It’s my turn here at InvestorPlace.com to write about buying cheap stocks.
Last summer, I wrote two pieces about cheap stocks. The first in June was 7 Cheap Stocks Under $20 That Could Double Soon. The second in August was 7 Cheap Stocks That Could Increase 10X by 2027.
In the former article, the stocks selected had the following three criteria: 1) At least five analysts covered them, 2) they had a projected price/earnings-to-growth ratio over the next 12 months less than 2, and 3) and generated annual free cash flow of at least $100 million.
And, of course, they traded under $20 and were a constituent of the S&P Composite 1500.
The last article focused on S&P Composite 1500 stocks between $5 and $20 with low PEG ratios and reserves with joint enterprise value-to-sales ratios.
So, for this article, my five criteria will be a blend of the two:
- A PEG ratio of less than 2.
- Trailing 12-month free cash flow of at least $100 million.
- An enterprise value-to-sales ratio of less than 5.
- The share price is between $5 and $20, and
- They’re a constituent of the S&P Composite 1500.
Here goes.
| PRDO | Perdoceo Education | $13.42 |
| MTG | MGIC Investment | $14.30 |
| EXTR | Extreme Networks | $15.71 |
Perdoceo Education (PRDO)
It’s always challenging to pick stocks when market strategists predict the S&P 500 will fall by over 20% over the next six to 12 months. Nonetheless, I’ve been tasked to do that, so I’ll do it.
Perdoceo Education (NASDAQ:PRDO) is my first selection. It operates two accredited academic institutions: Colorado Technical University and the American InterContinental University System, providing students with degree programs from the associate through the doctorate level. In addition, it offers non-degree programs for professional development.
In 2022, it generated revenue of $176.1 million, 10.2% higher than a year earlier. This was despite a 3% decrease in enrollment to 39,200. Further down the income statement, Perdoceo’s adjusted operating income was $164.0 million, 6.6% lower than a year earlier.
In February, the company announced it had acquired Coding Dojo for $52.8 million, with an additional $15 million possible based on specific financial metrics being met. The Washington state company joined Perdoceo’s Colorado Technical University.
Perdoceo’s trailing 12-month free cash flow is $135.6 million, providing investors with a 15.5% free cash flow yield. I consider anything above 8% to be in value territory.
MGIC Investment (MTG)
MGIC Investment (NYSE:MTG) is the parent company of Mortgage Guarantee Insurance Corporation. It provides private mortgage insurance (PMI) and other mortgage credit risk solutions. The company is licensed in all 50 U.S. states, the District of Columbia, Puerto Rico, and Guam.
At the end of December, it had $76.4 billion in new insurance written (NIW) and $295.3 billion in insurance in force, which was only $187.3 billion in June 2017. Over this period, the company has grown its insurance in force over every six month period.
MGIC was founded in 1957 in Milwaukee by Max Karl, the founder of the modern form of PMI. Its products have protected residential mortgage lenders and borrowers for 65 years.
Nine analysts are covering its stock, with six giving it a buy rating and a median target price of $17, considerably higher than where it’s currently trading.
While net premiums earned in 2022 were flat or slightly lower than in 2021, the company’s net income rose 36.3% to $865.3 million and $635.0 million in 2021. That amounts to an exceptionally high net margin of 86%.
And yet, MGIC trades at just 5.1-times earnings. Now that’s cheap.
Extreme Networks (EXTR)
Extreme Networks (NASDAQ:EXTR) designs and manufactures wired and wireless infrastructure equipment. Comcast Business announced that it would partner with the company to roll out 900 Extreme Wi-Fi 6E access points at the San Francisco Giants Oracle Park stadium.
“Having a strong and adaptable network infrastructure is how these fans, and the vendors that serve them, achieve those unforgettable experiences. And, with these new network upgrades, the game-day experience at Oracle Park will be prepared for years to come,” stated Scott Cohen, executive director at Comcast Business.
Through the first half of fiscal 2023, Extreme had revenue of $616 million, 12.3% higher than a year earlier. Further down the income statement, it generated $40.8 million, 12.1% higher than in 2021.
Over the trailing 12 months, the company’s free cash flow was $171 million, providing investors with a 7.2% free cash flow yield, which is within shouting distance of value territory.
Seven analysts cover its stock, with six giving it a buy rating. The consensus median analyst price target for EXTR stock currently stands at $23 per share, which is 25% higher than where it’s currently trading.
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.
