The S&P 500 is down more than 20% year to date and on track for one of the worst yearly performances in the index’s long history. While it’s not easy putting money into the markets when sentiment is so negative, there are still cheap stocks that Wall Street analysts love.
Whether you have the nerve to make a move is another story altogether. There’s no shame in sitting on cash rather than throwing money down a potential rabbit hole. For those who aren’t backing down from Mr. Market, though, I’m looking at stocks that have solid balance sheets, are making good money and have strong analyst support.
You’ll notice that there are some familiar names on the list, as well as some lesser-known businesses. All seven of them have a shot at redemption in 2023.
|ALK||Alaska Air Group||$44.24|
Cheap Stocks Wall Street Analysts Love: Boot Barn (BOOT)
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Shares of Boot Barn (NYSE:BOOT), a specialty retailer of Western wear, have gotten crushed in 2022, down more than 57% year to date. However, over the past five years, the stock is up more than 336%. Of the 12 analysts covering BOOT stock, 11 rate it either a “buy” or “overweight,” with only one “hold.” So, we have a beaten-down stock that is popular with analysts but with a recession looming.
In early January, I selected Boot Barn and six other stocks I thought could double for a second consecutive year. Of course, I had no idea about the terrible year the markets would experience in 2022. However, the company’s growth story remains intact.
Boot Barn reported its latest quarterly results at the end of October. They were better than analyst expectations. On the top line, revenue of $351.5 million was up 12.4% year over year and beat the consensus estimate by $8.5 million. On the bottom line, earnings per share of $1.06 were down from a year ago but much better than the 90 cents per share analysts were predicting.
For its full fiscal year ending April 1, 2023, Boot Barn expects to open 40 new stores, grow sales by at least 10.9% to $1.65 billion, and deliver earnings per share of $5.70 to $5.90.
Based on its guidance for 2023, BOOT trades at a cheap 1x sales and 9.1x earnings at the midpoint of its range. The average analyst price target of $89.27 is 70% above the current price.
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For those who are bearish on Alphabet (NASDAQ:GOOGL), one of the biggest issues is Google’s ad revenue, which the bears fear will be severely dented by a recession. The counterargument is that companies are forced to double down on advertising during recessions to maintain their growth. And some feel a slowdown in ad revenue has already been factored into the share price, which is down 40% on the year.
What Google loses in ad revenue, the company will more than make up in the cloud. In Q3, Alphabet generated $6.87 billion from its cloud business. That’s an annual run rate of $27.5 billion.
Investors should also consider what it may mean for the stock if the ad slowdown doesn’t materialize. That’s a risk/reward proposition worth taking, especially given that Alphabet has generated $62.5 billion in trailing 12-month free cash flow. That’s a financially sound company you want to own should a recession rear its ugly head.
Over the past five years, shares are up more than 69% versus 48% for the S&P 500. Of the 48 analysts covering GOOGL stock, 44 rate it either a “buy” or “overweight,” with only four “holds.” The average target price is $126.67, which is 45% higher than where shares currently trade.
Finally, its price-to-sales ratio of 4.17 is below its five-year average of 6.6. By every metric, GOOGL stock is cheaper than it’s been in years.
Cheap Stocks Wall Street Analysts Love: MaxLinear (MXL)
MaxLinear (NASDAQ:MXL) is a California-based company that provides systems-on-chip solutions to broadband, mobile, wireline infrastructure, data centers, industrial applications and more. Founded in 2003, it went public in 2010 at $14 a share, raising more than $90 million in its initial public offering. Its shares are up 125% since then, underperforming the broader market. However, over the same period, the company’s annual revenue has grown more than 2,000% from $51.4 million in 2009 to an estimated $1.1 billion in 2022.
Over the same period, it’s gone from an operating profit of $4.6 million in 2009 to a trailing 12-month operating profit of $169.5 million. That might not seem like much, but it’s more than double its 2021 operating profit of $67.5 million.
Management continues to execute its plan to deliver profitable growth for shareholders. Over the past three fiscal years, thanks to its organic growth and acquisitions, its serviceable available market has doubled to $8 billion.
Of the 12 analysts covering MXL stock, 11 rate it a “buy” or “overweight,” with only one “hold.” The average target price of $49 is more than 55% higher than the current share price.
In 2023, the consensus estimate is for MaxLinear to earn $3.92 per share. Shares are trading at 8.1 times that estimate, which is very cheap for a company growing sales and operating earnings by high double digits.
MXL stock is one of the cheap stocks analysts love and an excellent long-term buy.
Alaska Air Group (ALK)
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Alaska Air Group (NYSE:ALK) announced on Oct. 26 that it had ordered 52 Boeing 737 Max aircraft for delivery between 2024 and 2027. This will bring its 737 MAX fleet to 146. In addition, it has the option to buy 105 more by 2030. It is the company’s largest order in its 90-year history.
In an interesting twist, the airline is expanding its subscription service to Salt Lake City from departure cities in California, Arizona and Nevada. Subscribers can book up to 24 roundtrip flights in a year at a fixed monthly rate.
In October, the airline reported excellent third-quarter results, including a record $2.8 billion in operating revenue, which was 45% higher than a year earlier. Alaska Air’s load factor — defined as the number of seats it sells versus those available — of 86.9% was 620 basis points higher than a year earlier. Anytime an airline gets above 80%, it generally makes money on its flights.
Third-quarter adjusted net income of $325 million was 74% better than a year ago. And Alaska Air ended the quarter with $3.2 billion in cash and marketable securities on its balance sheet and adjusted net debt of just $805 million, which is just 14% of its market cap.
Of the 13 analysts covering the stock, 12 rate it a “buy” or “overweight,” with only one “hold.” Their average target price of $61.58 is 39% higher than where shares currently trade.
Cheap Stocks Wall Street Analysts Love: Lumentum (LITE)
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I included Lumentum (NASDAQ:LITE) in a September article on tech stocks to buy with superior fundamentals. The maker of optical and photonics products had delivered excellent quarterly results only two weeks earlier, including net income of 49 cents a share, 28 cents better than the consensus analyst estimate, in the final quarter of the company’s fiscal 2022 year. However, shares sold off following the report, dropping nearly 7% on the day, as investors weren’t impressed with management’s Q1 2023 guidance.
Fast-forward roughly three months and we’re seeing a similar scenario play out. This time, the stock plunged 16% in a single day following the release of the company’s Q1 fiscal 2023 results on Nov. 28, again on disappointing guidance. Year to date, the stock is down 48%.
However, the company beat on the top and bottom lines. It generated revenue of $506.8 million, $5.4 million higher than the consensus estimate. On the bottom line, it earned $1.69 a share, excluding one-time items, 10 cents higher than analyst expectations.
As for the guidance for the fiscal second quarter, management expects revenue of $505 million at the midpoint of its range, 13% higher than a year earlier, with a non-GAAP operating margin of 21%, significantly below the 31.7% operating margin a year earlier. Its non-GAAP EPS is also expected to be lower. Yet, analysts remain bullish on the stock.
Of the 15 analysts covering LITE stock, 13 rate it a “buy” or “overweight,” with two “holds.” The average target price of $108.36 is 96% higher than where it currently trades.
Analysts expect EPS of $5.97 a share for fiscal 2023, ending in July, and $6.73 in 2024. Based on these estimates, share are trading at 9.2x fiscal 2023 earnings and 8.2x fiscal 2024 earnings.
The risk is high, given the company’s guidance, but the potential rewards are commensurate.
EPAM Systems (EPAM)
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EPAM Systems (NYSE:EPAM) is a technology company providing engineering services for software development and digital platforms. Of the 17 analysts who cover it, 15 rate it a “buy” or “overweight,” with two “holds.” Their average target price of $426.67 is 39% above the current share price.
I happened to see an article recently suggesting EPAM Systems has excellent capital allocation. To me, excellent capital allocation means generating significant free cash flow. In the trailing 12 months, its FCF was $445.9 million. That’s a decent amount for a company that’s expected to grow its revenue by 28% this year to $4.8 billion. It might not be the 41% YOY growth it delivered in 2021, but it would be more than $1 billion higher for all of 2022.
For the third quarter, revenue rose 24% year over year to $1.2 billion, while non-GAAP net income of $183.7 million was 28% higher than in Q3 2021. Management said on the earnings conference call that Q3 revenue from its top 20 clients grew by 22% YOY. Perhaps more telling is the fact that revenue from customers outside the top 20 increased by 25% over Q3 2021.
EPAM finished the third quarter with nearly $1.5 billion in cash and cash equivalents. That compares to just $28.2 million in long-term debt. In other words, its balance sheet is rock solid.
Cheap Stocks Wall Street Analysts Love: Microsoft (MSFT)
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Microsoft (NASDAQ:MSFT) is a very popular stock among analysts. Of the 53 that cover it, 48 rate it a “buy” or “overweight,” with four “holds” and one “sell.” The average target price of $291.97 is 30% higher than where it currently trades.
This bullishness is not surprising given Microsoft’s many powerhouse businesses, including Microsoft Azure. CEO Satya Nadella has ridden the move to the cloud all the way to the bank — and shareholders are thankful for that.
Right now, the elephant in the room is Microsoft’s $69 billion acquisition of Activision Blizzard (NASDAQ:ATVI), pending regulatory approval. Even though Activision reported excellent Q3 earnings on Nov. 7, the video game company’s shareholders are more concerned about Microsoft getting the thumbs up.
The difference between approval and rejection is currently around $23 — Microsoft is paying $95 a share for ATVI — but it could widen considerably should regulators say “no.” On Nov. 8, the European Commission said it would undertake a second and more thorough examination of the Microsoft-Activision merger that could last through March.
While Xbox could benefit from the combination, Microsoft remains a force to be reckoned with — with or without the acquisition. If Microsoft’s trailing 12-month free cash flow of $63.3 billion were revenue, it would be a Fortune 100 company. That’s mighty.
As for Microsoft Azure, it finished the latest quarter with $20.3 billion in revenue, $200 million less than Amazon (NASDAQ:AMZN) Web Services. It’s a neck-and-neck race that will continue to play out in 2023 and beyond.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.