3 Stocks Too Cheap to Ignore at These Prices

Key Points

• Wireless telecom outfit Verizon will never be a growth stock. It’s a powerful income investment though, with little plausible price downside from here.

• Retailer Target’s future may still be fuzzy, but the market’s undeservedly pricing in a worst-case scenario.

• Perhaps the most compelling underpriced stock isn’t a stock at all. It’s a collection of hand-picked names, including some privately owned businesses you can’t invest in any other way.

• 10 stocks we like better than Target ›

How much does a stock's valuation matter? Most investors will at least look at the metric. By and large, however, most investors also know there's not much correlation between a stock's price (relative to earnings) and that ticker's performance. Expensive stocks can and do continue to rally, while cheap stocks are often cheap for good reason.

Sometimes, though, a bargain is too good to ignore -- even if a particular stock wasn't one you were thinking about owning. Here's a rundown of three such stocks to consider adding to your portfolio.

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1. Verizon

For the record, Verizon Communications (NYSE: VZ) will never serve as a growth stock in anyone's portfolio. It's just not possible. While it's a solid, income-producing name, the U.S. wireless telecom market it leads is just too saturated.

Numbers from Pew Research indicate that 98% of adults living in the United States already own a cellphone, for perspective, while the rest of its profit centers like cable TV, broadband, and business services just aren't going to be big enough anytime soon to truly matter. With the major carriers mostly just swapping subscribers these days, the most hope for long-term growth from this company is population growth.

As a dividend stock, though, you'd be hard-pressed to find better. Newcomers will be plugging into a forward-looking yield of 6.6% based on a dividend that's now been raised in each of the past 18 years, and is apt to continue rising indefinitely.

Image source: Getty Images.

The key to these continued dividend payments and payout growth is the nature of the business itself. Americans love their mobile phones -- perhaps to an unhealthy degree. A recent report from health data management firm Harmony Healthcare IT suggests nearly half of all Americans are addicted to their devices, in fact, spending an average of more than five hours per day looking at their handheld connection to the outside world. Healthy or not, even if they're willing to switch service providers, Verizon's target market isn't likely to ever become interested in giving up their phones.

As of the latest look, Verizon shares are trading at less than 10 times this year's expected per-share earnings of $4.69. This doesn't necessarily translate into above-average upside. It does, however, certainly limit its downside.

2. Target

There's no denying general merchandise retailer Target (NYSE: TGT) has been forced out of its element for the past few years. While its "cheap chic" shtick works in a firm economy where consumers aren't quite so cost-conscious, when money is tight (as it has been since inflation gripped the nation beginning in late 2021), Walmart is king.

Target's mostly disappointing same-store sales growth since then confirms it. And the market has punished the company's lackluster performance. Shares are now more than 60% below their late-2021 peak, and still within sight of the multiyear low made in April of this year.

The sellers, however, have arguably overshot their target. That's what the stock's forward-looking price/earnings ratio of only 13 says, anyway. That's about as cheap as Target shares have been in eight years.

The kicker: The forward-looking dividend yield's been pumped up to 4.4%.

The irony is, thanks to a handful of turnaround initiatives, Target's a more compelling investment prospect now than it's been in a long, long time. These initiatives include same-day shipping of online orders, product collaborations like its one with Kate Spade, ongoing store remodels, and -- perhaps more than anything -- the execution of a clear merchandising-minded strategic plan that's expected to add another $15 billion worth of annual revenue by 2030.

These plans, of course, include the continued evolution of its private-label business, as well as the addition of new partnerships and the expansion of existing ones with the likes of Disney and Warby Parker.

There's certainly no guarantee these efforts will pan out as hoped. Indeed, the first quarter's same-store year-over-year sales dip of 3.8% confirms there's still work to be done.

The analyst community, however, believes a turnaround will start to take shape by the end of next year, perhaps assisted by simple economic stability that could start gelling by then. This stock should start reflecting this brewing turnaround before then, though, in anticipation of its materialization.

3. Berkshire Hathaway

Finally, add Warren Buffett's Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) to your list of stocks that have become too cheap to ignore.

OK, it's not a stock in the traditional sense. It's a conglomerate of several privately owned businesses that also happens to hold a bunch of publicly traded names, including Apple, Coca-Cola, and Chevron, some of which pay dividends, and all of which produce realized and unrealized gains and losses. This can make it particularly tough to determine a meaningful valuation for Berkshire shares.

It is possible, though, if you know where to look. That's on the official SEC filing, laying out this conglomerate's revenue, operating costs, and investment income as it can best be quantified in any given year. Although Buffett himself doesn't like the fact that the figure includes unrealized gains or losses on its stock holdings, last year, Berkshire reported the equivalent to $89.6 billion worth of net income following 2023's figure of $97.1 billion. Assuming it's able to repeat the feat again this year, with a market cap of just over $1 trillion, that translates into a projected price/earnings ratio of only about 11.

This makes sense, of course. Warren Buffett is a value investor, of course, so most of Berkshire's equity holdings are value stocks. Its privately held businesses like Dairy Queen, railroad BNSF, insurer Geico, Duracell batteries, and Fruit of the Loom are also cash-generating business lines that tend to be categorized as value industries. Ergo, this relatively low earnings multiple comes as no real surprise.

Even by most value stocks' average valuations right now, however, this is still dirt cheap. For the sake of comparison, the Vanguard Value ETF is trading at a trailing P/E of just under 20, while the iShares S&P 500 Value ETF is priced at more than 22 times its constituents' trailing per-share earnings.

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James Brumley has positions in Coca-Cola. The Motley Fool has positions in and recommends Apple, Berkshire Hathaway, Chevron, Target, Vanguard Index Funds - Vanguard Value ETF, Walmart, and Walt Disney. The Motley Fool recommends Verizon Communications and Warby Parker. The Motley Fool has a disclosure policy.