Value Investing: Three Dirt Cheap Stocks

Walter J. Schloss is a name that may ring bells with value investors as he was deemed a “super-investor” by none other than Warren Buffett in a famous essay entitled “The Superinvestors of Graham-and-Doddsville,” which was published in the Columbia University Business School magazine back in 1984. Many incredibly successful value investors that traced their lineage back to Columbia University and Buffett’s mentor, Benjamin Graham, were profiled in the article. 

Possibly the most interesting, however, was Schloss, who racked up annualized returns of 21.3% before fees, between 1956 and 1984, in his WJS Limited Partners Fund. Schloss’ investment strategy was remarkable in both its simplicity and discipline – not to mention the long-term returns that it generated. 

According to Buffett, Schloss was a classic “Cigar-Butt” – a value investor who purchased distressed equities that were trading for less than book value (net assets/share price). In fact, in a true contrarian approach, Schloss eschewed even earnings considerations in his stock purchases and instead focused exclusively on securities that provided a significant margin of safety whereby the stock was trading at a discount to the liquidation value of the company. 

Many will argue that this approach is somewhat outdated and given the proliferation of value investing wisdom, these opportunities are rare nowadays. There may be a bit of truth to this point of view, but it is also important to remember the axiom that nothing really ever changes on Wall Street because human psychology remains the same. 

The lack of tremendous value opportunities in recent years can mostly be attributed to Federal Reserve policy and equity markets that have become persistently overvalued as a result of a decade and a half of cheap money. This won’t last forever. It can’t. 

Despite hard times, “cigar-butt” value investing is not going away, and it will likely make a new generation of Graham-and-Doddsville adherents incredibly rich over the next 20 or 30 years. 

Below, we examine 3 of the cheapest stocks on the Street that would undoubtedly meet Schloss’ criteria for investment. These situations, as expected, are not elegant or compelling on the surface - exactly what we are looking for in identifying distressed value stocks trading at dirt cheap valuations. 

DISH Network DISH

The situation at the Englewood, Colorado satellite-TV provider has continued to deteriorate in recent quarters, leaving the equity trading at a tremendously attractive valuation – but risks do abound here. Among the major issues that have been a tremendous headwind for the stock is a devastating cyberattack that occurred in February, a huge debt load, and a rapidly declining subscriber base. 

The stock has lost more than 70% in 2023 and is currently trading at levels that have not been seen in decades. On Tuesday, DISH shares closed at $6.46. As recently as the Summer of 2021, this was a $40+ stock. The most problematic issue here in terms of valuation is DISH’s debt, which has fallen into distressed territory. 

On Monday, DISH CEO Charlie Ergen said that the company is facing a “narrow window” to address its capital structure and that the debt market is essentially closed for the company at this time, limiting DISH’s options. Moving forward, he said that DISH is considering putting up some of its assets as collateral for new loans or possibly undertaking other strategic options. 

The company shed 552k paying TV subscribers in the first quarter. Fleeing subscribers at the company has been an ongoing issue and has forced DISH to attempt to pivot into the wireless broadband market in an effort to grow sales. 

Obviously, there are many moving pieces here that account for the stock’s distressed valuation. Nevertheless, shares are incredibly cheap using traditional metrics. 

DISH is currently trading at just 0.26x book value, 0.34x sales, a trailing P/E of 2.47 and a forward P/E of 10. As mentioned above, we can see that the company’s debt load is the overhang on the stock as operating cash flow in the trailing twelve-month period was $3.12 billion and EBITDA was $2.61 billion - which compares to a current equity value for the company of under $5 billion.  

These are unbelievably attractive metrics, except for the fact that DISH has more than $24 billion in debt and much of it is trading at distressed levels. The interest on this debt will continue to be a tremendous overhang on earnings for years to come. Unfortunately, this situation lacks visibility and is not straightforward in the least. 

If, however, as the CEO mentioned, the company is able to make substantive progress on re-orienting its business and addressing its capital structure, the stock has tremendous upside. Nevertheless, investors looking to buy at these levels will need to accept a degree of uncertainty and risk and understand that management’s plan for unlocking value may take years.

General Motors GM

This company has a very long and storied tradition, but the legacy automotive industry is not seen as a growth sector, and the stock’s valuation reflects this as well as a number of other issues. Both sales and earnings have been very choppy in recent years, and Wall Street analysts estimate that EPS at GM will continue to fall. 

For fiscal 2023, the Street is at $6.83 vs. $7.59 in the year-ago period. Next year, earnings are expected to decline a further 4.5% to $6.52. Alternatively, the Street sees sales growing 6.10% in 2023 to $166.31 billion and then adding another 2.70% to $170.83 billion in fiscal 2024.

These numbers are not spectacular by any means, but they don’t fully account for the stock’s depressed valuation. Consider that GM shares are currently lighting up on nearly every metric in terms of their overall cheapness. 

The stock is trading at both a trailing and forward P/E of ~5, a Price/Sales ratio of 0.29, a Price/Book of 0.65 and an EV/EBITDA multiple of 5.47. 

GM’s 5-year PEG ratio of 1.43 helps to put some of these metrics in perspective, as the Street’s view is that this is a very mature legacy automaker with few near-term growth opportunities and potential for compressed margins as the industry continues to shift to EV vehicles. 

This is further solidified by the vast gulf between GM’s valuation and that of the auto industry as a whole, although much of this can be attributed to Tesla TSLA. For example, the industry average P/E is currently above 52 and the average P/S is over 26. 

Valuation remains extremely attractive and analysts seem to agree as the stock currently has 15 Buy ratings, 11 Hold ratings and one Sell rating, according to Wall Street Journal data. The most recent upgrade for GM came on May 1, from Morgan Stanley which is Overweight the name and bumped its price target from $36.00 to $38.00. Shares closed on Tuesday at $33.28. 

GM reported its first-quarter earnings results on Tuesday, April 25, beating consensus estimates and raising guidance. The commentary from the analyst community in the wake of the strong report, however, has been a near-term drag on the stock. 

Analysts cited eroding pricing power, labor concerns and challenges in the EV space as being catalysts for likely eroding margins at GM into the future. It is these concerns, however, that have provided such an attractive valuation in the stock and the consensus remains that while financial performance may leave something to be desired, valuation is compelling. 

Heading into the second half of the trading week, GM has lost a little less than 2% in 2023 and the stock is down 14% over the last 52 weeks, sitting just above a 52-week low of $30.33. 

JetBlue Airways JBLU

The Coronavirus pandemic had a devastating impact on sales and earnings at the Long Island, New York airline, and the stock is currently trading at a depressed valuation as the company seeks to get its operations back on track. In 2020, JBLU lost $2.96 billion. In fiscal 2021, that loss narrowed to $182 million, but then climbed again in fiscal 2022 to $362 million. 

Nevertheless, there are some very positive trends at the company as sales rebounded from a low of ~$3 billion in 2020 to over $9 billion last year. Furthermore, the Street sees JBLU getting back to profitability this year, with consensus EPS estimates of $0.66. This number is expected to jump another 40% next year to $1.11. 

Given these estimates, the current share price of $7.00 begins to look extremely attractive from a value standpoint. The swing to profitability this year and next is expected to come on the back of sales growth of 9.90% in 2023 and 6.80% in fiscal 2024 to $10.75 billion. Nevertheless, recent quarterly trends have shown some near-term deceleration and this is likely continuing to give investors pause. 

Shares are currently trading at a forward P/E of 9.43, a P/S of 0.24, a Price/Book ratio of 0.69 and an EV/EBITDA multiple of just under 11. Based on these metrics, this is a cheap stock. Consider that the industry average P/E is 17.85, the average P/S is 0.47 and the average Price/Book is over 2x. 

The stock has jumped around 8% in 2023 but remains down more than 30% on the 1-year chart. Currently, 13 analysts have coverage on the name, with one Buy recommendation, 10 Hold ratings, and 2 Sell ratings. The high target price on the Street is $11.00 and the median target is $8.13. 

The Coronavirus was devastating for JetBlue, but the company is clearly getting back on track in terms of sales growth and converting revenue into bottom-line profits. Nevertheless, the airline business has always been both difficult and fickle and there is little likelihood that will be going away anytime soon. The key here, however, will be execution. Given the stock’s current depressed valuation, if JBLU is able to hit its numbers in the coming years, look for this name to be significantly higher in 2025.

Featured Photo by Ramon Kagie on Unsplash.