5 Cheap Strong Buy Stocks: Values or Traps?

The S&P 500 Index today is up +0.31%, the Dow Jones Industrials Index is up +0.64%, and the Nasdaq 100 Index is up +0.11%.

Stocks today are moderately higher, with the Dow Jones Industrials posting a 1-week high. Positive corporate news today is boosting stocks. Super Micro Computer is up more than +10% to lead gainers in the S&P 500 and Nasdaq 100 after it said it believes it can file its delayed 10-K and 10-Q reports in the period available under Nasdaq rules. Also, Ross Stores is up more than +4% after reporting stronger-than-expected Q3 EPS and raising its 2025 EPS forecast.

Today’s rally in global government bond prices is supporting equity markets after 10-year German bunds climbed to a 1-month high, providing carryover support to T-note prices. T-notes are also climbing after the Wall Street Journal reported that President-elect Trump supports Kevin Warsh as the next Treasury Secretary, who is seen as a bond-friendly pick as Warsh has previously spoken out against high deficits.

Concern about weakness in the Eurozone economy is limiting gains in stocks after the Eurozone Nov S&P PMI unexpectedly contracted and Germany’s Q3 GDP was revised lower. Also, the recent escalation of the Ukraine-Russia conflict is weighing on stocks.

Of the 90% of companies in the S&P 500 that have released Q3 earnings so far, 75% surpassed the estimates, slightly below the 3-year average. According to Bloomberg Intelligence, companies in the S&P 500 have reported an average +8.5% y/y increase in quarterly earnings in Q3, more than double the preseason forecast.

The markets are discounting the chances at 59% for a -25 bp rate cut at the December 17-18 FOMC meeting.

Overseas stock markets today are mixed. The Euro Stoxx 50 is up +0.31%. China's Shanghai Composite Index fell to a 2-1/2 week low and closed down sharply by -3.06%. Japan's Nikkei Stock 225 closed up +0.68%.

Interest Rates

December 10-year T-notes (ZNZ24) today are up +5 ticks. The 10-year T-note yield is down -1.6 bp to 4.406%. Dec T-notes today are climbing on carryover support from a rally in European government bonds. T-notes also gained support from a Wall Street Journal report that said President-elect Trump is seen as supporting Kevin Warsh as the next Treasury Secretary. The appointment of Warsh, a former Fed governor known as a hawk who has warned about surging debt burdens, would be seen as a sign of stability and someone who would push back against some of the most extreme policy scenarios Trump has discussed.

European government bond yields today are moving lower. The 10-year German bund yield fell to a 1-month low of 2.235% and is down -5.4 bp to 2.264%. The 10-year UK gilt yield dropped to a 3-week low of 4.363% and is down -4.1 bp to 4.401%.

The Eurozone Nov S&P manufacturing PMI fell -0.8 to 45.2, weaker than expectations of no change at 46.0. Also, the Eurozone Nov S&P composite PMI fell -1.9 to 48.1, weaker than expectations of no change at 50.0 and the steepest pace of contraction in 10 months.

German Q3 GDP was revised downward to +0.1% q/q and -0.3% y/y from the previously reported +0.2% q/q and -0.2% y/y.

Swaps are discounting the chances at 100% for a -25 bp rate cut by the ECB at its December 12 policy meeting and at 45% for a -50 bp rate cut at the same meeting.

US Stock Movers

Super Micro Computer is up more than +10% to lead gainers in the S&P 500 and Nasdaq 100 after it said it believes it can file its delayed 10-K and 10-Q reports in the period available under Nasdaq rules.

Copart is up more than +7% after reporting Q1 revenue of $1.15 billion, stronger than the consensus for $1.10 billion.

The Gap is up more than +8% after reporting Q3 operating margin of 9.13%, better than the consensus of 8.17%, and raising its 2025 gross margin estimate to about +220 bps from a previous estimate of about +200 bps.

Ross Stores is up more than +4% after reporting Q3 EPS of $1.48, stronger than the consensus of $1.40, and raising its 2025 EPS forecast to $6.10-$6.17 from a previous forecast of $6.00-$6.13, the midpoint above the consensus of $6.13.

Elastic NV is up more than +21% after reporting Q2 adjusted EPS of 59 cents, well above the consensus of 38 cents, and raising its 2025 adjusted EPS forecast to $1.68-$1.72 from a previous estimate of $152.$1.56, stronger than the consensus of $1.53.

Nike is up more than +2% to lead gainers in the Dow Jones Industrials after Needham & Co. initiated coverage on the stock with a buy recommendation and a price target of $84.

Viking Therapeutics is up more than +2% after B Riley Securities initiated coverage of the stock with a recommendation of buy and a price target of $109.

NetApp is up more than +1% after reporting Q2 net revenue of $1.66 billion, above the consensus of $1.64 billion, and raising its 2025 net revenue forecast to $6.54 billion-$6.74 billion from a previous forecast of $6.48 billion-$6.68 billion.

Intuit is down more than -3% after forecasting Q2 adjusted EPS of $2.55-$2.61, well below the consensus of $3.23.

Pala Alto Networks is down more than -3% to lead losers in the Nasdaq 100 after HSBC downgraded the stock to reduce from hold with a price target of $291.

Reddit is down more than -7% after Downdetector reported that users are having problems connecting to Reddit’s website.

Nvidia is down more than -1% to lead losers in the Dow Jones Industrials after the company’s forecast for Q4 revenue exceeded estimates by only $400 million, the second consecutive quarter that revenue didn’t exceed estimates by $1 billion or more, suggesting the recent hyper-growth of the stock is fading.

Alphabet is down more than -1%, adding to Thursday’s -4% loss after the US Justice Department proposed major changes to Google, including a forced sale of its Chrome web browser, saying the browser “fortified” the company’s dominance.

Tenet Healthcare is down more than -1% after Raymond James downgraded the stock to outperform from a strong buy.

HCA Healthcare is down more than -1% after Raymond James downgraded the stock to market perform from outperform.

Earnings Reports (11/22/2024)

AMMO Inc (POWW), B Riley Financial Inc (RILY), Buckle Inc/The (BKE), Destination XL Group Inc (DXLG), Evolv Technologies Holdings Inc (EVLV), IES Holdings Inc (IESC), Spire Global Inc (SPIR).

On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policyhere.

While the proven Zacks Rank places an emphasis on earnings estimates and estimate revisions to find strong stocks, we also know that investors tend to develop their own individual strategies. With this in mind, we are always looking at value, growth, and momentum trends to discover great companies.

Looking at the history of these trends, perhaps none is more beloved than value investing. This strategy simply looks to identify companies that are being undervalued by the broader market. Value investors use a variety of methods, including tried-and-true valuation metrics, to find these stocks.

On top of the Zacks Rank, investors can also look at our innovative Style Scores system to find stocks with specific traits. For example, value investors will want to focus on the "Value" category. Stocks with high Zacks Ranks and "A" grades for Value will be some of the highest-quality value stocks on the market today.

One company value investors might notice is El Pollo Loco (LOCO). LOCO is currently sporting a Zacks Rank of #1 (Strong Buy), as well as an A grade for Value. The stock is trading with a P/E ratio of 13, which compares to its industry's average of 25.83. LOCO's Forward P/E has been as high as 16.11 and as low as 10.75, with a median of 13.99, all within the past year.

Value investors also frequently use the P/S ratio. This metric is found by dividing a stock's price with the company's revenue. This is a popular metric because sales are harder to manipulate on an income statement, so they are often considered a better performance indicator. LOCO has a P/S ratio of 0.77. This compares to its industry's average P/S of 0.95.

Finally, investors should note that LOCO has a P/CF ratio of 8.81. This data point considers a firm's operating cash flow and is frequently used to find companies that are undervalued when considering their solid cash outlook. LOCO's P/CF compares to its industry's average P/CF of 22.68. Over the past 52 weeks, LOCO's P/CF has been as high as 10.11 and as low as 6.06, with a median of 7.68.

These are only a few of the key metrics included in El Pollo Loco's strong Value grade, but they help show that the stock is likely undervalued right now. When factoring in the strength of its earnings outlook, LOCO looks like an impressive value stock at the moment.

Zacks Investment Research

The Retail-Wholesale group has plenty of great stocks, but investors should always be looking for companies that are outperforming their peers. Is Kura Sushi (KRUS) one of those stocks right now? Let's take a closer look at the stock's year-to-date performance to find out.

Kura Sushi is one of 210 companies in the Retail-Wholesale group. The Retail-Wholesale group currently sits at #7 within the Zacks Sector Rank. The Zacks Sector Rank considers 16 different groups, measuring the average Zacks Rank of the individual stocks within the sector to gauge the strength of each group.

The Zacks Rank is a proven model that highlights a variety of stocks with the right characteristics to outperform the market over the next one to three months. The system emphasizes earnings estimate revisions and favors companies with improving earnings outlooks. Kura Sushi is currently sporting a Zacks Rank of #1 (Strong Buy).

Within the past quarter, the Zacks Consensus Estimate for KRUS' full-year earnings has moved 125.4% higher. This signals that analyst sentiment is improving and the stock's earnings outlook is more positive.

Our latest available data shows that KRUS has returned about 25.7% since the start of the calendar year. Meanwhile, the Retail-Wholesale sector has returned an average of 24.8% on a year-to-date basis. This means that Kura Sushi is outperforming the sector as a whole this year.

One other Retail-Wholesale stock that has outperformed the sector so far this year is El Pollo Loco Holdings (LOCO). The stock is up 37.1% year-to-date.

Over the past three months, El Pollo Loco Holdings' consensus EPS estimate for the current year has increased 3.3%. The stock currently has a Zacks Rank #1 (Strong Buy).

Looking more specifically, Kura Sushi belongs to the Retail - Restaurants industry, which includes 42 individual stocks and currently sits at #82 in the Zacks Industry Rank. This group has gained an average of 7.2% so far this year, so KRUS is performing better in this area. El Pollo Loco Holdings is also part of the same industry.

Investors with an interest in Retail-Wholesale stocks should continue to track Kura Sushi and El Pollo Loco Holdings. These stocks will be looking to continue their solid performance.

Zacks Investment Research

El Pollo Loco Holdings, Inc.’s LOCO shares have performed poorly in the past three months, underperforming the S&P 500 and the industry. In the same time frame, LOCO has lost 11.2% against the industry and the S&P 500’s 4.5% and 5.2% growth, respectively.

As of Thursday, the stock closed at $12.09, below its 52-week high of $14.25 but above its 52-week low of $8.17. It has also underperformed other industry players like Chipotle Mexican Grill, Inc.'s CMG 11.5% rise, Restaurant Brands International Inc.'s QSR 0.8% dip and Brinker International, Inc.'s EAT 73.9% surge in the past three months.

Price Performance

• (0:30) - How To Find Small Cap Stocks That Benefit From AI Growth
• (5:50) - Strong Stocks To Keep On Your Watchlist Right Now
• (32:30) - Episode Roundup: INOD & TSSI
• Podcast@Zacks.com

Welcome to Episode #389 of the Value Investor Podcast.

Every week, Tracey Ryniec, the editor of Zacks Value Investor portfolio, shares some of her top value investing tips and stock picks.

With the end of the year approaching, and the stock market rally still intact, it’s time to look at some cheap Zacks #1 Rank (Strong Buy) stocks. This is the highest Zacks Rank and makes up just 5% of all the Zacks Ranked stocks.

But just because they are cheap, on a price-to-earnings or price-to-sales basis, and have the Strong Buy recommendation, which usually means the analysts are raising earnings estimates, doesn’t mean that they are a true value.

Values or Traps: How to Tell?

Remember, just because a stock has a low P/E or P/S ratio, doesn’t necessarily mean it’s a true value stock. The key is to look at the earnings growth that is expected for next year.

Is the company expected to grow earnings year-over-year?

Because while value investors want to buy cheap stocks, they also want companies that are growing earnings.

Screening for Cheap Strong Buy Stocks

Zacks has a premium screen called “Undervalued Zacks #1 Stocks” that looks for, obviously, Zacks #1 (Strong Buy) stocks, but also adds a cheapness component.

It must have a price-to-earnings (P/E) ratio under 20 and a price-to-sales (P/S) ratio under 1. A P/S ratio under 1.0 indicates an investor is getting the sales at a discount.

Also, to avoid microcaps, the screen looks for stocks that are over $5 and have average trading volume over 100,000 per day.

This screen returned 15 stocks.

5 Cheap Strong Buy Stocks: Values or Traps?

1. Dream Finders Homes, Inc. (DFH)

Dream Finders Homes is a Jacksonville, FL homebuilder with a market cap of $2.6 billion. It builds in 9 states including Florida and Texas.

Shares of Dream Finders Homes are down 14.2% year-to-date. It’s cheap with a forward P/E of just 8.1. Dream Finders Homes also has a P/S ratio of just 0.6. Earnings are expected to rise 20% in 2024.

It was recently announced that Dream Finders Homes was to join the S&P Small Cap 600 index.

Is Dream Finders Homes a value or a trap heading into 2025?

2. Tenet Healthcare Corp. (THC)

Tenet Healthcare is a large cap company in ambulatory surgery centers, surgical hospitals, outpatient facilities and other medical services.

Earnings are looking good in 2024. Tenet is expected to grow 2024 earnings by 63%. The analysts are bullish. 1 earnings estimate has been revised higher for 2024 and 2025 in the last week.

Shares of Tenet have soared 95% year-to-date but remain cheap. It has a forward P/E of just 13.5.

Is Tenet Healthcare a value or trap heading into 2025?

3. El Pollo Loco Holdings, Inc. (LOCO)

El Pollo Loco operates 495 restaurants in 7 states featuring fire grilled, fresh citrus marinated chicken. Celebrating its 50th anniversary, El Pollo Loco intends to expand to El Paso, Boise, Kansas City and Seattle-Tacoma in 2025.

Shares of El Pollo Loco have rallied 37% year-to-date but it is still cheap, with a forward P/E of just 15.8. Earnings of this small cap restaurant company are expected to rise 16.9% in 2024.

Is El Pollo Loco a value or a trap heading into 2025?

4. The Greenbrier Companies, Inc. (GBX)

Greenbrier manufactures and leases freight railcars and offers freight services. It is a small cap company with a market cap of $2 billion.

An analyst is bullish. 1 earnings estimate has been revised higher in the last 30 days for both 2024 and 2025. Greenbrier’s earnings are expected to rise 4.8% in 2024.

Shares of Greenbrier are up 49% year-to-date and are trading near 5-year highs. Yet it’s still cheap with a forward P/E of just 12.4.

Is Greenbrier a value or a trap heading into 2025?

5. Pediatrix Medical Group, Inc. (MD)

Pediatrix Medical Group is a national provider of prenatal, neonatal, and pediatric services. It has a market cap of $1.3 billion.

Analysts are bullish. 1 earnings estimate has been revised higher on Pediatrix Medical Group for 2024 in just the last week. Earnings are expected to be up 7.1% this year.

Shares of Pediatrix Medical Group have jumped 58% year-to-date. But it remains a cheap stock with a forward P/E of just 10.8.

Is Pediatrix Medical Group a value or a trap heading into 2025?

What Else Should You Know about Values Versus Traps?

Tune into this week’s podcast to find out.

Zacks Investment Research

The S&P 500 Index Thursday closed up +0.53%, the Dow Jones Industrials Index closed up +1.06%, and the Nasdaq 100 Index closed up +0.36%.

Stocks on Thursday finished moderately higher. Stocks recovered from mixed trading Thursday and turned higher on the prospects for the Trump administration’s tax policies and deregulation to boost corporate profits. Also, most chip stocks rallied Thursday following a volatile day for Nvidia, which finished only slightly higher despite reporting better-than-expected Q3 earnings after CEO Huang said the production and engineering costs of its new Blackwell AI chips will weigh on profit margins. The strength of software stocks was also positive for the overall market after Snowflake closed up by more than +32% after it reported stronger-than-expected Q3 revenue and raised its full-year product revenue estimate.

Dovish Fed comments Thursday were also supportive of stocks. New York Fed President Williams said US economic growth has been "very good" and "the disinflationary process will continue." He added that the cooling labor market and lower inflation show that monetary policy is restrictive today, and he expects "it will be appropriate over time to bring the fed-funds rate down closer to more normal or neutral levels." Also, Chicago Fed President Goolsbee said he has confidence inflation is easing toward the Fed's objective and "if we look out over the next year or so, it feels to me like rates will end up a fair bit lower than where they are today."

Thursday's US economic news was mixed for stocks, with Oct existing home sales climbing more than -expected but Oct leading indicators and the Nov Philadelphia Fed business outlook survey falling more than expected.

On the negative side, Alphabet closed down more than -4% after antitrust enforcers said in a court filing Wednesday that Google must divest Chrome, citing the browser “fortified” the company’s dominance. Also, fresh signs of escalation in the Ukraine-Russia conflict weighed on stocks after Ukraine said Russia launched long-range missiles into the city of Dnipro.

US weekly initial unemployment claims unexpectedly fell -6,000 to a 6-1/2 month low of 213,000, showing a stronger labor market than expectations of an increase to 220,000. However, continuing claims rose +26,000 to a 3-year high of 1.908 million, higher than expectations of 1.880 million, signaling a cooling labor market.

The US Nov Philadelphia Fed business outlook survey fell -15.8 to -5.5, weaker than expectations of 8.0.

US Oct leading indicators fell -0,4% m/m, weaker than expectations of -0.3% m/m.

US Oct existing home sales rose +3.4% m/m to 3.96 million, stronger than expectations of 3.95 million.

The price of Bitcoin Thursday closed down -6 ticks. The 10-year T-note yield rose +1.2 bp to 4.422%. Dec T-notes Thursday gave up early gains and turned lower after stocks rallied, which reduced safe-haven demand for T-notes. Also, weak demand for the Treasury’s $17 billion auction of 10-year TIPS undercut T-note prices as the auction had a bid-to-cover ratio of 2.35, below the 10-auction average of 2.40.

T-notes Thursday initially moved higher on carryover support from strength in European government bonds. Also, an escalation of the Ukraine-Russia conflict boosted safe-haven demand for T-notes after Russia launched long-range missiles into the city of Dnipro. In addition, dovish comments from New York Fed President Williams and Chicago Fed President Goolsbee boosted T-notes when they said it would be appropriate for the fed-funds rate to come down to a neutral level over time.

European government bond yields Thursday move lower. The 10-year German bund yield fell -3.3 bp to 2.318%. The 10-year UK gilt yield fell -2.6 bp to 4.443%.

Eurozone Oct new car registrations rose +1.1% y/y to 866,000 units, the biggest increase in 4 months.

The Eurozone Nov consumer confidence index unexpectedly fell -1.2 to a 5-month low of -13.7, weaker than expectations of an increase to -12.4.

ECB Governing Council member Stournaras said, "As inflation develops now and as the real economy develops now, I think the ECB should cut rates at each meeting until we get to what we call the neutral rate, which is about 2% according to estimates."

Swaps are discounting the chances at 100% for a -25 bp rate cut by the ECB at its December 12 policy meeting and at 19% for a -50 bp rate cut at the same meeting.

US Stock Movers

Software stocks rallied Thursday, led by a +32% surge in Snowflake after it reported Q3 revenue of $942.1 million, stronger than the consensus of $898.6 million, and raised its full-year product revenue estimate to $3.43 billion from a prior estimate of $3.36 billion. Also, MongoDB closed up more than +11%. In addition, Cloudflare closed up more than +7%, and Datadog closed up more than +6%.

Super Micro Computer closed up more than +15% to lead gainers in the S&P 500 and Nasdaq 100 after it submitted a compliance plan to Nasdaq and stated it could regain compliance within an extension period to file its 2024 annual report.

Salesforce closed up by more than +3% after Stifel raised its price target on the stock to $390 from $350.

Dream Finders Homes closed up more than +9% after S&P Dow Jones Indices said the company will replace Haynes International in the SmallCap 600 before trading on Monday, November 25.

Amentum Holdings A closed up more than +10% after Raymond James initiated coverage on the stock with a recommendation of outperform and a price target of $30.

Deere & Co closed up more than +8% after reporting Q4 net income of $1.25 billion, better than the consensus of $1.06 billion.

ON Holding AG closed up more than +4% after Raymond James upgraded the stock to strong buy from outperform with a price target of $63.

Dell Technologies closed up more than +3% after Evercore ISI added the stock to its tactical outperform list with a price target of $150.

Alphabet closed down more than -4% to lead losers in the S&P 500 after antitrust enforcers said in a court filing Wednesday that Google must divest Chrome, citing the browser “fortified” the company’s dominance.

PDD Holdings closed down more than -10% to lead losers in the Nasdaq 100 after reporting Q3 revenue of 99.35 billion yuan, weaker than the consensus of 102.83 billion yuan.

Amazon.com closed down more than -2% to lead losers in the Dow Jones Industrials after Reuters reported the company is likely to be investigated under the European Union’s Digital Markets Act.

Warner Music Group closed down more than -7% after reporting a Q4 operating margin of 8.8%, well below the consensus of 14.3%.

ZIM Integrated Shipping Services Ltd closed down more than -10% after Fearnley Securities downgraded the stock to sell from hold with a price target of $20.

Ulta Beauty closed down more than -1% after William Blair & Co downgraded the stock to market perform from outperform.

Earnings Reports (11/22/2024)

AMMO Inc (POWW), B Riley Financial Inc (RILY), Buckle Inc/The (BKE), Destination XL Group Inc (DXLG), Evolv Technologies Holdings Inc (EVLV), IES Holdings Inc (IESC), Spire Global Inc (SPIR).

On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policyhere.

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