Investing in cheap stocks doesn't come without risks. The biggest risk is that it's not just a cheap stock, but a value trap. The other risk is that it stays cheap for longer than expected.
In that case, it would be nice to receive some income while you wait. The four stocks below are stocks that appear to be trading cheaply and have higher growth rates and yields than their peers. At a time when valuations might be "stretched' and bond/Treasury yields are very low, cheap income is a big positive. They all have yields above 3% and PEG ratios below 1. Their payout ratios are all also below 40%.
First up is GameStop Corp. (NYSE:GME), with a 3.3% dividend yield. Its payout ratio is 38%, and it has virtually no debt. This company is one of the nation's leading retailers of video games and consumer electronics, boasting a store base of over 6,600. The majority of profits are derived from new and pre-owned video game software and hardware. About 50% of its gross profit is generated from the sale of used video games.
With the constant flow of new games to market, that's a positive for GameStop. As new games hit the market, older versions are sold back or exchanged. The margins on the used games that GameStop sells are very high. The smartphone sales platform is becoming a key revenue generator for GameStop as well. With almost as many stores as Wal-Mart (NYSE:WMT), GameStop has a vast reach. However, shares have been beaten down over the last year, with the stock trading near 52-week lows and only 9 times next year's earnings estimates, putting its PEG ratio at 0.8.
Second is Noble Corp. (NYSE:NE). This oil/gas drilling and exploration company pays the highest dividend yield of the four - coming in at 4.3%. Noble is nearly a century-old company, and is based in London.
Through a series of strategic acquisitions of offshore drilling assets, Noble Corp. has grown from primarily a North American company to a truly global company. It has a large global footprint, operating as a contractor in the off-shore drilling services and operations market. Its key areas include North America, South America, Africa and Asia.
With the rising demand for energy (being driven by the rising population and urbanization of emerging economies), oil and gas still is the most viable option for cheap energy. Oil/gas actually accounts for just over 50% of the world's energy production, and with Noble's global presence, it's a great play on the energy markets.
Its payout ratio is only 37%. It's also a very compelling value play, trading at less than 9 times next year's earnings estimates, less than 1-time book value, and a 0.8 PEG ratio. Its 22% net profit margin is also one of the best in the industry.
Validus Holdings (NYSE:VR) is third, and has a 3.2% dividend yield. Based in Bermuda, Validus Holdings offers insurance and re-insurance coverage. Apart from selling insurance products, it also offers investment advising services and capital management services worldwide.
However, it's looking to gain a presence in the U.S. insurance market. It recently snatched up Western World Insurance for just under $700 million, which should help diversify its business mix beyond reinsurance.
Around 60% of the analysts have a buy/strong buy rating on the stock. Its payout ratio is only 27%. Validus' forward P/E ratio of 7.4 and less-than-1 P/B ratio suggests the stock is fairly cheap. Its beta is also a low 0.7. What's more is that the insurance company trades at a PEG ratio of under 0.6.
Fortress Investment Group (NYSE:FIG) is the fourth company on the list, and pays a healthy 4.2% dividend yield. This publicly traded investment management company was founded in 1998.
Its investment portfolio uses a bottom-up approach, and is very diversified. Its investments range from mutual funds, hedge funds, private equity funds, real estate, natural resources, intellectual property, currency, commodities to public equity.
The payout is only 31%, and it has a very strong 29% return on equity. The beta is a little high, coming in at 2.19, versus an industry average of 0.93. But it's still one of the top investments in the investment management space. Fortress' 50% debt-to-equity and its strong ROE are superior to its peers, including the likes of Oaktree, Blackstone and KKR.
These 5 cheap growth stocks look to be great fits for any investor looking for an above-average yield and at a "cheap" price. GameStop still has some risks related to the rise of online and mobile gaming. However, it is making a stronger push into mobile - namely, opening mobile-focused stores. The fact that it has no debt makes its pivot a bit more possible. Noble is one of the best plays in the growing offshore drilling market, Validus is a very underrated/undervalued insurance company and Fortress is one of the great asset managers available.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.