The common wisdom of "you get what you pay for" equates the highest cost with the best product while denigrating less expensive and free items. Being a running enthusiast, I certainly feel buying expensive shoes from a trusted brand is the way to go. However, when it comes to stock picking, the same thing is not necessarily true as not all cheap stocks are ugly investments that will whipsaw you around with volatility.
I admit most cheap stocks are cheap for a reason and you have to have a good eye to separate the wheat from the chaff. However, some low-price shares are indeed screaming bargains worth your cash. Here are three low P/E stocks to consider:
Hanesbrands is a leader in the apparel essentials industry and holds either the #1 or #2 U.S. market share position by sales volume in most product categories that it competes in. The company's 5-year historical multiple is depressed somewhat from the significant losses the stock experienced during the recession. While most debt investors are likely comfortable with Hanesbrands' debt leverage and rating, particularly given the low cost of its current debt, I believe equity investors have continued to punish the stock since the credit crisis. However, the company is expecting to lower its leverage to under 2.0x by 2013-end, which should drive the stock's P/E multiple higher (as its 2013 EV/EBITDA multiple likely drops below ~5x and new investors are attracted to the stock). Moreover, with the cotton bubble and screen-print downsizing behind us, I believe a forward P/E of 10.8 is unjustified for a profitable (double digit operating margin), low risk business that generates significant cash flow ($3.50-$4.50/share in FCF).
Phillips 66 (PSX)
Phillips 66 is a downstream energy company with Refining and Marketing, Midstream, and Chemicals businesses. All of the company's three business segments are earning double digit returns on capital this year, with both the chemical and midstream businesses generating ~30% return. Moreover, the company's free cash flow profile appears robust as the company is expected to generate organic free cash flow of $2.6 billion in 2012 and $2.7 billion in 2013; equating to an above average yield of 10% in both years. In addition to the recently announced $1 billion share repurchase program, I see ample room for dividend hikes as the company has a very low payout ratio of 13%. I expect Phillips 66 to outline a dividend policy that maintains a yield above its peer average. The company's forward P/E (7.52) and P/S ratio (0.16) stand well below its peer group average and Warren Buffett's (holds ~5% stake in the company) seal of approval further makes me optimistic about the company.
Nu Skin Enterprises (NUS)
Nu Skin Enterprises is a global direct selling company that develops and distributes anti-aging personal care products and nutritional supplements under its Nu Skin and Pharmanex brands, respectively. Over the past couple of years, the company has launched several different ageLOC products that have higher incremental margins (vs. the company average). As ageLOC becomes a larger portion of the business, I expect the higher incremental margins from these products to flow through to the bottom line. I believe that the company will deliver better than anticipated results through the remainder of 2012 and into 2013 as the company continues to benefit from the roll-out of their latest line of ageLOC products. Moreover, the company's entry into the rapidly growing weight management market (growing at a 6% CAGR over the last 5 years) offers a huge growth opportunity. Nu Skin's stock is trading at a low P/E of 11.94 despite having an expected growth rate of 15.30% over the next five years. Thus, it looks extremely cheap on a PEG basis (PEG ratio=0.89).
To sum up, I believe these three companies look cheap at the current levels and offer a good investment opportunity. With the cotton bubble and screen-print downsizing behind us and the management's commitment to reduce its debt, I expect Hanesbrands' stock to move up. With a recovery in oil prices, Phillips 66 can enjoy healthy profit margins. The company is generating robust free cash flow and the management's strong focus on shareholder friendly activities will drive the shares up. Nu skin is expected to continue its strong momentum and the contribution from higher margin new products should drive further upside to guidance, as well as multiple expansion for the stock.