A major challenge for all investors is finding companies that are attractively priced, and yet also offer a bright future. Certainly, it is possible to find cheap stocks whether the ASX is at 7,000 or 4,000 (or anywhere in between), but all too often those same cheap stocks turn out to offer little more than disappointment. In other words, they prove to be value traps.
Of course, some cheap stocks have bright futures and, while they are rarely (if ever) cheap without reason, they can prove to be some of the most profitable companies to own over the long run.
With that in mind, here are three companies that are dirt cheap right now. But are they worth buying?
Rio Tinto Limited
Evidence of Rio Tinto Limited's (ASX: RIO) dirt cheap valuation can be seen in its price to earnings (P/E) ratio of 9.8. That's considerably lower than the ASX's P/E ratio of 16.5, and also offers a significant discount to the mining sector's P/E ratio of 12.7.
Looking ahead, Rio Tinto has the potential to cement its position as a dominant iron ore miner due to its strategy of increasing production while commodity prices are low. This has the effect of not only improving its bottom line in the short run, but also in squeezing its competitors to an even greater extent. And, with Rio Tinto having an extremely low cost curve, this strategy can be undertaken over the long run.
Woodside Petroleum Limited
Woodside Petroleum Limited (ASX: WPL) has a forward dividend yield of 5.4% (fully franked), which is significantly higher than the ASX's yield of 4.4%. In addition to being cheap, Woodside also has excellent finances and cash flow which are helping it to consolidate its position as one of the major energy plays on the ASX through multiple acquisitions that could improve its profitability in the long run relative to its peers.
In addition, Woodside continues to reduce costs and become more efficient, with job losses and a pay freeze also helping to make it a leaner business. And, with an excellent track record of growing profitability (earnings have risen at an annualised rate of 10.8% during the last ten years), Woodside seems to offer good value rather than just being cheap.
Woolworths Limited
Woolworths Limited (ASX: WOW) has a price to sales (P/S) ratio of just 0.62, which is considerably lower than that of the ASX (1.6) and also the wider food and staples retailing sector (1.02). Clearly, the supermarket sector is seeing competition increase, and this is set to continue over the medium term.
As such, a healthy margin of safety is perhaps inevitable, although Woolworths' present valuation seems too low given that it continues to offer lower than average volatility via a beta of 0.67, a great yield of 4.7% (fully franked), as well as an excellent track record of cash flow growth, with cash flow per share having risen by 10.1% per annum during the last ten years.
