CHATTANOOGA, Tenn – The common wisdom among most professional investors right now is that growth stocks are overvalued.
These stocks have seen a massive upswing as we all stayed home more and looked for ways to avoid the virus. While they are all wonderful businesses, many of them currently trade for multiples of sales and cash flows that would make the Internet bubble stocks of the late 1990s blush with envy.
As big a story and as exciting as the coronavirus stocks have been, they are not the whole American business story. There are still plenty of companies that are growing cash flows and earnings at a robust pace…
The businesses may not be as exciting, but ultimately the profits earned by these companies’ owners should be fantastic.
Rather than using price/earnings ratios to value the best cheap growth stocks, we find that price to free cash flow is a much more accurate indication of value.
A good accountant can make earnings per share pretty much whatever their boss wants it to be… but cash flow numbers are almost impossible to fudge.
We want to buy companies that are growing free cash flows at a high rate and are trading at reasonable multiples of the cash the business is producing.
Specifically, we want stocks to buy with less than 10 times free cash flow.
By comparison, most sectors of the S&P 500 trade for 20 times or more.
Here are three of the best cheap growth stocks to buy now
Beacon Roofing Supply Inc. (NASDAQ: BECN) is a perfect example of an undervalued growth stock in today’s market. Beacon sells roofing supplies and related materials like siding windows and doors. It is not exciting, and it’s not flashy.
It is a great business.
We have a building boom going on in the United States, and it’s not going to end soon. We had a shortage of houses before the pandemic hit, and the almost panic level of home buying as people fled dense urban areas has made it worse.
Beacon has been growing free cash flow by 25% a year for the past five years, while sales have increased by 22% annually.