As the saying goes, you have to pay for quality. This logic applies to stocks – many believe that the best stocks to own will necessarily have expensive valuations. And this is often true. After all, the best companies in the world attract a lot of buyers, thereby increasing their valuations.
However, there are also some good stocks at a low price, including I robot (NASDAQ: IRBT), United Rentals (NYSE: URI), and WEX (NYSE: WEX). These are three of the cheapest stocks I own. Read on to see what each company does and why I think these are great stocks to buy and hold for the long term.
1.iRobot: a market share leader in the face of short-term headwinds
When it comes to autonomous floor cleaning robots, iRobot is the global market share leader within a mile. According to the company, outside of China, it holds 62% of the market estimated at 2.5 billion dollars. However, according to Fortune Business Insights, this market is expected to grow at a compound annual growth rate of 24% through 2027, which means that iRobot could lose market share and yet easily double its business size.
iRobot could give up market share in the years to come, but I wouldn’t expect it to lose too much. Some skeptics rightly point to the cheaper robotic vacuum cleaner options of competitors. However, iRobot’s premium position is well deserved, and it’s clear to me that consumers love the product. After all, consider that 12.5 million iRobot customers voluntarily signed up for communications and software updates in the third quarter, up 60% year-over-year.
Through strong and growing relationships with its customers, iRobot management hopes they can generate more Direct to Consumer Sales (DTC) when people switch to new vacuum cleaner models. This would help increase the company’s profit margins by cutting out third-party retailers and other middlemen. There is already cause for optimism here, given that Q3 DTC revenue grew faster than total revenue and was already 9% of the mix.
In addition, iRobot management hopes that its direct relationship with consumers can boost sales of ancillary products. Its hand-held vacuum cleaner is already selling well, and sales of replacement accessories are also growing satisfactorily. In addition, the company recently acquired Aeris Cleantec in order to be able to sell air purifiers to its existing customers. The acquisition is just one step towards its goal of building “a larger ecosystem by entering new adjacent categories of robotics and smart home”.
Right now, iRobot faces headwinds in the supply chain and ongoing tariffs on its products made in China. These two elements weigh on its results and frighten the market. However, the business remains profitable. If these headwinds are only temporary, profitability will rebound. Therefore, there is risk but opportunity. And investors are offered shares of iRobot today at one of their cheapest valuations yet, just 1.2 times trailing sales. It’s a godsend, in my opinion.
2. United Rentals: a snowball cash-flow opportunity
Many investors buy stocks at an exorbitant valuation, trying to find investments that can increase 10 times in value in just 10 years. They don’t think that a stock that trades at a modest 20 times its earnings could be increased tenfold. These extreme returns are usually accompanied by high expectations and sky-high valuation ratios. To the right?
And yet, that’s exactly what the United Rentals stock has been doing for the past 10 years. Its stock traded 20 times rolling earnings or cheaper for most of that time.
Like iRobot, United Rentals is the market share leader in its industry: equipment rentals. However, unlike iRobot’s stellar 62% market share, United Rentals only has 13% of its chosen target market. This suggests that the space is extremely fragmented, with small players making up the majority of the sector. And this reality helps us understand why United Rental’s goal is to be a consolidator in its industry. For a recent example, it acquired General Finance for around $ 1 billion in April.
The market consolidation strategy works particularly well for United Rentals, in my opinion, due to the cash flow of the business. Consider the company’s free cash margin to be 16%, 17%, and 29% in 2018, 2019, and 2020 respectively. Last year’s margin was a bit of an anomaly given that management was conserving cash very cautiously. However, its free cash margin is 18% over the first three quarters of 2021, which is an exceptional result.
United Rentals’ competitors are also very profitable, which means that acquisitions immediately contribute to its cash flow. And beyond winning market share, the company also has a habit of using cash flow to reward shareholders with share buybacks. For example, its number of shares outstanding has decreased by 15% over the past five years, thereby increasing shareholder value.
I expect share buybacks and buybacks to continue, which means United Rentals shares could beat the market in the future for the same reasons they have been in the past.
3. Wex: a fully recovered company with big growth plans
While iRobot and United Rentals are cheap stocks worth owning, I think Wex stock is the best long-term opportunity out of these three.
But first, here’s what it does: Wex is a niche fintech stock. It provides business payment solutions so that businesses can manage expenses related to their vehicle fleet and also manage corporate travel expenses. The company recently added services for corporate healthcare plans, giving it three fairly diverse business segments. In the last quarter, its Fleet segment accounted for 59% of revenue, the Travel and Business Solutions segment was 19% and the Health and Benefits Solutions segment was 22%.
The COVID-19 pandemic has devastated the normal business operations of most of Wex’s customers, so it’s no surprise that the inventory fell sharply in early 2020. What is surprising, however, is how point the company’s revenues finally held up. The turnover for the year 2020 only decreased by 10% compared to 2019, a reminder of the importance of Wex’s services, even in difficult times.
However, the market did not reward Wex’s resilience. The stock is still down 46% from the all-time high it reached shortly before the start of the pandemic. Fortunately, the business has already fully recovered. It generated record quarterly revenue of $ 483 million in the third quarter. In addition, at the midpoint of its forecasts, it forecasts a turnover for the year 2021 of 1.83 billion dollars, an increase of 6% compared to 2019.
Wex management believes it can increase revenue between 10% and 15% per year through a mix of organic growth and acquisitions. And profitability is expected to grow faster than that. These are above-market growth rates that must be taken seriously, given the company’s history of meeting its growth targets. Looking at its current price-to-sell ratio of just 3.4, the only time in the past five years that it was cheaper to buy Wex shares was in the darkest depths of the stock market crash of 2020.
Why Wex is the winner today
To conclude, iRobot is trading at a historically cheap valuation, but still faces some uncertainty going forward. For its part, United Rentals should continue to perform well, particularly with priority infrastructure spending. However, the stock has been even cheaper on several occasions throughout its history. So, although it is cheap compared to many other stocks, it is currently trading at the high end of its historical range.
That’s why I like the balance of risk and reward that Wex provides versus iRobot and United Rentals. Not only has Wex made a full recovery, but its resilience in 2020 has demonstrated how important its business services are. I believe these will remain important and the business will continue to grow as it has in the past. For this, investors who buy today get a cheap valuation, making it an attractive opportunity in the long run.
This article represents the opinion of the author, who may disagree with the âofficialâ recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.