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Buy These 4 Cheap Stocks from Attractive Industries

Sejuti Banerjea
·6 min read

Picking stocks is no easy task, especially when there are so many to choose from. If you’re just looking for Zacks #1 (Strong Buy)-ranked stocks, there are over 4,000 names! So it’s imperative for you to narrow down the list to maximize your chances of upside.

So for example, if you couple a buy rank (Zacks ranks #1 or #2) with good value and/or growth scores, you get a list that offers earnings growth at relatively more favorable prices.

To further refine the list, you can select the ones that also operate in attractive industries. Our research shows that stocks in the top 50% of Zacks-classified industries outperform the bottom 50% by a factor of 2 to 1. In general, when the industry to which a company belongs has things going for it, this is reflected in the stocks that constitute the industry. So if the industry is in expansion mode (ecommerce for example), the constituent companies will exhibit strong growth characteristics.

It also pays to pick stocks with a recent history of positive surprises, because the companies that benefited from the pandemic or those that appear to be rebounding strongly are the ones that are likely to continue their outperformance.

You can also throw in expected growth estimates for the current and next fiscal years because growing companies are the ones that have the best chances of outperforming others.

That’s what I’ve attempted to do with the following picks-  

Polaris Inc. PII

Polaris designs, engineers and manufactures off-road and on-road vehicles like snowmobiles, motorcycles and boats. It also deals in other related products and after-market services.

The company’s Zacks Rank #2, Value Score B and Growth Score A indicate that it’s one of the safer picks in the Zacks universe.

Moreover, the Automotive – Domestic industry of which it’s a part, is in the top 24% of Zacks-classified industries, which increases chances of share price appreciation.

The company’s earnings surprise history of -62.1%, 116.7% and 30.7% in the last three quarters indicate that it was initially hit by the pandemic, but recovered strongly in the very next quarter, with further stabilization in the next quarter. So it makes sense that its estimated earnings for 2020 and 2021 are up a respective 64 cents (9.6%) and 49 cents (6.8%) since then.

Polaris is currently expected to grow 2020 revenue and earnings by 2.4% and 15.4%, respectively. Both revenue and earnings for 2021 are expected to be up 5.7%.

Valuation: The current price to forward earnings (P/E) multiple of 13.20X is below the median level of 14.48X over the past year, suggesting that the shares are undervalued.

Systemax Inc. SYX

Systemax is a direct marketer of brand-name and private label products, including PCs, notebooks, computer-related products and industrial products in North America and Europe.

Given its Zacks Rank #2, Value Score B and Growth Score B, SYX should be able to generate satisfactory returns for investors.  

The Retail - Consumer Electronics industry, of which it’s a part, is also in the top 21% of Zacks-ranked industries.

Being a relatively small company, there’s just one analyst providing estimates on the stock. And SYX has done a fairly good job of beating those estimates. In the September quarter for example, it reported earnings that were 60% better than expected, following which the 2020 and 2021 estimates were raised by a respective 36 cents (26.9%) and 30 cents (20.0%).

Systemax is expected to grow 2020 and 2021 earnings by 22.3% and 5.9%, respectively. It’s also expected to grow revenue 6.5% this year and 3.7% in the next.

Valuation: Trading at a P/E multiple of 16.74X, the stock is close to its median value of 16.56X. So there’s a lot of scope for upside.

MI Homes, Inc. MHO

One of the largest of the nation’s single-family home builders, MI Homes is known for its superior customer service, innovative design, quality construction and premium locations.

MHO’s Zacks Rank #1, Growth Score A and Value Score A underscores the strong upside potential in the shares.

The fact that the company also belongs in the Building Products - Home Builders industry, which is in the top 3% of Zacks-classified industries, further increases the chances of an upside.

The company solidly beat earnings estimates in each of the last three quarters, with a 68.5% beat in the September quarter. After the strong results, estimates for 2020 and 2021 increased $2.11 (33.3%) and 52 cents (8.5%), respectively.

Revenue and earnings for 2020 are currently expected to increase 29.7% and 82.3% with difficult comps leading to declines in 2021. However, there’s plenty of time for revision to the 2021 numbers, so we can take a bet on that.

Valuation: The shares are currently trading at 6.89X forward earnings, which is below the median value of 7.98X. Therefore, the shares are undervalued.

Beacon Roofing Supply, Inc. BECN

Beacon Roofing Supply is the largest distributor of residential and non-residential roofing materials, and complementary building products like siding, windows, specialty exterior building products, and insulation and waterproofing systems in the U.S. and Canada.

BECN’s Zacks Rank #2, Growth Score A and Value Score A are indicative of upside potential.

With the company also belonging to the attractive Building Products – Retail industry, which is in the top 13% of Zacks-classified industries, chances of upside increases further.

The company beat estimates by 52.5% in the June quarter. September quarter results will be reported on Nov 19. 2020 results are currently expected to shrink with the 2021 rebound exceeding 2019 levels.

Valuation: At 14.02X forward earnings, BECN shares are ahead of the 13.10X median over the past year. But since the valuation is well below the annual high, there’s a lot of scope for upside.

5 Stocks Set to Double

Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.

Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.

Today, See These 5 Potential Home Runs >>


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Systemax Inc. (SYX) : Free Stock Analysis Report
 
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