The stock market is full of expensive and cheap stocks, but the hard part is determining which are still worth buying at their current price tag. "Cheap" and "expensive" in this context do not refer to the price per share but rather to the company's valuation. This is an important distinction, as sometimes stocks considered "cheap" could trade for hundreds of dollars per share.
Three stocks that look cheap but are fantastic companies are Taiwan Semiconductor Manufacturing (NYSE: TSM), Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL), and Adobe (NASDAQ: ADBE). This trio has been sold off fairly hard over the past month, but investors should waste no time to consider scooping up shares.
All of these stocks are cheaper than the S&P 500 as a whole
Let's start by looking at these stocks' valuations based on their forward price-to-earnings (P/E) ratios. I prefer this metric over a trailing P/E because the market is a forward-looking machine, not a backward-looking one. Forward earnings multiples use analyst projections to value the company, which inherently has errors. However, it's the best measure we have to see where a company is heading.
As the chart shows below, all trade for a lower forward earnings multiple than the broader market as measured by the S&P 500. The S&P 500 trades for 21 times forward earnings right now, while none of these three trades for more than 20.
These stocks aren't much cheaper than the broader market, but with the market trading for a slight premium to this trio, it conveys that Wall Street expects these stocks to grow more slowly than the market. However, this is a mistake, as there is market-beating growth in store for all three of these companies.
None of these stocks has a good reason to trade at a discount
Taiwan Semiconductor (TSMC) probably has the best case for having a premium attached to its stock, as management has projected unbelievable growth for the next five years. TSMC is the top semiconductor foundry in the world and produces chips for companies that don't have the manufacturing capabilities themselves. This gives TSMC management a pulse on the chip industry that few others can access and gives credence to its guidance.
Over the next five years, management expects to grow its revenue at nearly a 20% compound annual rate, which is far quicker than the market's typical 10% pace. That growth doesn't appear to have been priced into TSMC's stock price yet, making it a prime buying opportunity to take advantage of the price mismatch.
While Alphabet doesn't have nearly the growth rate that TSMC has, it does have a strong advertising business that tends to put up double-digit growth nearly every quarter. Wall Street analysts expect nothing different from Alphabet in 2025 and 2026, with 11% growth expected in both years. However, its earnings per share (EPS) growth is expected to be faster than that, as various efficiency efforts coupled with share repurchases should boost this metric. Analysts expect 12% and 14% EPS growth in 2025 and 2026, respectively, which is faster than the broader market's usual growth rate.
Last is one of the most hated AI stocks on Wall Street: Adobe. Many investors see Adobe as a company that's prime for AI disruption, but that hasn't manifested yet. In its fiscal 2025's first quarter (ended Feb. 28), revenue rose 10% year over year, while its Firefly AI offering continues to be a leader in its industry. That's not incredibly fast growth, but the stock trades at a discount.
One item that will boost Adobe's earnings per share is its aggressive buyback program. it repurchased 7 million shares in the latest quarter. Considering that Adobe has about 435 million shares outstanding, the company is on the path to buy back around 6% of the company this year. Combine that share repurchase effort with 10% revenue growth, and you get a recipe for a company that can easily grow earnings at a double-digit pace. As a result, I think Adobe has a strong chance of beating the market moving forward.
While none of these companies is going to be the world's biggest growth stock over the next few years, they all have compelling cases for why they can beat the market moving forward. I think now is an excellent time to scoop up these value plays at a great price, as good deals tend not to last forever.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Keithen Drury has positions in Adobe, Alphabet, and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Adobe, Alphabet, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
