If you want an investment priced at a bargain with huge growth potential, it's a great time to hunt for cheap stocks to buy now.
So far this year the stock market has put in a solid performance with the S&P 500 up a little more than 17% and the Dow Jones Industrial Average rising a bit more than 18%.
It has been a very broad advance with the aggressive U.S. Federal Reserve policy pushing money into a wide range of securities.
About 470 of the S&P 500 constituents have risen so far this year and 29 of 30 Dow issues are higher in 2013. There is a strong opinion among major market strategists that as long as the Federal Reserve keeps interest rates at or near zero, money will continue to flow into equities.
If this is the case, then the lagging issues may well be bargains with high profit potential.
The key to identifying to bargain issues is to apply some measure of valuation to identify those stocks that are mispriced by the market and may move higher.
Many of the stocks that are down including former tech darlings like Apple Inc. (Nasdaq: AAPL) and EMC Corp. (NYSE: EMC) are struggling to provide the type of earnings and sales that will get growth enthusiasts excited enough to begin buying the shares again.
Others like J.C. Penney Company Inc. (NYSE: JCP) are experiencing severe operational and financial issues that may preclude them from a strong price recovery anytime soon.
One measure of value used by many value investors is the price-to-book-value ratio. This is simply an accounting measure similar to a net worth statement. When companies fall out of favor and trade for less than book value they can be considered a bargain.
The shares may be out of favor for many reasons. It could be part of a sector that's going through the down portion of its economic cycle, but eventually the undervaluation attracts investors and invites takeover offers that more closely reflect the asset value.
Look for those underperforming S&P 500 stocks that trade for less than book value as potential bargain issues with strong recovery potential.Three of the Best Cheap Stocks to Buy Now
Stocks underperform the market for many reasons. For these three stocks the major reason has been the cyclical nature of their business and the resulting oversupply in their industries.
As conditions improve, the following stocks should rise to reflect the underlying value of the assets, and reward investors who take a contrarian stance now.
Cliffs Natural Resources Inc. (NYSE: CLF) is one if the stocks in the index that trades at a discount to its asset value. This company provides iron ore pellets to the steel industry as well as metallurgical coal. The shares have been hammered as declining demand has led to increased supplies around the globe and ore prices have fallen sharply.
The company has cuts its dividend and raised capital though an equity offering to shore up the balance sheet and provide operating capital in a tough environment.
The remainder of 2013 could be tough as there is still excess ore supply in China and the global economy is still very weak. However, 2014 could well see a sharp recovery in ore demand, prices and bottom line profits for this company.
The stock trades at just 60% of its book value so the recovery potential for the share price next year is enormous.
The weak economy has also hurt shares of U.S. Steel Corp. (NYSE: X), one of the world's largest integrated steel producers. The company has seen declining sales and lowered margins as demand has fallen across all lines of business. The market for its tubular steel products has been hit hardest as demand from oil drillers has all but disappeared.
As with Cliffs, the picture doesn't begin to improve much until 2014, but with the stock trading at just 79% of book value shareholders could be well rewarded for being patient.
Alcoa Inc. (NYSE: AA) is flirting with being breakeven for the year so far but the company has been struggling and the shares are lagging the stock market badly. Although global demand for aluminum is starting to pick up and is expected to grow by 7% this year there is still excess capacity that will keep a lid on pricing and margins.
The company is working to improve the bottom line profitability by closing unneeded or less productive plants. Continued strength in sheet aluminum from the auto and construction industries should also help the company to grow the top and bottom lines.
As with our other two selections, 2014 looks much better than 2013 but the stock has strong recovery potential. With the shares trading at 70% of book value there is enough upside to justify investment by long-term patient investors.Tags: best cheap stocks, best cheap stocks to buy now, best stocks to buy, best stocks to buy now, cheap stocks, how to find the best stocks to buy now, stocks to buy, Stocks to buy now
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