In this article, we take a look at 10 best cheap stocks to buy now for long term.
To many investors, a cheap stock isn’t a stock that’s trading for a low stock price.
Instead, a cheap stock is a stock of a company that is trading for considerably below its intrinsic value. A company’s intrinsic value is what the company is really worth.
Although there are exceptions, the intrinsic value of high quality companies with competitive advantages tend to go up in the long term as those companies grow their market share or launch new products or services. The earnings per share of those companies can go higher as those companies buy back their stock. Those high quality companies can also pay a dividend as a way to return capital back to shareholders.
In the long term, quality stocks with competitive advantages tend to outperform stocks that might trade for lower valuations but don’t have the same quality businesses.
In the near term, however, some quality stocks might trade for lower valuations than they should given the market headwinds this year.
2022
In terms of 2022, there have been a lot of market headwinds for stocks given the Federal Reserve has raised interest rates seven times this year. As a result of the interest rate increases, the Federal Reserve’s federal funds rate is now 4.25% to 4.5% and the U.S. central bank might not be done with the raises.
According to projections released from the Federal Reserve during a December two day policy meeting, the U.S. central bank will raise interest rates past 5% next year.
Given the interest rate increases, borrowing costs have increased and it is harder for some businesses to make money. With the higher rates, some businesses have seen softer demand and the overall valuation of the broader market has decreased as capital has moved from the equities market into Treasuries. With the higher interest rates, many economists think there could be a recession next year.
With the lower overall market, the stocks of some high quality businesses are arguably fairly cheap given their future potential in the long term.
Given the uncertainty, however, it could be a good idea for long term investors to own a well diversified portfolio of stocks across many different sectors.
Pixabay/Public Domain
Methodology
For our list of 10 Best Cheap Stocks to Buy Now for Long Term, we picked 10 stocks with competitive advantages that arguably trade below their intrinsic value in the long term.
We then ranked the 10 stocks based on the number of hedge funds in our database that held shares of the same stock at the end of Q3.
For those of you interested, check out 12 Cheap Stocks to Buy That Outperformed in 2022.
10 Best Cheap Stocks to Buy Now for Long Term
10. Crown Castle International Corp. (NYSE:CCI)
Number of Hedge Fund Holders: 48
Crown Castle International Corp. (NYSE:CCI) is a leading communications infrastructure REIT whose shares have declined 35.44% year to date given the weaker broader market and rising interest rates.
Although Crown Castle International Corp. (NYSE:CCI) shares are lower, the company’s Q3 AFFO nevertheless increased by 5% year over year to $1.85 per share. Furthermore, Crown Castle International Corp. (NYSE:CCI) still benefits from 5G development in the U.S which could increase demand for the company’s communications infrastructure in the long term.
If demand remains strong, Crown Castle International Corp. (NYSE:CCI) could continue to increase AFFO per share and its intrinsic value could increase in the long term.
Alongside Meta Platforms, Inc. (NASDAQ:META), Amazon.com, Inc. (NASDAQ:AMZN), and Microsoft Corporation (NASDAQ:MSFT), Crown Castle International Corp. (NYSE:CCI) is a cheap stock that many hedge funds in our database owned at the end of Q3.
9. Walmart Inc. (NYSE:WMT)
Number of Hedge Fund Holders: 68
Walmart Inc. (NYSE:WMT) shares are arguably cheap in the long term given the company’s high quality business. Despite the inflation headwinds this year, the retailing giant’s Q3 U.S. comparable sales rose 8.2% year over year and the company’s U.S. eCommerce revenue grew 16% year over year. Given the increases, Wal-Mart continued to gain market share in the grocery sector, giving it even more scale to support its everyday low prices.
In the third quarter, Walmart Inc. (NYSE:WMT) approved a new $20 billion share repurchase authorization to replace its existing authorization which had $1.9 billion remaining at the end of September. With the share repurchases, the company could continue to increase its EPS if it maintains its market share.
Of the 920 hedge funds in our database, 68 owned shares of Walmart Inc. (NYSE:WMT) at the end of Q3, ranking the stock #9 on our list of 10 Best Cheap Stocks to Buy Now for Long Term.
8. Goldman Sachs Group, Inc. (NYSE:GS)
Number of Hedge Fund Holders: 69
Goldman Sachs Group, Inc. (NYSE:GS) is Wall Street’s top investment bank that has substantial earnings power given its strong brand. Although the company is retreating from the consumer business, Goldman Sachs Group, Inc. (NYSE:GS) still has a leading trading and investment banking unit that could continue to generate substantial profits for the years to come.
Recently, Reuters reported that Goldman Sachs Group, Inc. (NYSE:GS) is planning to cut thousands of jobs to lower its costs as the company tries to navigate the challenging economic environment.
If it can earn what the market expects, Goldman Sachs Group, Inc. (NYSE:GS) could be cheap in the long term given its forward P/E ratio of 9.23.
69 hedge funds in our database were long shares of Goldman Sachs Group, Inc. (NYSE:GS) at the end of Q3, ranking the stock #8 on our list of 10 Best Cheap Stocks to Buy Now for Long Term.
7. Bank of America Corporation (NYSE:BAC)
Number of Hedge Fund Holders: 97
Bank of America Corporation (NYSE:BAC) is another leading bank that has substantial earnings power given its brand and scale. With technology improvements and implementation, it could be possible for Bank of America Corporation (NYSE:BAC) to be even more profitable in the future, which could make its shares cheap in terms of the long term. Bank of America Corporation (NYSE:BAC) shares are currently trading for around 8.6 times next year’s earnings estimates.
Ariel Investment commented on Bank of America Corporation (NYSE:BAC) in a Q3 2022 investor letter,
We initiated three new positions in the quarter. We added leading financial institution Bank of America Corporation (NYSE:BAC) which serves individual consumers, small and middle-market businesses, and large corporations with a full range of banking, investing, asset management, and other financial and risk management products and services. The current company was formed through various mergers including NationsBank, FleetBoston, US Trust, Countrywide Financial, and Merrill Lynch with the legacy commercial bank to form a national banking powerhouse and bulge bracket investment firm. As one of the ‘Big Four’ U.S. banks it enjoys scale driven cost advantages and economies of scale which provide meaningful competitive advantages and potential for strong returns in the largely commoditized banking industry. A survivor of the financial crisis, BAC has emerged with a solid capital base and stands to benefit from a rising interest rate environment.
6. JPMorgan Chase & Co. (NYSE:JPM)
Number of Hedge Fund Holders: 110
Given many analysts think JPMorgan Chase & Co. (NYSE:JPM) is America’s best big bank, the company has substantial earnings power and many competitive advantages. Although its forward P/E ratio of 10.05 is higher than Bank of America Corporation (NYSE:BAC)’s forward P/E of 8.6, JPMorgan Chase & Co. (NYSE:JPM) could ultimately perform just as well or even better in the long term given its strong business. If it makes the profits that analysts think it can, JPMorgan Chase & Co. (NYSE:JPM) could buy back shares and increase its dividends so that its shares are substantially higher in the next 10 years.
110 hedge funds in our database owned shares of JPMorgan Chase & Co. (NYSE:JPM) at the end of Q3, ranking the stock #6 on our list of 10 Best Cheap Stocks to Buy Now for Long Term.
Like JPMorgan Chase & Co. (NYSE:JPM), Meta Platforms, Inc. (NASDAQ:META), Amazon.com, Inc. (NASDAQ:AMZN), and Microsoft Corporation (NASDAQ:MSFT) are cheap stocks that many hedge funds in our database owned at the end of the third quarter.
5. The Walt Disney Company (NYSE:DIS)
Number of Hedge Fund Holders: 112
The Walt Disney Company (NYSE:DIS) shares have declined nearly 42% year to date to trade for a forward P/E ratio of 16.93 as of December 16. Although a recession next year could make it harder for The Walt Disney Company (NYSE:DIS) to exceed earnings estimates substantially, the company nevertheless has a quality entertainment business that will likely increase earnings meaningfully in the long term that could make shares cheap now.
Third Point commented on The Walt Disney Company (NYSE:DIS) in a Q3 2022 investor letter,
As disclosed in our Q2 letter, we reinitiated a significant position in The Walt Disney Company (NYSE:DIS) when the company retested its Covid lows earlier this year. At the current price, Disney is trading for little more than the stand-alone value of its Parks business and a mere 15x ’24 “street” consensus. The company remains early in its Direct to Consumer (“DTC”) transition with a leading market position, and yet the current stock price ascribes negligible value to the streaming business. We believe this is due to questions around the terminal economics of streaming, given large losses being generated today at Disney (>$1 billion dollars last quarter) and stagnating margins at peers such as Netflix. On the last earnings call, management highlighted three items that could lead to an inflection in DTC profitability over the next 12 months: a 38% price increase for Disney+ in the US; moderating growth in cash content expense; and an advertising tier for Disney+ launching in two months that can drive additional ARPU given high demand for the Disney brand amongst advertisers.
While the company has guided to Disney+ achieving breakeven sometime within the fiscal year ending September 2024, the valuation suggests the market remains skeptical. Disney only trades at ~14x the $7 in earnings generated prior to the Fox acquisition, which implies investors don’t expect earnings to meaningfully exceed this figure in the coming years. Hence, the first value driver we highlighted in our last letter is the opportunity for management to optimize Disney’s cost base to drive earnings growth. We believe Disney has ample means to rationalize costs across its operating platform and deliver targeted content for home viewing that does not entail the same cost structure of exclusive theatrical releases…
4. Apple Inc. (NASDAQ:AAPL)
Number of Hedge Fund Holders: 140
Apple Inc. (NASDAQ:AAPL) ranks #4 on our list of 10 Best Cheap Stocks to Buy Now for Long Term given 140 hedge funds in our database owned shares of the stock at the end of Q3. Although shares are down 24.25% year to date, Apple Inc. (NASDAQ:AAPL) still has a market capitalization of over $2 trillion, which gives it substantial resources to try to make the next big consumer technologies for the future. If it succeeds, Apple Inc. (NASDAQ:AAPL) could continue to perform well in the long term.
It should be noted that in the near term, however, Apple Inc. (NASDAQ:AAPL)’s services business might not have as much growth given the European Union has mandated that the company eventually allow for third party app stores in Apple devices.
3. Meta Platforms, Inc. (NASDAQ:META)
Number of Hedge Fund Holders: 177
Meta Platforms, Inc. (NASDAQ:META) recently received an upgrade from Doug Anmuth of JPMorgan who raised his rating on the social media giant to ‘Overweight’ from ‘Neutral’ and increased his price target to $150 from $115.
Although Meta Platforms, Inc. (NASDAQ:META) has faced numerous headwinds such as TikTok competition and the uncertain build out of the metaverse, Anmuth thinks some of those headwinds will ease in 2023 as the company is showing signs of controlling costs better. Given the analyst estimates, he thinks Meta Platforms, Inc. (NASDAQ:META) shares are trading for 12 times 2024 estimates, which makes the company’s valuation pretty compelling.
2. Amazon.com, Inc. (NASDAQ:AMZN)
Number of Hedge Fund Holders: 269
Although it is already a huge company, Amazon.com, Inc. (NASDAQ:AMZN) still has earnings growth potential given its leading position in cloud computing and the expected growth rate of the cloud industry in the future. If Amazon.com, Inc. (NASDAQ:AMZN) can maintain its market share in the giant market, the company’s current valuation could prove fairly cheap in the long term.
269 hedge funds in our database owned shares of Amazon.com, Inc. (NASDAQ:AMZN) at the end of Q3, ranking the company as one of the most popular stocks among elite institutions at the end of September.
1. Microsoft Corporation (NASDAQ:MSFT)
Number of Hedge Fund Holders: 269
Microsoft Corporation (NASDAQ:MSFT) ranks #1 on our list of 10 Best Cheap Stocks to Buy Now for Long Term given 269 hedge funds in our database owned shares of the software giant the end of the third quarter. Recently, Microsoft Corporation (NASDAQ:MSFT) has been in the news given its $1 billion investment in OpenAI in 2019, which is the maker of the popular AI chat bot, ChatGPT.
Given ChatGPT’s successful launch, OpenAI’s valuation has likely increased and Microsoft Corporation (NASDAQ:MSFT) has the potential to ultimately make up to 100 times its initial investment if the company is really successful.
You can also take a look at 11 Biggest Malls in Europe and 11 Best Quality Stocks to Buy Now.
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Disclosure: None. 10 Best Cheap Stocks to Buy Now for Long Term is originally published on Insider Monkey.
