I love a good bargain, and my contrarian nature mandates that I buy cheap stocks when everyone else is freaking out. I’m not recommending this policy for short-term trading. However, it’s worked well for me as a swing trader and a longer-term investor. As I see it, the steep and unexpected price drops in Nokia (NOK), Twitter (TWTR), and Ford (F) might provide precisely the type of opportunity I’m looking for in a mostly overvalued market.
Still, we need to slow down and examine both the fundamentals and the technicals of any stock before committing our hard-earned capital to it. With that in mind, let’s put these three suddenly unloved cheap stocks under a microscope to determine whether they’re worth salvaging or are just train wrecks.
Say goodbye to Nokia’s dividends
Nokia stock shed a mind-bending 23.68% in a single trading day on October 24 due to a rather unfavorable earnings report. The company had previously estimated 2020 EPS of between 0.37 euros and 0.42 euros, but now it’s projecting EPS of between 0.20 euros and 0.30 euros. The company also startled investors by declaring that it wouldn’t be paying any dividends until further notice.
I actually think it’s a smart move for Nokia to use its cash to augment its 5G development instead of paying it out to shareholders. This is a company with no debt. Its CEO has also declared his commitment to cost reduction and productivity improvement. Nokia stock is trading at a nice price too. I’m not against picking up a few shares of this cheap tech stock—dividends or no dividends—while it’s down.
Analysts get bitter about Twitter
Twitter’s $35 support level is now its resistance, as its shares plunged nearly 21% in a single session on October 24. Earnings were the culprit again, with analysts expecting third-quarter net income of $161.5 million and the company’s actual figure coming in at a paltry $37 million. It also didn’t help that Goldman Sachs (GS) analysts took the opportunity to downgrade the stock and cut their price target all the way down to $34 from $52.
I wouldn’t recommend buying TWTR here. Part of the blame ought to go to Goldman Sachs for having its price target so high in the first place and to the general analyst community for grossly miscalculating Twitter’s income potential when they knew full well that ad revenue (Twitter’s lifeblood) was down. When it comes to cheap stocks, I’m rating this one a “hold”—or more accurately a “watch-and-wait”—until further notice.
A pileup in Ford stock
Not long ago, $9.50 was the line in the sand for Ford stock. Now, suddenly, it’s $8.50. I absolutely love Ford shares at this level for a buy and hold. In this case, it wasn’t third-quarter earnings that sank the stock, as $0.26 per share were expected, and $0.34 per share were delivered. Nor was revenue the culprit, as Ford reported automotive revenue of $33.93 billion, outperforming analysts’ expectations by $50 million.
Rather, it was Ford’s guidance that caused the short-term panic. Ford CEO James Hackett conceded, “We are experiencing more headwinds than expected in our fourth quarter.” Hackett adjusted the company’s full-year adjusted EBIT downward from $7 billion–$7.5 billion to $6.5 billion–$7 billion.
Unlike some analysts and traders, I actually respect CEOs for being honest in their forward guidance. Besides, when Ford stock’s PE ratio dips below 16 and the company maintains its outstanding 6.51% dividend yield even during a trade war, I’m more than happy to champion the king of US automakers.
Cheap stocks: Two “buys” and a “hold”
So there you have them—my recommendations on some enticingly cheap stocks. As usual, I’m going against the grain and seeing today’s losers as tomorrow’s winners.