In this article, we will look at the 7 Most Profitable Cheap Stocks To Invest In.
Insights on Small Caps, Tech, and More
Sherry Paul, Morgan Stanley Private Wealth Management managing director, joined CNBC’s “Squawk Box” on October 8, to discuss her investment strategy amidst the current market trends. Despite the Russell 2000 being down a percent, Paul believes it’s the right time to strategically add to small caps, as they are ripe for M&A and have been teased out due to their dependence on domestic consumption.
Paul emphasizes that the key to navigating this market is to be selective and strategic, recommending a broadening out of investments across sectors in the S&P, with a focus on large caps, particularly in areas such as industrials, financials, and staples. She believes that the rates going lower, combined with the productivity-enhancing cost reduction kicker, will benefit these sectors. Paul also highlights the importance of dividend yields, which can add lower volatility to a portfolio.
Regarding large-cap tech stocks, Paul remains bullish, viewing it as a theme rather than an idea. She believes that corporations will invest in software and hardware upgrades, driven by their enormous cash balances and the need to cut costs as rates go lower. This will be a boost for the sector, although it’s a longer-term game, with a time horizon of 12-24 months.
Despite the S&P 500 near record levels, Tom Lee, co-founder of Fundstrat, an independent equity research firm, remains bullish, citing a strong economic backdrop, the Fed’s decision to cut rates, and stimulus policies in China as tailwinds that will support the market. He believes that the economy is resilient and that the Fed’s easing will lead to a continued bull market, with the S&P 500 potentially reaching 5700 or higher by the end of the year.
Lee acknowledges that there are some headwinds, including the looming election and rising oil prices, but believes that they will be offset by the tailwinds. He also notes that small caps, which have been the weakest area of the market since the Fed hike, are due for a rebound.
As the market continues to navigate through economic trends and global challenges, expert insights help provide valuable insights to make informed investment decisions. With that in context, let’s take a look at the 7 most profitable cheap stocks to invest in.
Stocks chart
Our Methodology
To compile our list of the 7 most profitable cheap stocks to invest in, we used the Finviz and Yahoo stock screeners to compile an initial list of the 40 largest companies by market cap that are trading at a forward P/E ratio of under 20 as of October 7. From that list, we narrowed our choices to 7 stocks with positive TTM net income and 5-year net income growth informed by reputable sources, including SeekingAlpha, which provided insights into 5-year growth rates, and Macrotrends, which supplied information on trailing twelve-month (TTM) net income. Then we sorted the stocks in ascending order, according to their hedge fund sentiment, which was taken from our database of 912 elite hedge funds as of Q2 of 2024.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
7 Most Profitable Cheap Stocks To Invest In
7. ConocoPhillips (NYSE:COP)
Number of Hedge Fund Holders: 72
Forward P/E Ratio as of October 7: 14.09
TTM Net Income: $10.68 Billion
5-Year Net Income CAGR: 8.39%
ConocoPhillips (NYSE:COP) is a leading global energy company with a diverse portfolio of conventional and unconventional assets across North America, Europe, and Asia. The company has a balanced portfolio and operations that are well-positioned to capitalize on the current energy market trends.
On May 29, ConocoPhillips (NYSE:COP) announced that it would acquire Marathon Oil in an all-stock transaction worth $22.5 billion, with Marathon Oil shareholders receiving 0.2550 shares of ConocoPhillips’s (NYSE:COP) stock for each share of Marathon Oil stock. The acquisition is expected to be immediately accretive to ConocoPhillips’ (NYSE:COP) earnings, cash flows, and return of capital per share, and is expected to result in at least $500 million of cost and capital savings within the first full year following the closing of the transaction.
ConocoPhillips (NYSE:COP) will also increase its ordinary base dividend by 34% to 78 cents per share starting in the fourth quarter and plans to repurchase over $20 billion in shares in the first three years, with over $7 billion in the first full year, at recent commodity prices. The transaction is expected to close in the fourth quarter of 2024, subject to regulatory clearance and other customary closing conditions.
ConocoPhillips’ (NYSE:COP) financial performance is supported by its solid production growth. In Q2, the company’s production reached 1,945 MBOED representing an increase of 8% year-over-year. The company’s average petroleum price of $81.30 per barrel was 10% higher than year over year, which contributed to its solid earnings and free cash flow. The OPEC+ is supporting petroleum prices, which makes the country well-positioned to continue generating strong earnings and free cash flow in the coming quarters.
The company’s financial performance is also reflected in its net income, which has grown over the past 5 years with a CAGR of 8.39%. For the twelve months ended on June 30, ConocoPhillips (NYSE:COP) reported a net income of $10.68 billion.
6. Elevance Health (NYSE:ELV)
Number of Hedge Fund Holders: 73
Forward P/E Ratio as of October 7: 13.21
TTM Net Income: $6.69 Billion
5-Year Net Income CAGR: 10.43%
Elevance Health (NYSE:ELV), formerly known as Anthem, is a leading health insurance company with a well-diversified portfolio of businesses, including health insurance, pharmacy benefit management (PBM), and healthcare services.
Elevance Health’s (NYSE:ELV) health insurance segment is its largest business, accounting for the majority of its revenue and operating profits. The company’s medical membership profile is well diversified, with a mix of commercial, Medicaid, and Medicare Advantage members. As of 2023, the company had approximately 32 million commercial memberships, with around 27 million being fee-based and 5 million risk-based.
In Q2, Elevance Health (NYSE:ELV) health insurance segment managed to grow earnings before interest and taxes (EBIT) by $125 million, despite a decline in revenue. This was driven by a recovery in margins in the commercial segment, where the company has made progress in lowering its benefits-expense ratio. Additionally, Elevance Health’s (NYSE:ELV) Medicaid membership declined due to the redetermination process, which is expected to be a one-time event. The company’s CarelonRx segment, which provides PBM services, has also shown resilience, with revenue growth of 3.6% year-over-year in the second quarter of 2024.
Elevance Health’s (NYSE:ELV) Carelon Services segment, which provides healthcare services to both internal and external clients has been gaining traction, with external revenue growth of over 50% year-over-year in Q2. With a high margin profile, Carelon Services has the potential to become a significant profit growth driver for Elevance Health (NYSE:ELV). The company’s management has highlighted the segment’s strong growth prospects, citing a “long runway” ahead.
For the twelve months ending June 30, Elevance Health’s (NYSE:ELV) net income was $6.69 billion, a 6.04% increase year-over-year and a 5-year net income CAGR of 10.43%, reflecting its strong market position. The company’s earnings are projected to increase by 11.70% in the current year and industry analysts have reached a consensus on the stock’s Buy rating, with an average target price of $602.60 that suggests a 20.20% upside potential from its current levels.
5. Johnson & Johnson (NYSE:JNJ)
Number of Hedge Fund Holders: 80
Forward P/E Ratio as of October 7: 16.04
TTM Net Income: $38.01 Billion
5-Year Net Income CAGR: 18.41%
Johnson & Johnson (NYSE:JNJ) is one of the world’s largest healthcare and pharmaceutical companies that has a wide portfolio spanning pharmaceuticals, medical devices, and consumer health products.
Johnson & Johnson’s (NYSE:JNJ) Tremfya, a fully human, dual-acting monoclonal antibody treatment has made a significant impact in immune-mediated diseases. The treatment has shown remarkable growth, with a 28.3% year-over-year increase in Q2 2024, and is expected to continue to be a major contributor to the company’s revenue growth, particularly as it expands its indications and patient base. Tremfya will also provide a boost to the company’s reputation and credibility in the field of immunology, potentially leading to increased investment and partnerships in the future.
On October 2, Johnson & Johnson (NYSE:JNJ) submitted a supplemental Biologics License Application (sBLA) to the U.S. Food and Drug Administration (FDA) for approval of a new indication for Darzalex Faspro (daratumumab and hyaluronidase-fihj), in combination with bortezomib, lenalidomide, and dexamethasone (D-VRd), for the treatment of adult patients with newly diagnosed multiple myeloma (NDMM) for whom autologous stem cell transplant (ASCT) is deferred or who are ineligible for ASCT. This is a significant step forward in the company’s efforts to provide innovative and effective treatments for patients with this debilitating disease, once approved, Darzalex Faspro will remain a key driver of growth and innovation in the multiple myeloma treatment landscape, ultimately improving the lives of patients and their families.
On October 1, Johnson & Johnson (NYSE:JNJ) announced that it would invest over $2 billion in a state-of-the-art biologics manufacturing facility in Wilson, North Carolina. The new facility will expand the production of the company’s portfolio and pipeline of innovative biologics, supporting its goal of advancing more than 70 novel therapies and product expansion filings and launches by the end of the decade.
Johnson & Johnson (NYSE:JNJ) reported a significant increase in net income for the twelve months ending June 30, with a 191.24% year-over-year growth to $38.01 billion, supported by a strong 5-year net income compound annual growth rate (CAGR) of 18.41%. Johnson & Johnson’s (NYSE:JNJ) forward P/E ratio of 16.04 represents a 25.16% discount compared to the sector median of 21.44. Industry analysts are bullish on the company’s stock price and have a consensus Buy rating at a target price of $172.31, which implies a 7.30% increase from its current level.
4. Dell Technologies (NYSE:DELL)
Number of Hedge Fund Holders: 88
Forward P/E Ratio as of October 7: 15.31
TTM Net Income: $3.97 Billion
5-Year Net Income CAGR: 9.41%
Dell Technologies (NYSE:DELL) is a major player in the global technology sector, providing computing hardware, software, and IT services.
Dell Technologies (NYSE:DELL) is focusing on AI deployment for communications service providers (CSPs) by bringing together its AI expertise, infrastructure, and services. The need for AI adoption in the telecommunications industry is evident, with a recent MeriTalk study finding that 48% of telecom executives see AI as the industry’s most transformative technology in the next five years. The Dell AI for Telecom program addresses these challenges by providing CSPs with on-premises AI solutions that can enhance network performance, improve customer service, and provide greater value.
Dell Technologies (NYSE:DELL) is collaborating with NVIDIA to transform telecom networks with AI solutions. The two companies are co-creating and validating telecom AI solutions for CSPs. These solutions use Dell PowerEdge servers, NVIDIA GPUs, and enterprise-grade AI software to help CSPs use AI to enhance customer care, improve network maintenance, and automate call center scripts and customer care operations.
Dell Technologies (NYSE:DELL) and NVIDIA are also working together to facilitate AI deployments with the PowerEdge XR8000 server, which is now available with NVIDIA L4 Tensor Core GPUs. This server is designed for telecom and edge use cases and features a compact, modular design that simplifies deployment and maintenance.
Furthermore, Dell Technologies (NYSE:DELL) is helping CSPs design and deploy GPU-as-a-Service (GPUaaS) offerings, which allows them to provide on-demand NVIDIA GPU capacity for enterprise customers. This enables enterprises to scale AI deployments and resources as needed while maintaining data ownership and governance.
Dell Technologies (NYSE:DELL) is already partnering with CSPs in the Dell Telecom Open Ecosystem Labs to develop AI solutions with Dell AI Factory infrastructure and ecosystem partners to enhance customer experiences and improve network performance. For example, Lintasarta, an Indonesian information and communication technology company, is using GPU Merdeka, a GPUaaS, to provide AI infrastructure, including NVIDIA GPUs with Dell PowerEdge XE9680 servers.
Dell Technologies’ (NYSE:DELL) AI growth is supported by its core server business, which has demonstrated a growing backlog that reached $3.8 billion in Q2. Management emphasized that it recorded $3.2 billion in AI server orders “driven by tier-2 CSPs.” The company’s ability to transition its current enterprise customers to its AI-optimized portfolio is still in the early stages, and management is confident that the growing adoption will result in favorable outcomes for the company.
Dell Technologies’ (NYSE:DELL) diversified ISG portfolio which includes products in its storage, server, and networking segments, has continued to gain market share and has also made progress with tier-2 cloud service providers.
Dell Technologies’ (NYSE:DELL) margins are expected to remain solid, and the market seems increasingly confident in the company’s capabilities to overcome its past growth rates. The stock’s forward P/E ratio of 15.31 indicates a 36.35% discount compared to the sector median of 24.06. Analysts expect Dell Technologies (NYSE:DELL) to increase its earnings by 9.73% this year, and have a a consensus Buy rating at a target price of $146.58, which implies a 20.08% increase from its current levels. For the twelve months ending July 31, Dell Technologies’ (NYSE:DELL) net income was $3.97 billion, a 108.61% increase year-over-year.
3. Exxon Mobil (NYSE:XOM)
Number of Hedge Fund Holders: 92
Forward P/E Ratio as of October 7: 15.32
TTM Net Income: $34.16 Billion
5-Year Net Income CAGR: 14.03%
ExxonMobil (NYSE:XOM) is a global energy giant with a diverse portfolio of operations spanning exploration and production, refining, manufacturing, and a range of upstream, downstream, and chemical activities. The company is making strategic investments in low-carbon technologies, including biofuels, and hydrogen while maintaining its leadership in the oil and gas sector.
In May, ExxonMobil (NYSE:XOM) acquired Pioneer Natural Resources for $60 billion. This acquisition is expected to boost the company’s oil and gas production, enhance operational efficiency, and create synergies across businesses. The company’s updated revenue structure suggests a 10.5% increase in total revenue in 2024 and an 11.5% increase in 2025 due to increased contribution from the Upstream segment. The company’s EBITDA is expected to increase by 8% in 2024 and 7% in 2025, due to a higher forecast for the Upstream segment’s revenue.
ExxonMobil (NYSE:XOM) presents a compelling investment opportunity in the energy sector. As of October 7, the stock has a forward P/E ratio of 15.32, ExxonMobil’s (NYSE:XOM) net income for the twelve months ending June 30, was $34.16 billion, a compound annual growth rate (CAGR) of 14.03% over the last 5 years.
2. Merck & Co. (NYSE:MRK)
Number of Hedge Fund Holders: 96
Forward P/E Ratio as of October 7: 13.51
TTM Net Income: $13.73 Billion
5-Year Net Income CAGR: 7.97%
Merck & Co. (NYSE:MRK) is a multinational pharmaceutical company that has been a leader in the industry for over 125 years. The company focuses on delivering innovative, life-changing medicines and vaccines, and has established itself as one of the world’s largest and most successful pharmaceutical companies.
In Q2, Merck & Co.’s (NYSE:MRK) revenue increased to $16.11 billion, up 7.1% year-over-year, and its earnings per share (EPS) was $2.28, up 10.1% quarter-over-quarter. The strong results were driven by the company’s pharmaceutical segment, which accounts for 89.4% of its revenue. The segment’s total sales were $14.41 billion, up 7.1% year-over-year.
Merck & Co.’s (NYSE:MRK) oncology portfolio was a major contributor to its success, with sales of $8.05 billion, up 16.4% year-over-year. Keytruda, the company’s PD-1 inhibitor, was a significant driver of this growth, with sales of $7.27 billion, up 15.9% year-over-year. The medication has been approved for 40 indications in the US and is expected to continue to drive growth for the company.
Merck & Co.’s (NYSE:MRK) vaccine franchise also performed well, with sales of $3.51 billion, up 7.6% year-over-year. The company’s Gardasil and Gardasil 9 vaccines, which protect against human papillomavirus, were major contributors to this growth, with sales of $2.48 billion, up 10.2% quarter-over-quarter. The company’s cardiovascular franchise also saw significant growth, with sales of $248 million, up 86.5% year-over-year, driven by the FDA’s approval of Winrevair for the treatment of pulmonary arterial hypertension.
Merck & Co.’s (NYSE:MRK) Winrevair is the first and only activin signaling inhibitor therapy approved for Pulmonary Arterial Hypertension (PAH), a serious and debilitating condition that affects millions of people worldwide, in all 27 member states of the European Union, as well as Iceland, Liechtenstein, and Norway. Winrevair is expected to continue to drive growth for the company.
Merck & Co. (NYSE:MRK) is also progress in developing its pipeline of vaccines and experimental drugs, including the publication of encouraging data from a Phase 3 clinical trial evaluating the efficacy of Clesrovimab in protecting infants against respiratory syncytial virus disease, which will also drive growth for the company.
Merck & Co.’s (NYSE:MRK) forward P/E ratio of 13.51indicates a 36.97% discount compared to the sector median of 21.44, the company’s net income for the twelve months ending June 30, was $13.73 billion, a staggering 341.53% increase year-over-year and a 5-Year net income compound annual growth rate (CAGR) of 9.97%. Analysts forecast the company’s earnings will increase by 136.62% this year and are extremely bullish on the company’s stock price, with a consensus Buy rating at a target price of $139.86, which implies a 24.10% increase from its current levels.
1. JPMorgan Chase (NYSE:JPM)
Number of Hedge Fund Holders: 111
Forward P/E Ratio as of October 7: 11.93
TTM Net Income: $52.21 Billion
5-Year Net Income CAGR: 9.53%
JPMorgan Chase (NYSE:JPM) is a multinational bank and financial services company that has been a leader in the industry for over 200 years. JPMorgan Chase (NYSE:JPM) largest U.S. bank by assets and operates in investment banking, financial services for consumers and small businesses, commercial banking, financial transaction processing, and asset management to millions of customers in the US, and many of the world’s most prominent corporate, institutional and government clients globally. As of June 30, JPMorgan Chase (NYSE:JPM) had $4.1 trillion in assets and $341 billion in stockholders’
The bank has had a strong performance, driven by high net interest income and a favorable interest rate environment. However, as the Fed cut interest rates, a lower net interest income could affect the bank’s future earnings performance. Despite this JPMorgan Chase’s (NYSE:JPM) unique diversified business model, strong non-lending operations, and strategic investments position it well for success even in a lower interest rate environment. Lower interest rates could benefit the bank through reduced loan charge-offs and strong performance in non-lending operations, such as trading and investment banking, driving stronger revenue and net income growth.
In 2023, JPMorgan Chase (NYSE:JPM) acquired the majority of assets and assumed the deposits and liabilities of First Republic Bank from the Federal Deposit Insurance Corporation (FDIC). This acquisition helped the bank to achieve an additional $500 million in net income per year. This increase in earnings was driven by the acquisition of First Republic Bank’s assets, which include approximately $173 billion of loans and $30 billion of securities. This helped the bank expand its loan portfolio and provide a new source of revenue.
The acquisition of First Republic Bank will also help JPMorgan Chase (NYSE:JPM) advance its wealth strategy. First Republic Bank has built a strong reputation for serving clients with integrity and exceptional service, and JPMorgan Chase (NYSE:JPM) plans to leverage this expertise to further expand its own wealth management capabilities. By combining the two companies’ strengths, JPMorgan Chase (NYSE:JPM) will be able to offer a more comprehensive range of services to its clients, enhancing its position in the wealth management market.
JPMorgan Chase (NYSE:JPM) has been a popular choice among hedge funds, with a total of 111 hedge fund holders holding $6.97 worth of stocks in the company. The company is expected to report a 20.35% increase in earnings for the current year. For the twelve months ending June 30, JPMorgan Chase’s (NYSE:JPM) net income was $52.21 billion, a 13.38% increase year-over-year and a CAGR of 9.53% over the last 5 years.
While we acknowledge the potential of JPMorgan Chase (NYSE:JPM) to grow, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than JPM but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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