If you want an investment priced at a bargain with huge growth potential, it's a great time to hunt for cheap stocks to buy now.
So far this year the stock market has put in a solid performance with the S&P 500 up a little more than 17% and the Dow Jones Industrial Average rising a bit more than 18%.
It has been a very broad advance with the aggressive U.S. Federal Reserve policy pushing money into a wide range of securities.
About 470 of the S&P 500 constituents have risen so far this year and 29 of 30 Dow issues are higher in 2013. There is a strong opinion among major market strategists that as long as the Federal Reserve keeps interest rates at or near zero, money will continue to flow into equities.
If this is the case, then the lagging issues may well be bargains with high profit potential.
The key to identifying to bargain issues is to apply some measure of valuation to identify those stocks that are mispriced by the market and may move higher.
Many of the stocks that are down including former tech darlings like Apple Inc. (Nasdaq: AAPL) and EMC Corp. (NYSE: EMC) are struggling to provide the type of earnings and sales that will get growth enthusiasts excited enough to begin buying the shares again.
Others like J.C. Penney Company Inc. (NYSE: JCP) are experiencing severe operational and financial issues that may preclude them from a strong price recovery anytime soon.
One measure of value used by many value investors is the price-to-book-value ratio. This is simply an accounting measure similar to a net worth statement. When companies fall out of favor and trade for less than book value they can be considered a bargain.
The shares may be out of favor for many reasons. It could be part of a sector that's going through the down portion of its economic cycle, but eventually the undervaluation attracts investors and invites takeover offers that more closely reflect the asset value.
Look for those underperforming S&P 500 stocks that trade for less than book value as potential bargain issues with strong recovery potential.
Three of the Best Cheap Stocks to Buy Now
Stocks underperform the market for many reasons. For these three stocks the major reason has been the cyclical nature of their business and the resulting oversupply in their industries.
As conditions improve, the following stocks should rise to reflect the underlying value of the assets, and reward investors who take a contrarian stance now.