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Investment Ideas

Stocks are the only thing that people don't like to buy when they go on sale.

This earnings season, investors have been selling companies on worries over weakening revenue guidance as currency translation hits the large multinational companies. But even those with more of a domestic bent, are seeing share weakness on general worries over the global economy.

These market conditions have created a buying opportunity in many top names for the first time this year.

Why not buy companies that have gone on sale?

Now's your chance.

There are more cheap stocks out there than you realize. And as an added bonus, these cheap stocks also have a Zacks Rank of #1 (Strong Buy) or #2 (Buy), which means they have rising earnings estimates.

Too good to be true?

Nope. You just have to know where to look.

Cheap Stocks Are Not What You Think

To find the cheap stocks in this market you have to get over your obsession with tech stocks, social media stocks and the expensive well-known retailers. Forget about Amazon and Netflix. Those are overbought and the story is well known. None of them are cheap.

Our cheap stocks are found outside of the mainstream. They're not the most followed on Stocktwits and they're not mentioned (usually!) at cocktail parties.

But that's what it takes to be a value investor. Sometimes you have to dig beneath the surface to find the stocks that the market is disregarding.

How To Find Cheap Stocks

To find cheap stocks I first looked for a P/E ratio under the average of the S&P 500 which is trading at 18x. In this market, anything under 18 would be cheap by comparison but the stocks I found trade considerably lower.

But I also considered companies that have no earnings at the moment because of industry conditions but whose other fundamentals are stellar. I also screened for a Price-to-Book ratio under 3.0. When a company has a P/B ratio under 3.0 it is usually considered undervalued.

I then added the important ingredient of a Zacks Rank of #1 (Strong Buy) or #2 (Buy) to make sure the earnings estimates are rising.

These three stocks have sold off in recent weeks, which has put them on sale.

3 Cheap Stocks To Buy Now

1. Precision Drilling Corporation
2. Aaron's, Inc.
3. The Dow Chemical Company

1. Precision Drilling (PDS - Snapshot Report)

Precision is a Canadian provider of services to the oil and gas industry. It operates a fleet of contract drilling rigs in Canada and the US, as well as other international locations.

With the active drilling rig count down 54% in the United States as of July 17 and down 50% in Canada, the first six months of the year has been challenging. But Precision has prepared for the cyclical nature of the industry. It has been grabbing market share.

In the second quarter, US day rates were up 10% quarter over quarter and 14% year over year.

Is the bottom in? Precision is bullish about the second half of the year. It expects 10 rigs to go back to work in the US in the coming months.

Shares have sunk 29% in the last month as oil prices have weakened again. They are near a 52-week low.

Forward P/E= N/A (is taking a loss)
Earnings expected to jump 61% in 2016
P/B ratio = 0.7
P/S ratio = 0.8

Zacks Rank #2 (Buy)
Zacks Style Score for Value = A

2. Aaron's (AAN - Snapshot Report)

Aaron's operates more than 2,000 stores in 48 states, the District of Columbia and Canada, where it specializes in sales and lease of furniture, consumer electronics, home appliances and accessories. It also operates Progressive Leasing, which provides lease-purchase options in 46 states.

On July 24, Aaron's beat the Zacks Consensus Estimate for the second quarter by $0.15. Revenues were up 16.1% year over year.

Aaron's re-affirmed full year revenue guidance.

Investors didn't like the report, though, as shares have fallen 6.4% in the last month.

Forward P/E = 15.9
Earnings expected to jump 14.8% in 2016
P/B ratio = 1.9
P/S ratio = 0.8

Zacks Rank #1 (Strong Buy)
Zacks Style Score for Value = A

3. Dow Chemical (DOW - Analyst Report)

Dow is one of the largest chemical companies in the world with over 6,000 product families being produced in 35 countries worldwide.

On July 23, Dow beat the Zacks Consensus by $0.10 even as sales fell 13%. Currency translation and lower oil prices were mostly to blame for sales weakness.

Analysts are bullish, however, as trends support a more bullish second half of the year despite the overhangs.

Shares have fallen 10% in the last month, presenting a buying opportunity. Investors also get a juicy dividend, yielding 3.7%.

Forward P/E = 14.9
Earnings expected to jump 11.5% in 2016
P/B ratio = 2.6
P/S ratio = 1.0

Zacks Rank #2 (Buy)
Zacks Style Score for Value = A

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Tracey Ryniec is the Value Stock Strategist for She is also the Editor of the Insider Trader and Value Investor services. You can follow her on twitter at @TraceyRyniec.