Cheap stocks are always a good buy. That’s because their downside is limited and upside could be immense – the definition of a great investment. That said, most investors have two different definitions of “cheap stocks.” In an attempt to please everyone, here are my top two picks for stocks trading under $20 that are also fundamentally undervalued.
Cheap stock #1
WELL Health (TSX:WELL) is always a top pick for growth investors. This little-known health-tech startup has delivered a 7,000% return since going public in 2016! Now, it’s a mature tech stock trading at an attractive valuation.
This year the company expects to generate $400 million in revenue. Meanwhile, its market value is roughly $1.6 billion. In other words, the stock is trading at a forward price-to-revenue ratio of four, which is unbelievably low for a software company.
WELL Health’s key growth driver is acquisitions, the perfect strategy for the deeply fragmented healthcare market. Recent acquisitions have helped the company launch online pharmacies, telehealth services, and private clinics across North America. Backed by a Hong Kong billionaire, WELL Health’s consolidation of the trillion-dollar healthcare sector is just getting started.
Keep an eye on this $7.8 stock.
Cheap stock #2
Alaris Equity Partners Income Trust (TSX:AD.UN) (formerly Alaris Royalty), is another cheap stock worth looking into. The company occupies a unique niche — preferred equity investor in private businesses. In other words, it’s an investment company that targets small- and mid-sized companies and buys up preferred shares to extract consistent cash flow.
The company’s target is 13% to 15%. Meanwhile, the stock trades at $18.3 and offers a 6.8% dividend yield. The stock also trades at a price-to-earnings ratio of 6.5, which implies an earnings yield of 15.4%!
Those yields and valuation metrics seem almost too good to be true. This is why it’s worth noting some of the risks. Alaris is vulnerable to business cycles. A sudden spike in interest rates or unexpected recession could plunge many of its portfolio companies into chaos.
However, I believe the current valuation has priced in that risk. This is why this cheap stock deserves a spot on your watch list.
Cheap stock #3
Trading at $21 a share and 15.6 times earnings, Aecon Group (TSX:ARE) is the final pick on this list. The company offers construction services for large-scale infrastructure projects. That’s a sector of the economy it seems everyone can agree is likely to boom.
The company blew past analyst estimates in its most recent quarter. Adjusted EBIDTA came in 15% higher than anticipated at $61 million. Now, it’s targeting $4 billion in revenue this year. It also has a backlog of projects worth $6 billion for the years ahead.
Aecon seems to offer robust earnings, revenue visibility, and stable growth. That’s why it deserves a spot on your watch list for cheap stocks this year.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Vishesh Raisinghani owns shares of WELL Health Technologies Corp. The Motley Fool recommends Alaris Equity Partners Income Trust.