What makes a stock “cheap?” Is it because the stock has fallen significantly over the past few months? Or is it because the price of a share is in the single digits, rather than double or triple digits like other stocks? How is it that we define and search for the cheapest stocks?
Indeed, neither of the metrics above matters.
An outrageously expensive stock that has fallen significantly over the past few months may still be expensive. The fact that it has fallen doesn’t necessarily mean that it is now cheap .
And we know that share price has no bearing on whether it is cheap or expensive. Amazon.com (NASDAQ: AMZN), a stock that I regard as expensive, trades for around $288 per share. If Amazon did a 100-for-1 stock split, suddenly you would have 100 shares priced at $2.88 per share.
Is the stock any less expensive? Clearly it is not. It may have a lower price, but its valuation has not changed.
“Cheap,” as it pertains to stocks, generally refers to what we think the company is worth versus the price at which the stock actually trades. This is what we refer to as “valuation.”
Every quarter Goldman Sachs’ David Kostin publishes a forecast for the S&P 500 and a list of the 40 cheapest stocks right now.
Some of these stocks, such as the energy stocks listed, have fallen considerably and appear “cheap” as value stocks. Others have tremendous near-term growth opportunities or are realizing cost savings that Kostin doesn’t believe the market is expecting based on current prices.
Here is Kostin’s list of the 40 cheapest stocks:
Personally, I’m not convinced that the pain is over for oil and gas stocks, several of which appear on this list. I’m inclined to stay away from them, at least for now. Though I don’t own any of the stocks on this list, several are very interesting to me.
I expect Netflix (NASDAQ: NFLX) to continue profiting from the trend of people getting rid of cable subscriptions and relying instead on premium online services like Netflix and Amazon Prime’s instant video. I also expect Netflix to be a beneficiary of new net neutrality regulations.
Keurig Green Mountain (NASDAQ: GMCR) – formerly Green Mountain Coffee Roasters – is also intriguing to me. Coca-Cola (NYSE: KO) took a huge stake in the company and announced a partnership to produce cold beverages last year. I see this as a very positive sign. The relationship could last for a long time in its current form or Coca-Cola could simply buy Keurig Green Mountain outright. Either outcome would be positive for shareholders of Keurig Green Mountain.
Airline stocks are also very intriguing right now, with cheap oil greatly reducing the operating expenses of major airlines. Cheap oil also puts money in the pockets of consumers, making them more likely to spend it on travel. Both Delta Air Lines (NYSE: DAL) and Southwest Airlines (NYSE: LUV) made this list, as did travel booking giant Priceline (NASDAQ: PCLN). Ian Wyatt actually just first bought his first airline stock ever.
With top quality names and a lot of upside, it would be hard to go wrong buying the names on Goldman’s “cheapest stocks” list.
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