In this article, we will look at the 7 Most Profitable Cheap Stocks To Invest In.

Insights on Small Caps, Tech, and More

Sherry Paul, Morgan Stanley Private Wealth Management managing director, joined CNBC’s “Squawk Box” on October 8, to discuss her investment strategy amidst the current market trends. Despite the Russell 2000 being down a percent, Paul believes it’s the right time to strategically add to small caps, as they are ripe for M&A and have been teased out due to their dependence on domestic consumption.

Paul emphasizes that the key to navigating this market is to be selective and strategic, recommending a broadening out of investments across sectors in the S&P, with a focus on large caps, particularly in areas such as industrials, financials, and staples. She believes that the rates going lower, combined with the productivity-enhancing cost reduction kicker, will benefit these sectors. Paul also highlights the importance of dividend yields, which can add lower volatility to a portfolio.

Regarding large-cap tech stocks, Paul remains bullish, viewing it as a theme rather than an idea. She believes that corporations will invest in software and hardware upgrades, driven by their enormous cash balances and the need to cut costs as rates go lower. This will be a boost for the sector, although it’s a longer-term game, with a time horizon of 12-24 months.

Despite the S&P 500 near record levels, Tom Lee, co-founder of Fundstrat, an independent equity research firm, remains bullish, citing a strong economic backdrop, the Fed’s decision to cut rates, and stimulus policies in China as tailwinds that will support the market. He believes that the economy is resilient and that the Fed’s easing will lead to a continued bull market, with the S&P 500 potentially reaching 5700 or higher by the end of the year.

Lee acknowledges that there are some headwinds, including the looming election and rising oil prices, but believes that they will be offset by the tailwinds. He also notes that small caps, which have been the weakest area of the market since the Fed hike, are due for a rebound.

As the market continues to navigate through economic trends and global challenges, expert insights help provide valuable insights to make informed investment decisions. With that in context, let’s take a look at the 7 most profitable cheap stocks to invest in.

Our Methodology

To compile our list of the 7 most profitable cheap stocks to invest in, we used the Finviz and Yahoo stock screeners to compile an initial list of the 40 largest companies by market cap that are trading at a forward P/E ratio of under 20 as of October 7. From that list, we narrowed our choices to 7 stocks with positive TTM net income and 5-year net income growth informed by reputable sources, including SeekingAlpha, which provided insights into 5-year growth rates, and Macrotrends, which supplied information on trailing twelve-month (TTM) net income. Then we sorted the stocks in ascending order, according to their hedge fund sentiment, which was taken from our database of 912 elite hedge funds as of Q2 of 2024.

Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

7 Most Profitable Cheap Stocks To Invest In 

7. ConocoPhillips (NYSE:COP)  

Number of Hedge Fund Holders: 72  

Forward P/E Ratio as of October 7: 14.09  

TTM Net Income: $10.68 Billion  

5-Year Net Income CAGR: 8.39%

ConocoPhillips (NYSE:COP) is a leading global energy company with a diverse portfolio of conventional and unconventional assets across North America, Europe, and Asia. The company has a balanced portfolio and operations that are well-positioned to capitalize on the current energy market trends.

On May 29, ConocoPhillips (NYSE:COP) announced that it would acquire Marathon Oil in an all-stock transaction worth $22.5 billion, with Marathon Oil shareholders receiving 0.2550 shares of ConocoPhillips’s (NYSE:COP) stock for each share of Marathon Oil stock. The acquisition is expected to be immediately accretive to ConocoPhillips’ (NYSE:COP) earnings, cash flows, and return of capital per share, and is expected to result in at least $500 million of cost and capital savings within the first full year following the closing of the transaction.

ConocoPhillips (NYSE:COP) will also increase its ordinary base dividend by 34% to 78 cents per share starting in the fourth quarter and plans to repurchase over $20 billion in shares in the first three years, with over $7 billion in the first full year, at recent commodity prices. The transaction is expected to close in the fourth quarter of 2024, subject to regulatory clearance and other customary closing conditions.

ConocoPhillips’ (NYSE:COP) financial performance is supported by its solid production growth. In Q2,  the company’s production reached 1,945 MBOED representing an increase of 8% year-over-year. The company’s average petroleum price of $81.30 per barrel was 10% higher than year over year, which contributed to its solid earnings and free cash flow. The OPEC+ is supporting petroleum prices, which makes the country well-positioned to continue generating strong earnings and free cash flow in the coming quarters.

The company’s financial performance is also reflected in its net income, which has grown over the past 5 years with a CAGR of 8.39%. For the twelve months ended on June 30, ConocoPhillips (NYSE:COP) reported a net income of $10.68 billion.

6. Elevance Health (NYSE:ELV)  

Number of Hedge Fund Holders: 73  

Forward P/E Ratio as of October 7: 13.21  

TTM Net Income: $6.69 Billion  

5-Year Net Income CAGR: 10.43%

Elevance Health (NYSE:ELV), formerly known as Anthem, is a leading health insurance company with a well-diversified portfolio of businesses, including health insurance, pharmacy benefit management (PBM), and healthcare services.

Elevance Health’s (NYSE:ELV) health insurance segment is its largest business, accounting for the majority of its revenue and operating profits. The company’s medical membership profile is well diversified, with a mix of commercial, Medicaid, and Medicare Advantage members. As of 2023, the company had approximately 32 million commercial memberships, with around 27 million being fee-based and 5 million risk-based.

In Q2, Elevance Health (NYSE:ELV) health insurance segment managed to grow earnings before interest and taxes (EBIT) by $125 million, despite a decline in revenue. This was driven by a recovery in margins in the commercial segment, where the company has made progress in lowering its benefits-expense ratio. Additionally, Elevance Health’s (NYSE:ELV) Medicaid membership declined due to the redetermination process, which is expected to be a one-time event. The company’s CarelonRx segment, which provides PBM services, has also shown resilience, with revenue growth of 3.6% year-over-year in the second quarter of 2024.

Elevance Health’s (NYSE:ELV) Carelon Services segment, which provides healthcare services to both internal and external clients has been gaining traction, with external revenue growth of over 50% year-over-year in Q2. With a high margin profile, Carelon Services has the potential to become a significant profit growth driver for Elevance Health (NYSE:ELV). The company’s management has highlighted the segment’s strong growth prospects, citing a “long runway” ahead.

For the twelve months ending June 30, Elevance Health’s (NYSE:ELV) net income was $6.69 billion, a 6.04% increase year-over-year and a 5-year net income CAGR of 10.43%, reflecting its strong market position. The company’s earnings are projected to increase by 11.70% in the current year and industry analysts have reached a consensus on the stock’s Buy rating, with an average target price of $602.60 that suggests a 20.20% upside potential from its current levels.