It’s tough to figure out what stocks to buy as the Christmas chop is upon us. The markets are exceptionally volatile at the moment as some asset managers try and hit their year-end targets.
The 75% month-over-month increase in the Cboe volatility index reflects just that. My take on current market events is that we are experiencing broad-based drawdowns with subsequent recoveries in undervalued stocks.
This recurring trend could be the start of a market correction where cheap/undervalued stocks make a comeback. I screened through hundreds of stocks to find the most undervalued assets according to their ratios.
During the process, it was vital to dodge any value traps and cyclical stocks that aren’t going to benefit from the current market sentiment.
Here are my top picks.
- Marcus & Millichap (NYSE:MMI)
- PBF Energy (NYSE:PBF)
- Cigna Corporation (NYSE:CI)
- D.R. Horton (NYSE:DHI)
- BBQ Holdings (NYSE:BBQ)
- U.S. Silica Holdings (NYSE:SLCA)
- Customers Bancorp (NYSE:CUBI)
Marcus & Millichap (MMI)
Marcus & Millichap is a commercial real estate brokerage firm in Northern America.
The company recently faced a stagnating period as real estate prices broke through the upper bounds, which no longer enabled brokers to take advantage of high transaction volumes.
However, things are looking up for Marcus & Millichap and its investors alike. The company surpassed its earnings estimates in its third-quarter by beating on revenue by $87.68 million and on earnings-per-share by 37 cents.
I could easily see the firm building on its 109.66% year-over-year increase in revenue due to further re-openings and confidence in the commercial space amid a recovering economy.
This is one of the cheapest stocks around. Marcus & Millichap stock currently trades at price-earnings and price-cash flow discounts of 13.29% and 79.64%, respectively, indicating that its robust fundamentals are yet to be priced in by the market.
Stocks to Buy: PBF Energy, Inc. (PBF)
Oil and Gas prices may have ended their abrupt bull run for now, but there’s still plenty in-store for many energy stocks.
PBF Energy is a midstream energy firm operating in the refining and petroleum supply space.
PBF holds a dominant position in the market with achieved economies of scale, making it less susceptible to commodity price changes than its peers. The company beat its third-quarter earnings estimates with a revenue beat of $740 million and a GAAP earnings-per-share domination of 61 cents.
A critical stock metric to look at with any asset-heavy business is its price-to-book value, and PBF is in great shape relative to its 5-year average, trading at a price-book discount of 25.91%.
In addition, the stock is trading at a price-sales discount of 45.94%, indicating that the firm’s revenue growth hasn’t been priced in yet.
Cigna Corporation (CI)
The insurance industry experienced a broad-based drawdown during the initial phases of covid-19, making it an attractive sphere to be looking into for undervalued stocks.
Cigna operates in the medical insurance space, causing it to be less cyclical than otherwise property & casualty coverage providers.
Cigna managed to beat its third-quarter earnings estimate last month with a revenue beat of $1.41 billion and an earnings-per-share beat of 52 cents.
During the third quarter, the medical care ratio did weaken slightly to 84.4% from 82.6% in 2020 due to covid-related implications; however, this remains under the 85% threshold and is a temporary problem.
Continuing its solid recovery, the firm has now increased its medical customers by 3% year-over-year and its net income by 17% during the same period.
There’s no doubting the stock’s value prospects, with its price-earnings ratio trading 26.01% below its 5-year average. In addition, Cigna stock is also trading at price-sales and price-book discounts of 46.08% and 36.10%, respectively.
Stocks to Buy: D.R. Horton (DHI)
The homebuilders have been struck with rising input costs as commodity prices became uncontrollable during the earlier parts of 2021.
The real estate market activity was concentrated on ready property transactions instead of new builds this year; however, with commodity prices finding calm, I expect some of the construction stocks to rediscover their form.
In November, D.R. Hortonhas already shown signs of a recovery by beating its third-quarter earnings estimates. America’s second-largest homebuilder beat on both revenue and earnings-per-share estimates by $339.27 million, and 32 cents, respectively.
The stock is undervalued by 25.65% according to its 5-year average price-to-earnings ratio. In addition, D.R. Horton has started to pick up an extreme amount of momentum, with the stock now trading above its 10-, 50-, 100-, and 200-day moving averages.
BBQ Holdings (BBQ)
The restaurant industry has been sub-divided during covid. We saw the takeout outlets do well but the dine-inners such as BBQ doing less well.
Although there still are pandemic headwinds such as new variants and high inflation, things seem to be calming down, and investors need to get in on some of these underperforming restaurant stocks before they turn hot among the masses.
BBQ beat its third-quarter earnings estimates comprehensively with a revenue beat of $2.52 million and an earnings-per-share beat of 30 cents. The company also upgraded its guidance for net income to $22.5 – $23 million from a previous consensus of $20.6 million – $21 million.
BBQ stock is undervalued based on a peer analysis. The price-earnings ratio is trading at 58.66% sector discount, indicating that the market’s yet to price in earnings-per-share, which is projected to grow by an annual compounded rate of 14% for the next 3-5 years.
Value is also conveyed by the stock’s price-sales, and price-cash flow ratios, as they’re currently trading at 40.01% and 31.73% sector discounts, respectively.
Stocks to Buy: U.S. Silica Holdings (SLCA)
Source: Gurufocus
This is possibly one of the cheapest stocks to buy I’ve encountered in years. U.S. Silicaproduces and distributes silica to energy firms for developmental uses, and its stock spiraled downwards during the pandemic because their primary clients didn’t have the budgets to spend large on silica.
The reason behind the depleted budgets is that oil and gas companies couldn’t produce their usual amounts under pandemic enforced lockdowns in 2020, but a recovery has materialized ever since, and it looks like energy firms will be spending on rig developments during 2022.
To illustrate the abnormal amount of value this stock holds, I thought I’d draw up a chart that shows how the stock’s current price is trading at a 10.5x discount to what it did at its highest price-sales ratio.
We obviously can’t make any inferences based on this statistic alone but we could table a serious bull argument when considering that this is a cyclical company with an anticipated 12-month free cash flow growth of 45.36%.
Customers Bancorp, Inc. (CUBI)
Customers Bancorp generates 85% of its revenue from loan operations with its deposits insured by the Federal Reserve.
This is a tremendous opportunity to get in on a cheap stock that will benefit from rising interest rates.
Rising interest rates generally translate into better profits in the debt market due to higher spreads on loans–thus, financial sector stocks with considerable exposure to the debt market are provided with systemic support when rising interest rate rhetoric is in the air.
Wedbush analyst Peter Winter upgraded Customers Bancorp stock last month to a target of $75 from a previous $61, citing valuation as his reason.
By analyzing the stock’s ratios, it’s clear why Winter upgraded the stock; according to 5-year averages, Customers Bancorp is trading at a 27.14% price-earnings discount and has a PEG of 0.04, indicating that the stock’s price has lagged earnings per share growth by 25x.
On the date of publication, Steve Booyens held a long position in SLCA. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Steve Booyens co-founded Pearl Gray Equity and Research in 2020 and has been responsible for equity research and PR ever since. Before founding the firm, Steve spent time working in various finance roles in London and South Africa, and his articles are published on various reputable web pages such as Seeking Alpha, Benzinga, Gurufocus, and Yahoo Finance. Steve’s content for InvestorPlace includes stock recommendations, with occasional articles on crowdfunding, cryptocurrency, and ESG.