As major indices remain down by double digits year-to-date (YTD), you may be on the prowl for cheap bargain stocks. Even as the market’s downturn this year has been the result of a worsening macro picture, to paraphrase Warren Buffett, being “greedy when others are fearful” can be a profitable move.
That said, buying while market fears run high doesn’t mean you should go out and buy any seemingly cheap stock. There are plenty of names today trading at low valuations for good reasons. If a recession does happen within the next year, many companies that “crushed it” in terms of earnings in 2021 and 2022 could see a big earnings drop in 2023.
Yet while it’s wise to avoid “undervalued on paper” stocks that have a strong chance of becoming “value traps,” there are cheap bargain stocks out there that are the real deal. For instance, these seven. Each one trades at a low valuation, with factors at play to send them toward higher prices.
Cheap Bargain Stocks: Vaalco Energy (EGY)
Vaalco Energy (NYSE:EGY) is a stock I’ve discussed several times this year. Mainly, that’s due to its appeal as an oversold energy stock. However, in the past month, a new reason to like the stock has emerged: It plans to merge with another small oil exploration and production (E&P) company.
As InvestorPlace’s Alex Sirois discussed in July, the company is combining with TransGlobe Energy (NASDAQ:TGA) in an all-stock deal. EGY stock has moved lower since the news. This is despite many signs this deal is a positive for shares going forward.
For one, it diversifies the company’s asset base. The deal also increases the company’s cash position. To top things off, with increased cash flow, Vaalco plans to increase its annual dividend payout to 25 cents per share (implied yield of 5.2%). Trading for just 2.6x earnings, take advantage of its recent selloff.
Franchise Group (FRG)
Formed when Liberty Tax (a business since divested) merged with rent-to-own retailer Buddy’s in 2019, Franchise Group (NASDAQ:FRG) is a diversified holding company. Its portfolio of businesses includes retailers like The Vitamin Shoppe and Pet Supplies Plus. It’s also the parent company of tutoring services provider Sylvan Learning.
Since its formation, FRG stock has performed strongly. Even after the market selloff since late 2021, shares are still up threefold. CEO Brian Kahn’s aggressive pursuit of profitable acquisitions is a key reason for the stock’s success in recent years.
Franchise is still pursuing deals. You may recall it tried to buy Kohl’s (NYSE:KSS). While the Kohl’s deal didn’t happen, given Kahn’s track record, chances are it will level up on its past success, with another needle-moving purchase. The stock today is a bona fide bargain, trading for just 8x forward earnings.
Cheap Bargain Stocks: Geo Group (GEO)
Down nearly 75% in the past five years, many investors may take a look at Geo Group (NYSE:GEO) and assume it’s one of the cheap bargain stocks that will get cheaper. Changes in U.S. federal government policy have been bad news for this private prison operator.
Yet while it may seem like a “value trap,” there may be a path for GEO stock to make a comeback. Moving to extend the maturity of its outstanding debt, it stands to soon have more time to de-lever and adapt to industry changes. For investors buying shares today, while it trades so far below its high-water mark, this could result in big returns.
Why? Generating a high amount of operating cash flow (around $250 million annually) relative to its market capitalization ($953 million), using this cash to de-lever could have an outsized positive impact on its share price.
As the chance of a recession rises, it may seem like the worst time to buy a consumer cyclical stock like Hibbett (NASDAQ:HIBB). An economic downturn could severely impact this sporting goods chain’s profitability. Then again, this may be already more than accounted for in its valuation.
HIBB stock today trades for just 6.2x forward earnings. Although earnings could slide in a downturn, results would likely revert back when the economic environment improves. Especially as this under-the-radar name in the space has a long-term competitive edge.
At least, that’s the view of one Seeking Alpha commentator. Arguing the bull case back in July, the commentator pointed out how the company’s focus on small, rural communities could keep online and big-box competition at bay. After selling off following an incredible run during the pandemic era, now may be the time to enter a position.
Cheap Bargain Stocks: Salem Media Group (SALM)
It makes sense that radio broadcasting stocks trade at low valuations. There’s a big risk of full “disruption” by the rise of audio streaming. Yet Salem Media Group (NASDAQ:SALM), trading at a super-low earnings multiple, may have the ability to re-hit past price levels.
How? First, it’s moving into digital media. Besides operating 101 AM and FM radio stations, Salem also owns a portfolio of Christian and conservative-themed websites. A further pivot toward digital could lead to a re-rating. Instead of trading at a single-digit multiple, it may in time move to a double-digit multiple.
The second potential needle-mover for SALM stock? Its upside potential from selling non-core land holdings. It has already generated tens of millions in gains from such sales. What remains of its land holdings have a book value of around $27 million. Not bad compared to its current $63.1 million market cap.
Tenet Healthcare (THC)
Tenet Healthcare (NYSE:THC) operates hospitals and other healthcare facilities. A forward earnings multiple of 10.5x may look pricey compared to some of the cheap bargain stocks listed above, but this valuation is dirt cheap relative to other hospital stocks.
Peers like HCA Healthcare (NYSE:HCA) sell at higher forward valuations than THC stock. Some may blame a high debt position for this valuation discrepancy. However, it generates sufficient cash flow to service and potentially pare down this high amount of leverage.
Also, the company’s decision to retain its Conifer revenue cycle outsourcing unit looks to be a wise one. Back in March, when management announced it was not spinning off the division, Jefferies analyst Brian Tanquilut noted that improvements with Conifer will bolster its operating performance going forward. Bouncing back in recent weeks after sliding earlier this year, shares may be en route to a recovery.
Cheap Bargain Stocks: Turning Point Brands (TPB)
Turning Point Brands (NYSE:TPB) is a tobacco products company. Major brands include Stoker’s smokeless tobacco and Zig-Zag cigarette paper. It also markets vaping products.
TPB stock has struggled in recent months. Headwinds in the vaping space, plus a poorly received earnings report and guidance update, have pushed it to multiyear lows. Typically, a selloff like this is a sign of more disappointment ahead. This situation may be an exception, though. Why? Valuation. At a valuation of just 12x this year’s earnings, and 8.5x estimated 2023 earnings, it’s dirt cheap compared to other non-cigarette tobacco stocks.
For instance, Swedish Match (OTCMKTS:SWMAY). SWMAY trades for 26.75x earnings. That’s not to say this stock will move to such a multiple. Still, once the vaping headwinds clear up, or Turning Point turns its focus back to traditional tobacco (or perhaps even cannabis), it could climb back to a higher valuation.
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On the date of publication, Thomas Niel held a long position in GEO. He did not have (either directly or indirectly) any positions in any other securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.