In this article, we take a look at 11 most profitable cheap stocks to buy.
Cheap stocks are stocks that trade below what many people think they’re really worth. Given different people have different opinions on what’s cheap, cheap stocks are subjective. Some people might think a stock is cheap but others may not.
Nevertheless, some of the best cheap stocks in the long term are blue chip stocks with substantial competitive advantages trading for fair or below average valuations.
Cheap stocks can trade for lower valuations for various reasons.
Some companies like Meta Platforms, Inc. (NASDAQ:META) might spend more money than the market would like on a project for instance and that’s weighed on the stock as result. In recent years, Meta Platforms, Inc. (NASDAQ:META) has spent over ten billion dollars annually on building the metaverse without any meaningful profits to show for it yet. Given the tens of billions more the company plans to invest, Meta Platforms, Inc. (NASDAQ:META) stock declined substantially in 2022 before its 2023 rally.
Some companies such as Alphabet Inc. (NASDAQ:GOOG) might experience more competition in the future as Microsoft Corporation (NASDAQ:MSFT) plans to incorporate the popular ChatGPT AI into Bing. Although ChatGPT makes a lot of mistakes, many find the AI useful given the strong adoption since its launch. If Bing gains substantial market share given new AI tools it will soon launch, Alphabet Inc. (NASDAQ:GOOG)’s earnings could decrease in the near term and the company will need to launch new services that will need to do well to preserve its growth.
Other companies might be affected by macroeconomic headwinds. In 2022, inflation rose substantially and the Federal Reserve had to raise interest rates considerably as a result. With the substantially higher interest rates, U.S. Treasury yields have increased considerably, and the outflow of capital from the equity market into the Treasury market has weighed on some valuations.
Although inflation has recently eased from its highs late last year, many economists think the U.S. central bank might have to raise rates several more times this year to make sure that inflation has really peaked. If the Federal Reserve raises rates too much, there could be an economic slowdown or even a recession that might weigh on earnings.
If economic conditions normalize in the long term, however, the valuations of the leading stocks could also potentially normalize assuming that they maintain their market shares and profitability.
Similarly, if companies like Meta Platforms, Inc. (NASDAQ:META)’s metaverse project end up being very profitable, there’s potential for upside.
Every company is different and some companies might not do as well as expected even if they have a lot of competitive advantages. As a result, it could be a good idea for long term investors to own a well diversified portfolio of leading stocks across many different sectors.
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Methodology
For our list of 11 Most Profitable Cheap Stocks to Buy, we selected blue chip stocks that either trade below their normal valuations or have the potential to increase their earnings substantially in the next ten years.
We ranked each stock based on their TTM net income according to YCharts.
We used YCharts’ TTM net income, which might not incorporate adjusted income. Given some companies have not reported their fourth quarter earnings and some companies have different fiscal years, the net income might not cover the same time periods.
11 Most Profitable Cheap Stocks to Buy
11. The Walt Disney Company (NYSE:DIS)
Net Income (TTM) as of December 31, 2022: $3.32 billion
The Walt Disney Company (NYSE:DIS) is an entertainment conglomerate that trades for a forward P/E of 20.43, which isn’t necessarily cheap by conventional standards. Nevertheless, analysts expect the company’s earnings to increase in the future as they have consensus estimates of $3.78 per share for 2022, $4.13 per share for 2023, $5.48 per share for 2024, and $6.73 per share for 2025. If The Walt Disney Company (NYSE:DIS) meets or exceeds analyst profit estimates, the stock could be cheap in the long term, especially if the company’s Disney+ streaming service keeps growing and the company successfully monetizes its substantial number of users. For the trailing twelve months ended December 31, 2022, The Walt Disney Company (NYSE:DIS) had net income of $3.32 billion.
Alongside Bank of America Corporation (NYSE:BAC), JPMorgan Chase & Co. (NYSE:JPM), and Alphabet Inc. (NASDAQ:GOOG), The Walt Disney Company (NYSE:DIS) is one of the most profitable cheap stocks to buy.
10. BlackRock, Inc. (NYSE:BLK)
Net Income (TTM) as of December 31, 2022: $5.178 billion
BlackRock, Inc. (NYSE:BLK) is the world’s largest asset manager that had $393 billion of full year long-term net inflows, reflecting 4% organic asset growth and positive organic base fee growth. Total AUM at the end of Q4 2022 was $5.594 trillion, down 14% given the declines in various markets however.
While the company experienced a 8% decrease in full year revenue given the lower markets and lower AUM, the company nevertheless returned $4.9 billion to shareholders in the year, including $1.9 billion in share repurchases. While there is still some uncertainty in the near term, BlackRock, Inc. (NYSE:BLK)’s long term EPS growth potential still looks attractive given the expected continued growth in AUM and the company’s capital returns. Shares of BlackRock, Inc. (NYSE:BLK) trade for a forward P/E of 18.16 as of 2/10.
9. NIKE, Inc. (NYSE:NKE)
Net Income (TTM) as of November 30, 2022: $5.634 billion
Although its stock has rallied almost 50% from the lows in October of 2022, NIKE, Inc. (NYSE:NKE) shares are still down 16.4% over the last year as the high inflation has weakened demand for the company’s premium apparel. Nevertheless, NIKE, Inc. (NYSE:NKE) exceeded Wall Street’s expectations for its quarter ended November 30, with sales up 17% year over year and EPS of $0.85 versus the expected EPS of $0.64. According to YCharts, NIKE, Inc. (NYSE:NKE) also had trailing twelve month net income of $5.634 billion as of November 30, 2022.
8. Lowe’s Companies, Inc. (NYSE:LOW)
Net Income (TTM) as of October 31, 2022: $6.686 billion
Lowe’s Companies, Inc. (NYSE:LOW) is one of the largest home retailers in the United States that’s trading for a forward P/E of 15. While its stock price is down 10.7% in the last year given higher interest rates have weakened housing demand, Lowe’s Companies, Inc. (NYSE:LOW) has been profitable with net income in the last four quarters of almost $6.7 billion according to YCharts. Lowe’s Companies, Inc. (NYSE:LOW) also has a substantial stock buyback program which could help its EPS growth in the future if the company maintains its market share and profitability.
7. Wells Fargo & Company (NYSE:WFC)
Net Income (TTM) as of December 31, 2022: $13.18 billion
Wells Fargo & Company (NYSE:WFC) had net income of $13.18 billion for the year ended December 31, 2022. Return on assets for the year was 0.7% and return on equity was 7.5%. Net interest margin on a taxable equivalent basis for the year was 2.63%. Although Wells Fargo & Company (NYSE:WFC)’s earnings could decrease if there is an economic slowdown or recession in the United States, the bank nevertheless has substantial earnings power in the long term. As of February 10, Wells Fargo & Company (NYSE:WFC) has a forward P/E ratio of 9.07 and a dividend yield of 2.53%.
6. Citigroup Inc. (NYSE:C)
Net Income (TTM) as of December 31, 2022: $14.84 billion
Citigroup Inc. (NYSE:C) is one of the big four American banks with a forward P/E ratio of 7.44 and a dividend yield of 4.07%. Citigroup Inc. (NYSE:C) is also trading considerably below its book value given its price to book ratio of 0.54. Although the bank’s earnings and stock price could decline if there is an economic slowdown or recession, Citigroup Inc. (NYSE:C) has been profitable with net income of over $14.8 billion over the last four quarters according to YCharts and the bank has substantial normalized earnings power if it maintains its market share.
Like Citigroup Inc. (NYSE:C), Bank of America Corporation (NYSE:BAC), JPMorgan Chase & Co. (NYSE:JPM), and Alphabet Inc. (NASDAQ:GOOG) are among the most profitable cheap stocks to buy.
5. The Home Depot, Inc. (NYSE:HD)
Net Income (TTM) as of October 31, 2022: $17.10 billion
The Home Depot, Inc. (NYSE:HD) is the leading home improvement retailer in the United States with substantial scale and normalized earnings power. Although demand has softened given rising interest rates have weakened the housing market, The Home Depot, Inc. (NYSE:HD) nevertheless had trailing net income of $17.10 billion as of October 31, 2022 according to YCharts. For the future, analysts see The Home Depot, Inc. (NYSE:HD)’s earnings rising with consensus estimates of $15.49 per share for 2022, $16.67 per share for 2023, $16.81 per share for 2024, and $17.74 per share for 2025.
4. Meta Platforms, Inc. (NASDAQ:META)
Net Income (TTM) as of December 31, 2022: $23.20 billion
Meta Platforms, Inc. (NASDAQ:META) ranks #4 on our list of 11 Most Profitable Cheap Stocks to Buy given its net income of $23.20 billion for the last four quarters. Although the social media giant’s profit for the last year is considerable, Meta Platforms, Inc. (NASDAQ:META)’s net income would have been even higher if the company had not spent substantial amounts building the metaverse. In the fourth quarter, the company’s Reality Labs lost $4.28 billion, bringing the unit’s total losses to $13.72 billion for 2022. If the metaverse is a success financially, Meta Platforms, Inc. (NASDAQ:META) could benefit in the long term. Shares currently have a forward P/E of 15.41.
3. Bank of America Corporation (NYSE:BAC)
Net Income (TTM) as of December 31, 2022: $27.53 billion
Bank of America Corporation (NYSE:BAC) is one of the most profitable companies in the United States thanks to its substantial scale and its strong business. For the trailing twelve months as of December 31, 2022, Bank of America Corporation (NYSE:BAC) earned $27.53 billion according to YCharts, allowing the bank to more than support its annual dividend of $0.88 per share. If the economy doesn’t slow too much, Bank of America Corporation (NYSE:BAC) has the potential in fact to raise its dividend this year given its earnings power.
2. JPMorgan Chase & Co. (NYSE:JPM)
Net Income (TTM) as of December 31, 2022: $37.68 billion
JPMorgan Chase & Co. (NYSE:JPM) was the most profitable ‘big four’ American bank in 2022 with trailing twelve months net income of $37.68 billion according to YCharts. JPMorgan Chase & Co. (NYSE:JPM) is also trading at a fairly attractive valuation in terms of the long term with a forward P/E ratio of 10.50. Although an economic slowdown could be a headwind, JPMorgan Chase & Co. (NYSE:JPM) has long term EPS growth potential if it maintains its market share.
1. Alphabet Inc. (NASDAQ:GOOG)
Net Income (TTM) as of December 31, 2022: $59.97 billion
Alphabet Inc. (NASDAQ:GOOG) is a stock that faces competition given Bing’s impending incorporation of ChatGPT, which many users find useful even if it makes a lot of mistakes. Nevertheless, Alphabet Inc. (NASDAQ:GOOG) has its own AI technology in Bard which the company plans to launch this year and as of February 10, the tech giant’s stock has a forward P/E ratio of 15.58. Alphabet Inc. (NASDAQ:GOOG) has been one of the most profitable companies in the world in 2022 with net income of almost $60 billion according to YCharts. As a result, Alphabet Inc. (NASDAQ:GOOG) ranks #1 on our list of 11 Most Profitable Cheap Stocks to Buy.
Polen Global Growth Strategy commented on Alphabet Inc. (NASDAQ:GOOG) in a Q4 2022 investor letter,
Alphabet Inc. (NASDAQ:GOOG) revenues were up 11% constant currency with a 6% FX headwind to reported revenue growth during the most recent quarter. This was a deceleration in growth and Operating Income declined year over year, but this was due to incredibly difficult comparisons from the prior year. On a two-year basis, Total Revenue, Search Revenue, and YouTube Revenue all grew at roughly a ~20% CAGR, as did Operating Income. The Google Cloud Platform continued to grow at a strong pace. Margins expanded significantly last year given the incredibly strong growth and are now falling back to a more normal level as revenue growth moderates on those tough comps. While management did note a small impact from the softening economic environment (ad budgets are easy to adjust down and then back up as we saw during the pandemic), we believe underlying trends in the business remain healthy for the long term.
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