Back to top

Image: Bigstock

3 Cheap Buy-Ranked Stocks That Also Pay a Dividend

Read MoreHide Full Article

Bearish sentiments continue to reign the markets this week, as not much has changed since the Fed intensified measures to contain inflation. Continued supply chain issues and energy market pressures are the primary reasons that inflation is proving so hard to contain. Last week, we also had unfavorable numbers from the housing market where weaker starts point to continued strength in pricing.

From the look of things as they stand now, it appears that this will be a long and slow correction, with much more pain in the cards. But the bitter pill must be swallowed as there is no other known cure. The quicker we realize that we must cut consumption (even if it means postponing things we feel we can afford) and pay down whatever debt we may have taken, the greater will be the impact on the market and the quicker we will be out of the mess. Speed is really what we need through this transition, which may include a recession on the way.

Most of us looking to invest in the current environment are under no illusions about the risk involved. But whether we should be hoarding cash instead is the question. Could it be that we will lose more by staying out?

Falling markets can be disconcerting, but a long-term investor often waits for these opportunities. When markets are rising, you can ride the wave. But you would need to spend more. On the other hand, when markets are down, you can get more for less.

You do need to be prepared for something of a short-term beating, however, as nobody can guarantee what the absolute bottom will be. And it’s imperative that you do your homework because it would never pay to get into stocks that are justifiably underpriced.  

One factor that really helps in such situations is analyst reaction. If analysts are raising their estimates on a stock, they are obviously optimistic about its potential to climb out of the situation. The revisions trend is captured in the Zacks Rank, which grades companies on a scale of 1 to 5, #1 being Strong Buy, #2 Buy, #3 Hold, #4 Sell and #5 Strong Sell.

It also makes sense to check out the current year’s growth rate. If it is strong, the company is positioned to weather the current uncertainties well enough. If not, it is at the receiving end of inflation and supply chain issues and could be seeing early effects of interest rate hikes.

Another factor is the valuation, which doesn’t just mean the cost of buying a share. Valuations are linked to performance metrics to help you understand how a stock is doing relative to its earnings power, earnings growth potential, sales, cash flow, or a variety of other factors.

This helps you avoid making mistakes. So for example, a stock that has a low price because its earnings are declining, would have a high price-to-earnings (P/E) ratio (because as earnings fall, the price appears high in comparison, even if it too is declining).  

If the company also pays a dividend, it’s a bonus because dividends can offset losses from the investment and can be used for expenses or re-investment in the security, thus lowering the overall cost of the investment.

Let’s take a look at a few companies that satisfy all these criteria:

Commercial Metals Company (CMC - Free Report)

This manufacturer and recycler of steel and other metal products carries a Zacks Rank #1. Commercial Metals’ revenue is expected to grow 31.5% this year and its earnings are expected to grow 153.0%. In the last 7 days, its earnings estimates for the current and following year have climbed a respective 42.0% and 19.2%.

Its P/E of 5.89X is close to its lowest point over the past year and way below the S&P 500’s 15.71X. Its P/S ratio of 0.50 is at its lowest point over the past year and indicates that the market is discounting its sales potential. It is also well below the S&P 500’s 3.68X. Therefore, the shares are really cheap. To top it all, Commercial Metals also pays a dividend that yields 1.54%.

Reliance Steel & Aluminum Co. (RS - Free Report)

Reliance Steel, the largest North American metals service provider and a major distributor of metal products into a broad range of industries, carries a Zacks Rank #1. Analysts expect its revenue and earnings to grow a respective 16.6% and 26.1% this year.

In the last 7 days, the Zacks Consensus Estimate for its 2022 earnings increased 35.2% while the estimate for 2023 earnings increased 25.6%. With a P/E of 6.91X (close to its annual low point) and P/S of 0.64X (also near its annual low point), Reliance Steel shares look decidedly undervalued. And they come with the added advantage of a dividend, that currently yields 2.06%.

Greif, Inc. (GEF - Free Report)

This provider of paper and other packaging products for industrial use has a Zacks Rank #1. Its revenue and earnings are expected to grow a respective 17.5% and 36.3%. Estimate revisions in the last 30 days have only been in one direction, and that is up.

Greif’s earnings estimate for the year ending in October 2022 has increased 17.4% while the estimate for 2023 increased 7.4%. Its dividend currently yields 3.18%. A P/E of 8.16X (close to its low point over the past year) and P/S of 0.43X (its lowest point over the past year) indicates a cheap valuation.

One-Month Price Performance

Zacks Investment Research
Image Source: Zacks Investment Research

In-Depth Zacks Research for the Tickers Above

Normally $25 each - click below to receive one report FREE:

Reliance Steel & Aluminum Co. (RS) - free report >>

Commercial Metals Company (CMC) - free report >>

Greif, Inc. (GEF) - free report >>