Analysts love these cheap stocks.
With the S&P 500 up more than 100% from its March 2020 lows and trading at all-time highs, it may seem like there are no cheap stocks left in the market. In fact, most stocks trading at less than $10 at this point are there for good reasons and should be avoided at all costs. However, for investors willing to do some digging, the Morningstar analyst team still sees a handful of attractive buying opportunities. Here are nine cheap stocks to buy for less than $10 that have significant valuation upside, according to Morningstar.
Banco Santander SA (ticker: SAN)
Banco Santander is the largest Spanish bank by market cap. Analyst Johann Scholtz says Banco Santander’s capital ratios still need some improvement following the latest European Central Bank stress tests, but the bank proved to be less sensitive to stress than peers. Scholtz says Santander could improve its profitability, capitalization and valuation if it would trim its presence in underperforming geographical regions. He says the bank’s Latin American business is particularly impressive, and it is a market leader in Brazil, Mexico and Chile. Morningstar has a “buy” rating and a $4.50 fair value estimate for SAN stock.
Lloyd’s Banking Group PLC (LYG)
Lloyd’s Banking Group is a British retail and commercial bank. Analyst Niklas Kammer says remediation costs weighed on Lloyd’s second-quarter earnings, but the bank’s underlying performance was solid. Almost 95% of Lloyd’s assets are based in the U.K., making it essentially a pure play investment. Kammer says the bank has become a much more attractive investment since its massive restructuring than began in 2011. Now, he says the company is one of the strongest retail banking franchises in the U.K. Morningstar has a “buy” rating and a $3.40 fair value estimate for LYG stock.
Telefonica SA (TEF)
Telefonica is the major telecom operator in Spain. Analyst Javier Correonero says the company is doing an impressive job of divesting underperforming divisions, but it may still be difficult for Telefonica to generate excess return on invested capital over the next decade. Still, Correonero says the company’s decision to sell its tower assets will help it reduce debt, a top capital allocation priority. Correonero says Telefonica will likely continue to sell assets and streamline its business, efforts that could potentially unlock hidden value in the company. Morningstar has a “buy” rating and a $5.80 fair value estimate for TEF stock.
Energy Transfer LP (ET)
Energy Transfer is a U.S. midstream oil and gas infrastructure company. Analyst Travis Miller says Energy Transfer is set up for a “blockbuster” 2021, but there are still plenty of capital allocation risks that investors should monitor. Miller says Energy Transfer shares trade at roughly a 50% discount to his fair value estimate, making the stock one of the best values in the energy sector. Energy Transfer has reduced its debt by $5.2 billion this year, and Miller says he expects more acquisitions ahead. Morningstar has a “buy” rating and an $18.50 fair value estimate for ET stock.
PG&E Corp. (PCG)
The past couple of years have been a harrowing experience for PG&E investors. The California utility company filed for bankruptcy in 2019 following two deadly wildfires linked to PG&E power lines. In 2020, PG&E emerged from bankruptcy after $25.5 billion in liability settlements. Miller says PG&E’s recent investor day event helped reassure shareholders about its approach to mitigating future wildfire risk, including a $20 billion plan to bury 10,000 miles of power lines in high-risk regions of California. Morningstar has a “buy” rating and an $11.50 fair value estimate for PCG stock.
Enel Americas SA (ENIA)
Enel Americas is a conglomerate of South American electric energy companies. Analyst Charles Fishman says the recent acquisition of Enel Green Power’s Latin American renewable energy assets gives Enel more than 3 gigawatts of additional operating renewable energy assets. Unfortunately, Brazil’s sluggish economic recovery will continue to be a headwind for Enel’s solar and wind project developments in the near term. Enel stock pays a 3.2% dividend, however, and Fishman projects strong electricity demand and customer growth in Argentina and Brazil once the pandemic has subsided. Morningstar has a “buy” rating and a $10 fair value estimate for ENIA stock.
Teva Pharmaceutical Industries Ltd. (TEVA)
Israel-based Teva Pharmaceutical Industries is the world’s largest generic drug producer. Analyst Damien Conover says Teva is likely undervalued in part due to uncertainty over the severity of its eventual opioid litigation settlement. Conover says Teva’s relatively large $22.7 billion in debt may allow for greater flexibility in its settlement payment plan or even a reduced settlement. Classic value investors should know that Teva is also one of just two stocks trading under $10 that are included among Warren Buffett’s Berkshire Hathaway (BRK.A, BRK.B) investments. Morningstar has a “buy” rating and a $20 fair value estimate for TEVA.
Aegon NV (AEG)
Aegon is an insurance company that operates in the Netherlands, the U.K. and the U.S. Analyst Henry Heathfield says Aegon management is focusing on several initiatives to improve the business. The first priority is strengthening the company’s balance sheet. Second, management wants transparency, including a shift from biannual to quarterly financial reporting. Finally, the company is improving efficiency and increasing its strategic focus. AEG also pays a 3.4% dividend and trades at an attractive valuation of just 5.2 times forward earnings. Morningstar has a “buy” rating and a $6 fair value estimate for AEG stock.
Telecom Italia SpA (TIIAY)
Telecom Italia is an Italian wireless and fixed-line telecom provider. Correonero says the Italian mobile market has challenges, but Telecom Italia remains focused on deleveraging its balance sheet over the next three years. The company intends to stabilize its revenue, cut costs and secure partnerships that will help improve its working capital. If successful, Correonero says this strategy will improve free cash flow in the long term. However, investors should expect revenue pressures as traditional telephone services decline and low-end mobile market competition intensifies. Morningstar has a “buy” rating and a $7.30 fair value estimate for TIIAY stock.
9 of the best cheap stocks under $10:
— Banco Santander SA (SAN)
— Lloyd’s Banking Group PLC (LYG)
— Telefonica SA (TEF)
— Energy Transfer LP (ET)
— PG&E Corp. (PCG)
— Enel Americas SA (ENIA)
— Teva Pharmaceutical Industries Ltd. (TEVA)
— Aegon NV (AEG)
— Telecom Italia SpA (TIIAY)
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