7 Cheap Stocks That Wall Street Analysts Still Love

7 Des 202222.54 UTC

Now is as good a time as ever to start collecting cheap stocks. The S&P 500 has a year-to-date total return of 14.81% through Dec. 6. It is projected to be the index’s worst yearly performance since 2008 and the third worst of the 21st century. But it could have been much worse. So, while it’s not easy putting money into the markets when the sentiment is so negative, there are still cheap stocks that analysts love.

Whether you have the nerve to make a move is another story altogether. There’s no shame in sitting on cash rather than throwing money down a potential rabbit hole looking for cheap stocks.

For those who aren’t backing down from Mr. Market, I look for cheap stocks that have solid balance sheets, make good money, and a majority of analysts that cover these companies rate them “Overweight” or outright “Buy.”

You’ll notice that there are some very familiar names and some lesser-known businesses. All seven thee cheap stocks have a shot at redemption in 2023.

BOOT	Boot Barn	$63.89
AZEK	Azek Company	$19.04
GOOGL	Alphabet	$94.94
NOVA	Sunnova Energy International	$21.00
ALK	Alaska Air Group	$44.28
MSFT	Microsoft	$244.37
NIO	Nio	$12.58

Boot Barn Holdings (BOOT)

Boot Barn Holdings (NYSE:BOOT) has gotten crushed in 2022. Its stock is down more than 47% year-to-date, making it one of the cheap stocks to buy on weakness. However, over the past five years, it’s up more than 317%. Of the 12 analysts covering BOOT stock, 11 rate it either “Buy” or “Overweight,” with only one “Hold.”

In early January, I selected Boot Barn and six other stocks I thought could double for a second consecutive year. Of course, I had no idea the terrible year the markets would experience in 2022.

However, the company’s growth story remains intact.

JPMorgan believes value-priced small-cap stocks such as Boot Barn are the place to be over faster growers.

In Q2 2023, Boot Barn’s revenues increased 12.4% over the previous year to $351.5 million. That’s on top of 69.5% growth in Q2 2022. Its same-store sales grew 2.3% with a 3.9% increase in retail same-store sales and a 7.0% decrease in e-commerce same-store sales.

For all of 2023, it expects to open 40 new stores and grow sales by at least 10.9% to $1.66 billion at the midpoint of its guidance. On the bottom line, earnings per share should be at least $5.80.

Based on its guidance for 2023, BOOT trades at a cheap 1.1x sales and 11.0x earnings.

Azek Company (AZEK)

There are currently 20 analysts covering Azek Company (NYSE:AZEK). Of the 20, 17 rate it “Overweight” or “Buy.” The median target price is $22.45.

In November 2020, I recommended AZEK as one of the year’s best IPOs to hold for the long term, and still think it’s one of the better cheap stocks out there.

“Over the last two fiscal years, its sales have grown by 26% to $794 million, while it’s gone from an operating loss in 2017 of $26 million to an operating profit of $59 million in 2019. In the first nine months of 2020, sales are up 10% over last year, with a 3% increase in operating profits,” I wrote on Nov. 17, 2020.

Over the next five years, Azek’s target is to grow net sales by 10% annually from $1.4 billion at the end of fiscal 2022 (September year-end) to $2.3 billion in 2027. At the same time, it expects its adjusted EBITDA margin to grow by 100 basis points annually over the same period.

In November, it reported Q4 2022 results that included a 15% increase in sales. That was the good news. Unfortunately, its adjusted net income fell by 51%, to $24.5 million, due to higher costs of raw materials and employee expenses.

Due to a potential slowdown in its residential business, the maker of capped polymer, capped composite decking and other outdoor living products, the company expects a 10% volume reduction in 2023.

Nonetheless, Azek is positioned to take market share and expand into new markets. Down 58% YTD, AZEK stock is cheaper than it’s been since it went public.

Alphabet (GOOGL)

InvestorPlace contributor David Moadel recently discussed what layoffs at Google would mean for Alphabet (NASDAQ:GOOGL) stock. My colleague believes these job cuts could lead to a leaner, more competitive business.

Moadel also pointed out that UK-based activist investor TCI Fund Management feels Alphabet has too many employees. With slowing revenue growth, that’s resulting in a cost per employee that is too high.

Google is considering laying off as many as 10,000 employees. The mere threat of these job cuts has undoubtedly hampered the company’s productivity in recent weeks. If they’re going to cut, do it sooner rather than later because nobody wins by dithering about the decision.

However, of the 49 analysts covering Google stock, 45 give it an “Overweight” or outright “Buy” rating, with an average target price of $125.70.

Despite bears suggesting Google’s ad revenues will take a hit if a recession hits, the business is still excellent. In Q3 2022, Google advertising revenue was $53.1 billion, accounting for 89% of Google Services’ revenues. Google Services’ operating profit in the quarter was $24.0 billion, good for an operating segment margin of 40%, 400 basis points higher than in Q3 2021.

It’s making significantly more profits from slightly less revenue, which makes it one of the more surprising cheap stocks on this list. There are lot worse things in life.

What Google loses in ad revenues, it will more than make up in the cloud. In Q3 2022, it generated $6.87 billion from its cloud business. That’s an annual run rate of nearly $28 billion.

However, what if the ads slowdown doesn’t materialize? That’s a risk/reward proposition worth taking, especially given it generates $62.5 billion [key ratios] in trailing 12-month free cash flow. That’s the financially sound company you want to own should a recession rear its ugly head.

Its price-to-sales ratio is 4.68x sales, lower than it’s been at any time in the past five years. By every metric, it’s cheaper than it’s been in years.

Sunnova Energy International (NOVA)

There are currently 23 analysts covering Sunnova Energy International (NYSE:NOVA). Of the 23, 19 rate it “Overweight” or an outright “Buy.” The average target price is $37.19, making it one of the cheap stocks to watch in the energy space.

Although analysts are generally optimistic about Sunnova and the rest of the residential solar systems providers, some are concerned that a recession will put the brakes on residential spending for these systems. In July, Piper Sandler analyst Kashy Harrison downgraded NOVA to neutral from overweight while also cutting the target price by $4 to $23.

However, over the past month, Sunnova’s share price has gained nearly 19%, partly due to the state of California reducing the payments residential customers with rooftop solar get from the utilities for putting excess power back into the grid. In addition, the state scrapped a plan to charge a monthly grid access fee of $60.

“While the proposal doesn’t check every box on the industry’s wishlist, it’s a significantly better outcome than the previous iteration and should be a particular boon to the residential storage industry,” Barron’s reported Tudor Pickering Holt analyst Colton Bean wrote in a note to clients.

In Sunnova’s third quarter of 2022, it added 21,800 customers, bringing its total to 246,600 as of Sept. 30. As a result, revenue increased by 117% to $149.4 million. Its adjusted EBITDA was 64% higher than a year ago at $41.30 million.

As of the end of the third quarter, the gross contracted customer value was $5.71 billion, up from $4.34 billion at the end of December. The weighted average contract life remaining of its customers is 22.3 years.

The company expects to have 400,000 customers by the end of 2023. As it continues to add dealers and customers, the net contracted customer value (NCCV) will continue to accumulate. Its NCCV at the end of Q3 2022 was $10,400. By the end of 2025, it’s projected to be $19,000.

Alaska Air Group (ALK)

On Nov. 30 Alaska Air Group (NYSE:ALK) became the first U.S. airline to launch electronic bag tagging. The service allows passengers to complete all their at home and then drop their checked luggage at the bag drop, avoiding lining up at the counter.

It’s these kinds of things that will help it fill the 52 Boeing 737 Max aircraft the airline ordered in October. The planes will be delivered between 2024 and 2027. That brings its 737 MAX fleet to 146. In addition, it has the option to buy 105 more by 2030. It was the company’s largest order in its 90-year history.

In October, the airline reported record third-quarter results, which included $2.8 billion in revenues, 45% higher than a year earlier, and a load factor — defined as the number of seats it sells versus those available — of 86.5%, 620 basis points higher than a year earlier. Anytime an airline gets above 80%, its business generally makes money on its flights.

In Q3 2022, Alaska Air’s adjusted net income was $325 million, considerably better than $187 million a year earlier. It finished the third quarter with $3.2 billion in cash and marketable securities on its balance sheet and adjusted net debt of just $805 million, a low 14% of its market cap.

Of the 14 analysts covering its stock, 13 rate it “Buy” or “Overweight,” with an average target price of $61.08.

Microsoft (MSFT)

Microsoft (NASDAQ:MSFT) is a very popular stock with analysts. Of the 53 giving it a rating, 48 have it “Overweight” or an outright “Buy.” The average target price of $293.06.

Who wouldn’t like Microsoft stock? They have so many powerhouse businesses, including Microsoft Azure. CEO Satya Nadella has ridden the move to the cloud all the way to the bank, and shareholders are thankful for that.

Right now, the elephant in the room is its $69 billion acquisition of Activision Blizzard, pending regulatory approval. Even though Activision reported excellent Q3 2022 earnings on Nov. 7, the video game company’s shareholders are more concerned about Microsoft getting the thumbs up.

The difference between approval and rejection is currently $23. Microsoft is paying $95 a share, but it could widen considerably should regulators say no. On Nov. 8, the European Commission said it would undertake a second and more thorough examination of the Microsoft-Activision merger that could last through March.

One way that Microsoft hopes to calm regulators is by putting Call of Duty on Nintendo for the next 10 years. On Dec. 6, Microsoft’s head of gaming said it had signed a 10-year commitment with Nintendo should its acquisition close. It’s also offered Call of Duty to the Stream game distribution platform.

While Xbox could benefit from the combination, Microsoft remains a force to be reckoned with. If Microsoft’s trailing 12-month free cash flow of $63.3 billion [key ratios] were revenues, it would be the 60th-largest Fortune 500 company.

As for Microsoft Azure, it finished the latest quarter with $20.3 billion in revenue, $200 million less than Amazon Web Services. It’s a neck-and-neck race that will continue to play out in 2023 and beyond.

Nio (NIO)

Like many EV manufacturers, Nio (NYSE:NIO) has had a brutal year in the markets. It’s down more than 60% year-to-date. From its January 2021 all-time high of $66.99, it’s lost 80% of its value.

November’s provided a little hope for the EV maker.

On Dec. 1, the company reported its November 2022 delivery update. Nio delivered 14,178 vehicles last month, 30.3% higher than a year earlier. YTD, it delivered 106,671 vehicles, 31.8% higher than in the same 11 months of 2021. Since its launch, it’s had 273,000 vehicles delivered to customers in China and elsewhere.

At the end of November, Nio entered into a strategic cooperation agreement with Tencent Holdings to develop “… autonomous driving-related cloud services, intelligent driving maps and digital ecosystem to provide users with experiences beyond expectation.”

Deutsche Bank analyst Edison Yu recently suggested that Nio’s problems may soon be behind them.

“While supply-chain problems and production delays persist, he [Yu] sees things getting better early in 2023 ‘supported by the government’s gradual pivot away from COVID zero,’ wrote the analyst in a Monday research report. ‘The key to watch will be December sales as NIO will likely need to deliver something close to 20,000 units in volume to demonstrate execution is indeed improving,’” Barron’s Al Root reported on Nov. 21.

Speaking of analysts, of the 41 that cover NIO stock, 34 rate it “Outperform” or an outright “Buy,” with an average median target price of $16.88.

With Covid-19 restrictions easing in China, look for EV buyers to come out in December to buy themselves a Nio or two.

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.comPublishing Guidelines.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.