In this article we take a look at 10 cheap stocks to invest in (February 2021). You can skip our detailed discussion of our criteria of choosing these stocks and go directly to 5 cheap stocks to invest in.
Perhaps one of the most difficult things for an investor in a bull market is to spot cheap stocks that are full of value and long-term gains. We are currently in a bull market, with soaring valuations, stocks breaking records based on internet memes and consistent warnings from analysts that the bubble won’t sustain for long. In January, cofounder of investment firm GMO Jeremy Grantham said that the bull market which began in 2009 has now “matured into a fully-fledged epic bubble.” The investor said in his note that hysterical price increases and speculations have caused the bull market transition into what he calls one of the “great bubbles of financial history.” Legendary investor and billionaire Carl Icahn in January also warned that stocks are overpriced and the “wild” rallies were are seeing are not sustainable. He said eventually these overpriced stocks will hit the wall and go through a “painful correction.”
Last year, 78% of investors in a survey conducted by Bank of America said that the market is overpriced. This was the highest percentage of investors agreeing on an idea since the survey began in 1998. The bank surveyed over 200 mutual, hedge and pension funds.
In this article we will try to look through the market frenzy and spot 10 cheap stocks to invest in. For that we will use price-to-earnings, or P/E ratio. P/E ratio compares the current price of a stock to its EPS. This metric is used by analysts and investors to gauge the actual value of a company. P/E ratio tells you whether the stock price actually reflects the company’s earning potential. If a company’s stock is trading at $200 but its EPS is $5, its P/E ratio is 40, which shows that the company would take another 40 years of accumulated earnings to reach its cost of investment.
We chose the 10 cheap stocks to invest in based on P/E ratios of stocks. We chose the most valuable stocks with a maximum P/E ratio of 12. But we don’t solely rely on P/E ratio. We also see the financial performance and hedge fund sentiment to rank these cheap stocks.
Average investors need to be careful while investing in a bull market. Even the smart money is finding it difficult to make sense of the rapidly changing markets. The hedge fund industry’s reputation has been tarnished in the last decade during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 88 percentage points since March 2017. Between March 2017 and February 5th 2021 our monthly newsletter’s stock picks returned 187.5%, vs. 75.8% for the SPY. Our stock picks outperformed the market by more than 111 percentage points (see the details here). We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 16. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
Let's start our list of 10 cheap stocks to invest in (February 2021).
10. Allstate Corp (NYSE: ALL)
Number of Hedge Funds: 38 P/E Ratio: 6.27
Ranking 10th on our list of 10 cheap stocks to invest in (February 2021) is Allstate. Allstate offers property-casualty insurance services, life insurance, accident and health insurance and protection plans. The stock is down about 12% over the last 12 months. The company on Feb. 22 increased its quarterly dividend by 50% to $0.81 per share quarterly dividend. The stock was also on our list of 10 best insurance stocks for 2021.
A total of 38 hedge funds tracked by Insider Monkey held stakes in Allstate Corp at the end of the 4th quarter. AQR Capital Management is the biggest stakeholder in the company, with 3.2 million shares, worth $349 million.
9. PulteGroup, Inc. (NYSE: PHM)
Number of Hedge Funds: 40 P/E Ratio: 9.0
Georgia-based PulteGroup, Inc. is a Fortune 500 company that constructs homes. It also offers financial services related to mortgage and property title operations. It ranks 309 on the list of Fortune 500 companies. In January, an analyst at BTIG upgraded PulteGroup to Buy from Neutral, expecting double-digit orders in the first half of 2021. The company in the fourth quarter generated about $500 million of operating cash flow. Adjusted EPS in the period totaled $1.49, above the Wall Street’s estimate of $1.40.
According to our database, the number of PulteGroup’s long hedge funds positions decreased at the end of the fourth quarter of 2020. There were 40 hedge funds that hold a position in PulteGroup by the end of December, compared to 43 funds in the third quarter. The biggest stakeholder of the company is Cliff Asness' AQR Capital Management with 3.8 million shares, worth $165 million.
8. Fidelity National Financial, Inc. (NYSE: FNF)
Number of Hedge Funds: 40 P/E Ratio: 12.05
Fidelity National provides title insurance, trustee activities, trustee sales guarantees, recordings services and home warranty products. In December 2020, the company completed its sale of F&G Reinsurance to Aspida, a subsidiary of Ares Management. The stock has lost about 7% in value over the last 12 months. Earlier in February, the company declared a quarterly dividend of $0.36 per share.
Overall, 40 funds tracked by Insider Monkey held stakes in FNF at the end of December 2020.
7. Quest Diagnostics Incorporated (NYSE:DGX)
Number of Hedge Funds: 45 P/E Ratio: 9.0
New Jersey-based Quest Diagnostics sells diagnostic testing information and services, risk assessment services to businesses and insurers and IT solutions to healthcare providers. The company is behind several brands like AmeriPath, Dermpath Diagnostics, Focus Diagnostics, Athena Diagnostics, ExamOne, Quanum and Care360. On Feb. 24, the company launched a new COVID-19 testing service that gives insights to an individual's immune response. In the fourth quarter, Quest posted a 55% jump in its revenue, beating the Street by $80 million.
6. The Progressive Corporation (NYSE:PGR)
Number of Hedge Funds: 48 P/E Ratio: 9.32
Ohio-based Progressive Corporation offers personal and auto insurance, specialty property-casualty insurance and related services. The company’s combined ratio for the month of January plummeted to 86.3% from 92.1% a year ago. Earlier in February, the company entered into an agreement with Protective Insurance to acquire all of the latter’s outstanding Class A and Class B common shares for $23.30 per share in cash for a total transaction value of about $338 million.
The stock is up about 10% over the last 12 months. A total of 48 hedge funds tracked by Insider Monkey held stakes in the company at the end of the fourth quarter.
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Disclosure: None. 10 Cheap Stocks To Invest In (February 2021) is originally published on Insider Monkey.