Buy low, sell high — that’s the mantra for making money in the stock market, right?
And the first part of the process sounds simple enough: Find a cheap stock with a low price-to-earnings ratio, buy it — then wait for it to rise in price.
Problem is, some stocks are cheap for a reason. No matter how cheaply you buy them, there’s no guarantee they’ll go up. So how do you improve your chances of finding a winner?
TipRanks uses a system called “smart score.” Crunching data on Wall Street sentiment, buying activity by insiders and hedge funds, and other factors — including, yes, low P/E — TipRanks assigns each stock a smart score rating indicating a level of confidence that it will outperform the market, on an easy to understand scale of 1 to 10.
Those stocks at the tippety top of the scale score a perfect 10 — and over the last eight years they’ve outperformed the average S&P 500 stock by more than 70%.
Here are three stocks meeting the criteria for “perfect 10” status today:
Momo Inc. (MOMO)
China’s version of Tinder, Momo hasn’t actually been showing a whole lot of momentum lately. In fact, up only 15% over the past year, Momo stock is actually slightly underperforming the S&P 500 as a whole.
That may be okay for investors, though, if it means they get a chance to buy a piece of the world’s biggest dating market at a bargain price — and Momo’s price tag sure does look like a bargain. Valued at just 22.8 times trailing earnings, the first “Perfect 10” on our list today sells for a slight discount to the market’s average 23.1 P/E.
Momo is likely to show nearly 23% growth in profits next year — nearly three times faster than the average 8.3% growth that analysts are predicting for S&P stocks. Such a disconnect between price and growth prospects has Wall Street analysts feeling bullish on Momo stock.
Morgan Stanley’s Alex Poon recently noted, “Online dating is a global phenomenon and we think Momo is best positioned to benefit in China. With Tantan set to achieve profitability in China in 2020e and rising dividends, we see Momo’s 4-year derating cycle reversing.”
Poon rates MOMO stock an Overweight (i.e. “buy”) with a $45 price target, which implies about 23% upside from current levels. (To watch Poon’s track record, click here)
Indeed, every single analyst who’s voiced an opinion on Momo over the past year says this stock is a “buy.” On average, analysts who track Momo predict the stock will rise more than 18% from its current price to race past $43 per share within the next 12 months. And that definitely makes the stock a “strong buy.” (See Momo stock analysis on TipRanks)
Radian Group (RDN)
Philadelphia-based mortgage services provider and private mortgage insurer Radian Group is our second stock up for consideration, and at a P/E ratio of just 8.5, there’s no argument this one isn’t cheap enough to justify a closer look.
Indeed, Wall Street has been looking at Radian of late, and investors seem to like what they see. Over the past 12 months, Radian stock is up an impressive 40% — even more than BJ’s, and remains close to its 52-week high. It probably hasn’t hurt that last quarter, Radian posted a 15% increase in its revenues — and a 21.5% increase in its profits.
What’s more, with mortgage interest rates currently at 3.75% (for a 30-year fixed-rate mortgage), and more than one full percentage point below where rates were a year ago, there’s still a big tailwind behind the housing market, which should be good news for Radian’s business.
Hedge funds are loading up on the stock, with firms such as Gotham Asset Management and Caxton Associates adding to their positions in the most recent quarter.
Analyst Chris Gamaitoni of Compass Point is bullish on the stock, too, reiterating “buy” ratings on Radian shares, while raising the price target to $33.50 (from $33), which implies about 40% upside from current levels.
Gamaitoni noted, “Radian produced a consistent quarter with not a lot of change in our forward estimates or outlook. We are modestly increasing our estimates because Radian lowered its initial default-to-claim rate faster and more meaningfully than we anticipated, as well as better expense guidance than previously modeled. This is somewhat offset by lower premium revenue as new vintages are skewing more high quality (lower premium, less capital, less losses) and lower investment income because of changes in interest rates since we last published. Our 2019E/2020E/2021E increases to $3.10/$3.13/$3.36 from $3.02/$3.12/$3.31.”
On average, the consensus on the Street is that Radian stock has room for another 15.4% of upside over the next year, during which time the stock should hit $29.50 a share. (See Radian stock analysis on TipRanks)
Kosmos Energy (KOS)
Last but not least, we come to Kosmos Energy, the Dallas-based deepwater oil and gas driller whose primary assets are in the Gulf of Mexico … and off the West Coast of Africa. No huge mystery why there — Kosmos found Ghana’s biggest oil field off the coast of that country in 2007, and just two days ago, another company, “the Springfield Group,” struck oil in two different locations off the Ghanaian coast.
Priced at 18.5 times earnings, Kosmos shares are the most expensive of the three companies covered in today’s list — but still 20% cheaper than the average S&P 500 stock. And despite their higher valuation than our other candidates today, it’s worth pointing out that Wall Street analysts are unanimous in their endorsement of the shares.
Kosmos stock has been endorsed with “buy” ratings by all seven of the analysts who have voiced an opinion on the shares over the past year, including most recently Mark Wilson of Jefferies, who has a $9 price target on the stock. (To watch Wilson’s track record, click here)
Wilson noted, “The market gave a positive reaction to KOS CMD earlier this year on Tortue LNG selldown plans, “ILX” exploration strategy & ~$1bn FCF expectations to 2021. Greater Tortue value is now enhanced after three successful wells & increased gas in place to “top end of 50-100 Tcf range”. ILX is successful in both Eq. Guinea & GoM. FCF is on track (despite lower production) & corporately, PE overhang is gone and US index inclusion likely ahead.”
The rest of the Street appears to echo Wilson’s sentiment. As it has racked up 4 Buys and no Holds or Sells, the consensus is unanimous: KOS is a Strong Buy. Adding to the good news, the upside potential lands at 34% based on the $9.63 average price target.
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