U.S. Markets closed

3 Hot Stocks to Buy in May

Billy Duberstein, The Motley Fool

The old saying goes, "Sell in May and go away." However, I'd do the opposite in the case of the following three stocks. Though the overall market has bounced back strongly from its fourth-quarter swoon, certain individual companies remain undervalued by investors, even as their prospects continue to brighten.

For those who take a long-term view, short-term pessimism or disinterest in high-quality companies with top-notch management can create opportunities. Here are three such opportunities to put on your buy list in May.

A man in a business suit holds out his hand where there is a spark of light and upward-sloping lines emanating from it.

Image source: Getty Images.

Alphabet

Of all the mega-cap tech giants, Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) was the only one to fall after its quarterly earnings report. Investors were disappointed in the company's decelerating top-line growth this quarter, but there's reason to think Alphabet still has an extremely bright future.

In the quarter, revenue appeared to decelerate substantially, from 26% to 17% year over year. However, at least some of that was due to currency swings. On a currency-neutral basis, revenue decelerated only from 23% to 19%, which looks rather tame in comparison, and still very impressive for a company of Alphabet's size.

The deceleration may have sparked fears over Amazon (NASDAQ: AMZN) stealing digital advertising market share, but Alphabet should still benefit from the long-term shift away from traditional advertising and to digital ads. While Amazon's advertising growth is very real and a positive for Amazon, it's only likely to steal limited ad share in the consumer goods segment, which is only a portion of the overall market.

In addition, global internet penetration is still only around 57%, according to internetworldstats.com, and is set to grow over time, with substantial opportunity in Africa, the Middle East, and Asia. In fact, Alphabet posted 31% revenue growth in the Asia Pacific region last quarter on a currency-neutral basis.

That solidly growing and highly profitable income stream will allow management to invest in new ventures, including its fast-growing cloud infrastructure business and a host of "Other Bets" across medical research, self-driving cars, artificial intelligence, and venture capital investments in other top companies.

Based on 2019 analyst estimates, Alphabet trades at only about 26 times forward earnings. However, about $113.5 billion of the company's market capitalization is in cash holdings. Absent that huge cash horde, that multiple comes down to just 22.2.

That's a very reasonable price to pay for a wide-moat core business growing in the high teens, with multiple high-upside bets.

JPMorgan Chase

Another top company to pick up in May is JPMorgan Chase (NYSE: JPM). The idea for buying JPMorgan takes no great insight. It is the largest and certainly one of the best-run banks in the U.S. Therefore, JPMorgan could be seen as a safe way to play the banking sector, which appears undervalued today.

JPMorgan recently reported first-quarter results that handily topped analyst estimates. The quarter featured impressive increases in return on tangible equity, higher and safer capital ratios, and a lower efficiency ratio (lower is better).

Though the banking sector trades at a discount to the market on fears that we are late in the economic cycle, last Friday's jobs report smashed expectations. Wage growth is up, and the economy grew an impressive 3.2% in the first quarter.

A healthy and growing economy is good for banks, so now might be a good time to take advantage of JPMorgan's bargain-basement 12.5 price-to-earnings ratio and invest in one of the higher-quality banks in the country. Warren Buffett would agree with you.

Cleveland-Cliffs

A global internet giant, a large bank, and now iron ore pellets. U.S.-based iron ore producer Cleveland-Cliffs (NYSE: CLF) is currently capping off a five-year turnaround under CEO Lourenco Goncalves. He has spent the past five years largely correcting past management's mistakes, selling off noncore businesses and doubling down on its U.S. iron ore mines. In addition, Goncalves has renegotiated contracts with U.S. steel producers that will not only give the company more stable, long-term cash flows less tied to the price of iron ore, but will also give Cleveland-Cliffs credit for the more environmentally friendly iron ore pellets it produces.

With financials stabilized and debt paid down to a manageable level, Cleveland-Cliffs is switching to offense. Last fall, the company reinstated its dividend and instituted a $200 million share repurchase program, which it just upped to $300 million. In addition, Cleveland-Cliffs is in the midst of constructing a new hot-briquetted iron (HBI) plant in Ohio that should be completed this year. That plant will be the only one of its kind in the region, and will sell high-margin HBI metallics to electric arc furnace (EAF) steelmakers, which are gaining share on older blast furnaces.

As with the banks, investors appear cautious about the cyclical nature of the steel and iron ore industries, with Cleveland-Cliffs trading at only 7.2 times forward earnings. But don't let that stop you from investing in a company that will benefit over the long term from newer, more environmentally friendly ways of producing steel in the U.S.

More From The Motley Fool

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Billy Duberstein owns shares of Alphabet (C shares), Amazon, Cleveland-Cliffs, and JPMorgan Chase. His clients may own shares of the companies mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Amazon. The Motley Fool has a disclosure policy.