Hunting for cheap stocks is a good idea in the current environment, as many of these overlooked names have strong upside potential with little risk to the downside. Moreover, with a recession on the horizon later this year, I believe it’s time to take profits on many of the growth names that have rallied this year.
Of course, the potential recession fears may be exaggerated and it will likely not happen in the next few months at least. But Wall Street should soon recognize that there are much better deals outside of the hottest tech companies. Many companies are starting to turn a corner as supply constraints ease and producer inflation falls considerably.
Thus, here are three cheap stocks you should look into:
Clearfield (CLFD)
Clearfield (NASDAQ:CLFD) is a company that designs, manufactures, and distributes fiber optic solutions for communications networks. The company serves customers in the broadband, wireless, cable TV, and utility sectors. Clearfield’s products include fiber management systems, fiber delivery platforms, fiber connectors, and fiber terminals.
The stock of Clearfield seems very undervalued right now, given its impressive growth profile and low price-to-earnings (P/E) ratio of 12.9x. The company reported a 68% year-over-year increase in revenue and a 37% surge in earnings fiscal first quarter of 2023. Despite the growth, the stock trades at a seemingly unjustified P/E ratio.
Even though Clearfield’s growth will likely slow down this year due to some customers working through excess inventory, I believe the low valuation still remains compelling. The growth will likely return in the long run since Clearfield has a strong competitive advantage in the fiber optic market, which is expected to grow at a double-digit CAGR until 2027.
Moreover, there has been a recent bout of institutional investors going heavy on this stock, with Legato and Kornitzer Capital buying just under 73,000 shares in the past week.
All things considered, I think the company’s negatives are already priced in, and this stock has a lot of upside potential. Clearfield is one of the best cheap stocks to buy right now, offering a rare combination of growth and value. I will not be surprised if the stock reaches $100 or more by next year, as analysts have an average price target of $95.60, with a 125.37% upside potential.
US Bancorp (USB)
The banking sector has been hit hard by the recent crisis that triggered a wave of panic and sell-offs. Among the victims was US Bancorp (NYSE:USB), one of the country’s largest and most stable banks. USB plunged nearly 50% from its high of $53.88 to its current level of around $33.
But I think this is a great opportunity to buy USB stock at a huge discount. Here’s why.
The fears about US Bancorp’s lack of capital seem overblown, at least when you look at it from a long-term perspective. The Holdco report that exposed the banks’ capital hole is also based on a worst-case scenario.
In reality, the Federal Reserve is likely to step up its stress testing and regulatory measures to make sure no other banks fail. That will likely include some cost-cutting measures here, but US Bancorp has plenty of levers to boost its capital if needed. It can cut its dividend, which currently yields 6.07% or reduce its share buybacks. It also seems that management is aware of this problem and is working to fix it.
When questioned about the buybacks and the 9% CET1 requirement, the CEO replied:
“…I will tell you, as we all know, there’s a lot of capital changes that are likely to occur from a regulatory standpoint. So we’re not going to do anything until we have more clarity around that, which we hope to have in the second half of the year. But the focus on getting to the appropriate capital levels as quickly as possible, accreting capital and building that capital base is priority one.”
With that in mind, and the banking crisis being largely contained by the Federal Reserve’s bailouts and interventions, I expect US Bancorp to recover from the temporary setback and resume its growth trajectory. Personally, I find USB to be one of the cheap stocks that looks very compelling and is worth the risk.
Advance Auto Parts (AAP)
If you’ve read my columns recently, you’ll likely notice that I’m very bullish on auto parts companies. And that’s for good reason since the U.S. civilian vehicle fleet continues to age rapidly, reaching 13.1 years for cars. Most middle-class families feel the crunch for cash and don’t have enough saved up for a new car. Additionally, the interest rates on car loans seem excessive at 5.5% on average.
In that sort of environment, the best decision would be to simply repair what you have and wait until the economy gets better. Indeed, that’s what has been happening as auto parts companies are seeing rapid expansion and constant supply shortages due to high demand. It will be nearly a $1 trillion market by 2033.
With that in mind, I believe Advance Auto Parts (NYSE:AAP) is among the strongest value picks. The stock changes hands at a 11.61x forward P/E ratio despite the double-digit 3-year growth rate and a robust $722 million operating cash flow allowing a 4.73% dividend yield on the stock. The tailwinds will likely carry it much higher in the long run.
On the date of publication, Omor Ibne Ehsan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.