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I wanted to find five cheap stocks that have huge price appreciation potential. For these stocks, the valuations are well below their peers.
Here, the market is failing to recognize the growth potential of these cheap stocks. In effect, they are value stocks that should be growth stocks. The patient investor — who can withstand temporary dips –will do quite well with these investments.
For example, the average price-earnings ratio of this group of cheap stocks is just 17 times earnings. But their peers have much higher P/E ratios. In addition, the same is true of their enterprise value-revenue valuations.
The potential upside of each of these stocks is 30% to 50%, as a minimum, based on my target price for each one.
Here are the names of this selective group of cheap stocks stocks:
Cheap Stocks: Microchip Technology (MCHP)
Market Value: $27.7 billion
Forward P/E Ratio: 19.2x
Projected Stock Price Upside: 54.9%
The first company on my list of cheap stocks is Microchip Technology. It is a large semiconductor product designer and manufacturer based in the U.S. The company makes advanced microcontrollers and microprocessors, as well as memory and flash DRAM products.
Its earnings have waned as a result of the novel coronavirus, which has lowered demand. However, now that global restrictions are being lifted, the company expects a significant pickup in orders worldwide.
Moreover, its move into selling products for data centers as well as curtailing manufacturing to line up with demand should increase profits.
Three of its peers have significantly higher valuations, despite similar industry conditions. Therefore, I suspect the company is worth significantly more than its present price.
For example, right now Microchip Technology trades with a forward price-earnings ratio of 20.1 times. This is well below its peers such as Analog Devices (NASDAQ:ADI), with its forward P/E ratio of 28.6 times. In addition, Maxim Integrated Products (NASDAQ:MXIM) has a forward ratio of 27.1 times, and On Semiconductor (NASDAQ:ON) has a 50.5 times ratio.
Using these peer ratios with Microchip Technology’s March 2021 expected earnings of $5.73 per share gives MCHP stock a target price of $170.43. This represents 54.9% upside for investors in the stock.
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