A stock price alone doesn’t tell you anything about how cheap or expensive a stock truly is. A $20 stock can be far more expensive than a $100 stock based on earnings, cash flow, and growth prospects, even though the price tag is lower.
Still, focusing on low-priced stocks can make sense if you have a small amount to invest. We asked three of our Motley Fool contributors to each discuss a stock trading for less than $20. Here’s why they say investors should consider Energy Transfer (NYSE:ET), Hanesbrands(NYSE:HBI), and Codexis (NASDAQ:CDXS).
A low-priced pipeline giant
Matt DiLallo (Energy Transfer): Energy Transfer is one of the largest energy infrastructure companies in North America. It currently transports 30% of all the natural gas consumed in the U.S. each day — as well as significant quantities of oil, natural gas liquids, and refined petroleum products — on its more than 86,000 miles of pipelines. Overall, the company operates an estimated $90 billion of midstream assets that span all major U.S. supply basins and market centers.
Despite its massive size, Energy Transfer has a rather diminutive stock price, having recently traded for less than $15. That low price is mainly due to the number of new shares the company has issued to finance its growth initiatives over the past few years. It has handed out more than 1 billion new shares in the last three years alone — a nearly 150% increase — to help fund expansion projects and acquisitions, which has weighed on share prices.
Those investments, however, are starting to pay dividends, with cash flow zooming more than 30% on a per-share basis during the first quarter alone. As a result, the company generated enough cash to cover its high-yielding dividend with $856 million to spare. That trend should continue throughout the year, putting the company on track to produce between $2.5 billion and $3 billion in excess cash for 2019.
Because of that, Energy Transfer is starting to pivot away from its dilutive ways since it’s now producing enough money to cover its dividend and invest in a large slate of expansion projects. That ability to self-fund growth should help to start lifting the weight holding down the price of the stock.
Don’t underestimate this apparel company
Tim Green (Hanesbrands): Shares of basic apparel and activewear manufacturer Hanesbrands have been sitting under $20 for nearly a year. The stock was trading for more than $30 as recently as 2015, but the market has become increasingly pessimistic since then.
That pessimism doesn’t seem to be fully warranted. There are risks, including a potential recession, additional tariffs, and more upheaval in the brick-and-mortar retail industry. But the company has a lot going for it.
Its core business is innerwear — underwear, socks, intimates, for example. Innerwear get replaced more often than other types of clothing, and the per-capital consumption rate has been stable over the past five years. More importantly, the industry is heavily branded, with private-label merchandise accounting for just 10% of U.S. innerwear sales in 2018. That skew toward branded products is even stronger online, where 93% of innerwear sales last year were branded.
Hanesbrands also sells activewear. The company’s Champion brand has been growing fastoutside of large mass-market retailers, and it expects Champion to reach $2 billion of revenue by 2022. The athleisure trend doesn’t seem to be fading, so it should continue to grow that part of its business.
Hanesbrands expects to produce non-GAAP (adjusted) earnings per share of $1.76 this year at the midpoint of its guidance range. With the stock hovering below $17, the price-to-earnings ratio is below 10. The company has been putting up some solid growth numbers recently, with organic sales jumping by 10% year over year in the first quarter. There seems to be a disconnect between the beaten-down valuation and the company’s performance.
Hanesbrands isn’t an exciting company, but if you’re looking for a sub-$20 stock to add to your portfolio, look no further…
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