The flashy growth stocks get all the attention. The media loves to talk about these high-flying daredevil stocks as they soar... and come crashing back to Earth.
That's why we're looking at the best cheap growth stocks instead.
Overpricing has never been truer than in 2020, when the pandemic's arrival created a whole new class of super-growth stocks. Stay-at-home and e-commerce stocks have climbed to unimaginable heights this year.
But take a moment to think critically... How many of these stocks do you think will be on the best performing lists 20 years from now? How many of these already overpriced stocks will be among the next two decades' best-performing stocks?
History tells us that a handful will, but many of them will crash back down when reality reasserts itself and growth expectations can no longer support the valuation.
To invest in these companies now is a high-risk, low-reward situation. Valuations are sky high, so the future return potential is limited.
So instead, we need to find the best cheap growth stocks that will capture above market returns over the next 20 years.
These are businesses that are growing free cash flow by at least 15% annually while trading for less than 10 times free cash flow.
Here are my three best cheap growth stocks to buy now...
No. 3: The Best Automotive Cheap Growth Stock
Eastern Co. (NASDAQ: EML) makes hardware for the automotive industry, including things like seat belts, locks, mirrors, and hinges.
Eastern's security division is a little more exciting. It makes mobile payment apps, smart cards, and smart card readers - a hot industry.
This division also owns Illinois Lock, which makes security and engineered access solutions for industries, including data centers and healthcare facilities.
The metal products division makes iron castings that are used in a wider range of industries. The company's castings are used in everything from bridges and buildings to aerospace and defense equipment.
None of Eastern's businesses are particularly sexy. But they are absolutely necessary for the economy to function.
Eastern has grown its free cash flow by more than 18% over the past five years. Despite that, the shares trade at less than seven times free cash flow.
No. 2: The Best Construction Cheap Growth Stock
Columbus McKinnon Corp. (NASDAQ: CMCO) also makes very boring products. However, without its products, much of the economy would grind to a halt.
Columbus McKinnon makes hoists, crane components, actuators, rigging tools, light rail workstations, and digital power and motion control systems.
Simply put, the company's products make the supply chain function...
It would be difficult to imagine any point along the supply chain of almost any industry that does not require the type of equipment that Columbus McKinnon sells.
If you need to lift it, pull it, or secure it, this is the company for you.
For the past five years, Columbus McKinnon has grown its free cash flow by more than 25% a year.
Despite the company's impressive performance, the stock trades at less than nine times free cash flow right now.
No. 1: The Best Cheap Growth Stock to Buy Now
Caleres Inc. (NYSE: CAL) is an excellent example of an overlooked, unloved cheap growth stock. Caleres sells shoes through its Famous Footwear retail outlets. It handles most major brands through its almost 1,200 locations...
Caleres also has a portfolio of brands it licenses for sale by partners. These include Dr. Scholl's Shoes, LifeStride, Naturalizer, Fergie Footwear, Blowfish Malibu, Circus by Sam Edelman, and Vionic.
Shoes are boring, and retail is dead. Everybody knows that.
Someone forgot to tell Caleres it was dying. The company has been growing its free cash flow rapidly over the past five years. Free cash flow has grown from just $0.09 a share in 2015 to almost $3 over the past 12 months. That is an increase of more than 50% annually.
Caleres blew analysts away in the most recent quarter as it earned $0.48 a share for the third quarter. Wall Street was expecting just $0.04. That's a massive positive earnings surprise. The company also said that it had increased e-commerce sales by 48% in the quarter.
Because it is painted with the retail brush, CAL is trading at a bargain valuation. The stock is currently trading at less than five times free cash flow.
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