Skip to Content
Our Picks

4 All-Around Cheap Stocks

These stocks are undervalued based on a half-dozen valuation metrics.

Mentioned: , , , , , ,

Since this article was first published, Restoration Hardware RH released disappointing earnings and provided weak guidance. Shares have been placed under review as the analyst assigns a new fair value estimate.

Like beauty, value is in the eye of the beholder. For instance,  Ralph Lauren (RL) currently earns a 5-star rating, which means the stock is underpriced relative to our estimate of its fair value. Yet the stock's current price/earnings ratio tops that of the S&P 500.

Conversely,  Aetna (AET) looks like a bargain by "traditional" valuation metrics: The managed care organization's forward price/earnings ratio and current price/earnings, price/book, price/sales, and price/cash flow ratios all rest below that of the S&P 500, suggesting that the stock is undervalued. Yet we think the shares are pricey based on our long-term analysis of the company; it currently earns just 1 star.

To find stocks that would fit most definitions of "undervalued," we turned to our Premium Stock Screener. We looked for 5-star stocks that also carried forward P/Es and current P/Es, P/Bs, price/sales and price/cash flow ratios below that of the S&P 500's ratios. Premium Members who would like to manipulate the screen to their liking can do so  here.

As of this writing, four stocks made the list.

 Bed Bath & Beyond (BBBY)
Economic moat rating: None
Uncertainty rating: Medium
Like many retailers, no-moat Bed Bath & Beyond faces an uphill battle against online competitors. In an effort to maintain its competitive position, the company expects to increase capital spending. That will lead to some operating margin compression going forward. Not surprisingly, the company's shares are undervalued by most measures today.

"Even with industry headwinds persisting throughout our explicit forecast, Bed Bath still has tremendous cash flow potential," says analyst Jaime Katz.

For starters, registries in bridal, baby, and gift provide a steady stream of customers. Moreover, Katz expects the business to continue to benefit from rising housing market prices and stable turnover. International expansion and increased ominchannel offerings, such as buy online/pick up in store, will support growth, too. She projects total sales growth in the low-single-digits over the medium term, low-single-digit same-store sales (just below 2% on average), and unit location growth of about 20 stores per year.

“Even in a more competitive retail environment, we expect the company to be able to achieve low-double-digit ROICs," says Katz. Katz pegs the stock with a $70 fair value estimate.

 HollyFrontier (HFC)
Economic moat rating: Narrow
Uncertainty rating: High
Last quarter was not kind to the refiner, which owns and operates five petroleum refineries serving the Rockies, midcontinent, and Southwest. Earnings tumbled from the year before as gasoline margins weakened substantially during the quarter. To make matters worse, higher ethanol blending costs nicked margins and earnings, too. 

"While a poor quarter and below expectations, we see most of that weakness as attributable to seasonal factors and continue to expect gasoline margins to strengthen in the coming months as they have since the end of the first quarter," says analyst Allen Good.

Good notes that HollyFrontier remains on track with its business improvement plan to deliver incremental EBITDA of $700 million by 2018. He also expects blending margins to improve going forward due to higher gasoline prices and margins. And although HollyFrontier is a relatively small player, its refineries are competitively well positioned. In fact, the company earns a narrow economic moat.

"We still think HollyFrontier presents one of the more compelling opportunities in the sector currently, given the poor performance of its shares of late relative to its long-term outlook," says Good. Shares carry a fair value estimate of $47.

 Fiat Chrysler (FCAU)
Economic moat rating: None
Uncertainty rating: Very high
Despite headwinds, Fiat Chrysler posted pretty impressive numbers this past quarter. Earnings per share were well above consensus.

"We believe the outperformance relative to market expectations was due to higher-than-anticipated margin expansion in North America, being in the black in South America, and continued progress on European recovery," says senior analyst Richard Hilgert.

Nevertheless, the market continues to discount the automaker. Hilgert calls the discount "overly punitive," and says it's the result of a lack of buy-in to the company's five-year plan and its highly levered balance sheet. Hilgert believes the Fiat and Chrysler combination will eventually yield substantial benefits, including greater scale can be achieved in components, platforms, and capacity. Greater scale across more geographic regions lowers the company's costs, he says, and global expansion of the Jeep, Maserati, and Alfa Romeo brands bolsters volume growth expectations. Hilgert assigns a fair value estimate of $16 to the shares--but warns that they are best suited to risk-takers.

"We think Fiat Chrysler offers compelling valuation for investors who are willing to tolerate the risks associated with a turnaround situation and a highly leveraged balance sheet, operating in the cyclical, capital intense, highly competitive global auto industry," he says.

 Restoration Hardware (RH)
Economic moat rating: None
Uncertainty rating: High
Like others in its industry, luxury retailer Restoration Hardware expects the year ahead to be tepid, with low- to mid-single-digit top-line growth and flat earnings. Though disappointed with the guidance, analyst Katz still finds much to like here over the long term. The retailer is taking steps to improve its in-stock position, which will lead to a better customer experience and faster turns. Furthermore, Katz notes that the company does not earn an economic moat, but it does carry a positive moat trend, due to the real estate transformation that the management team is undertaking to strengthen brand awareness and perception.

"The ability to capitalize on real estate will depend on the economic environment, but we still think this is a key tenet in RH's potential success--taking bigger boxes which few retailers demand at the right price as more customers move on line, adding a destination element to drive footfalls," says Katz.

Katz projects total sales to grow at a low-double-digit pace over the next five years, low-double-digit store and direct-to-consumer growth, and square footage to rise more than 50% through 2020. She forecasts gross margins to rise 160 basis points over the next decade to 38%. She expects the company to achieve low-double-digit ROICs over the next five years, and estimates the per-share fair value to be $61.

"Shares are currently attractive, trading in 5-star territory, as the long term potential handily outweighs the near-term risks," Katz says.

Further research:

The Morningstar Fair Value Estimate (video)
The Morningstar Rating for Stocks (video)
Morningstar Equity Research Methodology (PDF)

Susan Dziubinski does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.