Tesla, the largest EV company, is expected to produce about 500,000 cars in 2020. By contrast, about 75 million vehicles are sold worldwide, meaning there’s plenty of room for a legacy manufacturer like GM to take market share as demand shifts to EVs — and the company has big plans to do so. GM aims to invest $27 billion in EVs by 2025 and to produce 30 different EV models globally by 2025. It also expects to have 1 million EVs on the road by the middle of the decade.
Additionally, GM’s autonomous vehicle division, Cruise, was last valued at $19 billion, showing the company has a strong position in the self-driving car race. Nonetheless, GM is valued as a stagnant legacy automaker, trading at a P/E of less than 10 based on this year’s expected earnings.
Shares of Alibaba, the Chinese tech giant, plunged at the end of December when Chinese authorities announced it was the target of an antitrust investigation.
But that just made an already cheap stock even cheaper, as it now looks like investors’ worst fears won’t be realized. It seems the Chinese Communist Party is mostly looking to save face after recent criticism from Alibaba founder Jack Ma. Most important, Alibaba is simply too valuable to China to be seriously damaged.
Chinese stocks tend to trade at a discount to their American peers because of such regulatory and trade-related fears, but Alibaba is now valued at a P/E of just 25, significantly cheaper than the average stock in the S&P 500.
However, Alibaba is a fast-growing tech stock with a multitude of competitive advantages. Its closet American analog is probably Amazon, which is much more expensive than Alibaba but less profitable.
The Chinese company has the bigger e-commerce marketplace of the two. It’s now generating more than $1 trillion in annual gross merchandise volume on its platforms, which include Tmall and Taobao in China and Lazada in Southeast Asia. Additionally, it has a thriving cloud-computing business, and valuable subsidiaries in areas like logistics and digital entertainment. In its most recent quarter, revenue jumped 30% to $22.8 billion, and adjusted operating income rose 44% to $4.4 billion.
On a separate note, Chinese stocks should get help from a more consistent trade policy from the U.S. as the Trump trade war comes to an end. Considering its dirt-cheap price tag and long-term growth potential, Alibaba stock could easily double from here.
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