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Three Cheap U.S. Stocks with Huge Profit Potential

Bargain-hunting investors this year have been able to feast from a market buffet of cheap U.S. stocks.

Reports have surfaced in the past few months about how the Standard & Poor's 500 is offering the lowest-priced stocks in years based on price/earnings ratios.

Bloomberg in March reported that companies in the S&P 500 were trading at 14.1 times earnings, the lowest valuation of all 34 peak periods since 1989.

Then in May former U.S. Federal Reserve Chairman Alan Greenspan declared that "stocks are very cheap."

Again just last week Bloomberg noted that the S&P 500 is trading 16% below its average valuation since the 1950s.

Now, after the S&P 500 recorded its best June since 1999, investors want to know if it's still the time to buy or if the party's over. With the Eurozone debt crisis still looming and a spate of recent gloomy U.S. economic reports, market optimism has thinned.

But there are still bargains to buy.

How to Find Cheap U.S. Stocks

First, to determine if a stock is undervalued with high profit potential, and not cheap and going nowhere, investors need to scrutinize the driving factors of why a stock's price has fallen.

For instance, you must look at what's happening to the stock's sector – is there a macroeconomic or cyclical reason for the stocks to slip?

Then look at the company – is it in healthy financial shape? What are its future prospects?

Some stocks like Bank of America (NYSE: BAC) may seem undervalued when looking at tangible value, which tells us BAC is worth almost double what it is trading at now. But the company posted negative earnings per share last quarter. Analysts expect it to post a positive EPS of 16 cents this quarter and give it a forward P/E just above 8, which is cheap – but it's a stock that comes with a lot of volatility, so its low price is risky.

Others have had a long slide and may be at a bottom, such as tech struggler Hewlett Packard (Nasdaq: HPQ). CEO Meg Whitman is trying to turn the company around, but HP has lost more than half of its market value over the past year. With its forward P/E less than 5 it seems like a bargain, but there isn't a strong case for why this stock could rally.

And finally look at General Motors (NYSE: GM) or Ford Motor Co. (NYSE: F). Both currently have P/E ratios below 6 and even though the auto industry has been one of the hardest hit U.S. sectors over the past few years it looks to be on the upswing now.

Three Cheap U.S. Stocks

Based on several factors, especially low P/E ratios and future prospects, here are three cheap U.S. stocks to consider from major industries.

ConocoPhillips (NYSE: COP) – In a sector where most companies are trading at historically low P/E ratios, global energy company Conoco Phillips stands out.

Conoco Phillips has a current P/E ratio less than 6 and a target price on average 15% higher than its current price. Add a great 4.7% dividend yield and you have yourself an attractive and relatively inexpensive U.S. stock.

As an energy company poised to benefit from the global transition to natural gas, ConocoPhillips is positioned well for the industry's future. Its recent split into two companies, Conoco Phillips and Phillips 66, will add shareholder value down the road.

General Motors (NYSE: GM) – It seems that the automobile industry recently has been one of the few bright spots in a rather downtrodden economy. Even as Europe's debt crisis continues to take its toll and job concerns hang over the United States, auto sales have managed to increase.

U.S. automakers last week reported strong sales increases among the "big three" automakers: GM, Ford, and Chrysler. All three beat analysts' expectations, unlike Toyota and Honda. Both had stronger sales increases than their American counterparts, but their numbers fell short of forecasts.

GM reported sales increases of 16%, more than double the projected 7.6%.

With a low P/E under 6, now's the time to add GM to your portfolio.

Apple (Nasdaq: AAPL) – Hear me out – Apple may be priced near $600, but value-wise it is an inexpensive stock.

In the tech sector where P/E ratios can sometime range into the triple digits, Apple has a very respectable P/E of 14.8. Compared to Facebook's P/E which is above 100, Apple looks very valuable.

Even better is Apple's forward P/E which is around 11.

So even though the tech giant has had an incredible run up in the past year to $600 from $350, its earnings have still grown faster than its stock price.

Many analysts expect this stock to resume its upward march after its recent pullback, and head toward $1,000 a share.

If Apple falls back to $550 it will hard to ignore the fundamentals, which at that point would include a P/E below 10. In fact, the rumors about an "iPad mini" have already driven Apple fans into a frenzy, and that'll build interest going in to the fall months.

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  1. Mark Mahoney | December 22, 2012

    Like this site. I am reserching low money stocks that have a promising future.

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