3 Cheap Stocks to Buy Before the Next Breakout

Stocks to buy

Investors looking for cheap stocks to buy certainly have more options these days. Valuations are down, and multiple compression provides long-term investors with a buying opportunity we haven’t seen in some time. For existing investors, this selloff isn’t great. However, for those with capital on the sidelines, now appears to be a much better time to buy than a year ago.

Although volatility will likely remain present, there are unique opportunities in various segments of the market worth considering. And over the long term, buying high-quality stocks at attractive prices has paid off.

Here’s a list of three stocks I am putting in my cheap bucket right now. These actually may not be the cheapest stocks in the market. However, these companies are ones which are looking increasingly attractive.

EGY Vaalco Energy $5.31
MSFT Microsoft $287.77
CMG Chipotle Mexican Grill $1,625.81

Cheap Stocks to Buy: Vaalco Energy (EGY)

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Incorporated in 1985, Vaalco Energy (NYSE:EGY) is a Houston-based independent energy organization. Vaalco engages in the development, exploration and production of assets in West Africa.

Given the company’s African focus, geopolitical concerns have led to a very attractive valuation multiple. Trading just above 3x trailing earnings, it’s hard to find a stock that’s cheaper than Vaalco

However, there is a catalyst I think is noteworthy for this stock. In July, the company announced plans to merge with TransGlobe Energy (NASDAQ:TGA). This merger will result in a diversified African oil producer with production of around 20,000 barrels per day. Additionally, synergies from this $307 million transaction could make this stock much more attractive from a margin basis, as costs are able to be removed over time.

The combined company will also have a more global footprint, with assets in established basins in Equatorial Guinea, Canada, Egypt and Gabon. Overall, I think this is a stock investors should at least put on their radars right now.

Microsoft (MSFT)

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Perhaps a more controversial pick on a list of cheap stocks to buy, Microsoft (NASDAQ:MSFT) is a company that really needs no introduction. A leader in software and cloud computing, Microsoft is one of the largest companies in the world. And given the company’s sky-high margins and growth, it’s a stock that’s really never been cheap.

Indeed, Microsoft’s valuation multiple of 29x earnings isn’t cheap at all. In fact, this multiple is nearly double the S&P 500’s and is higher than most mega-cap Nasdaq stocks.

That said, this is among the lowest valuation multiples Microsoft has traded at in a very long time. For a company with earnings stability and relative growth certainty, a premium is in order. It’s the size of the premium that’s typically in question.

Currently, Microsoft is trading nearly 20% below its 52-week high. While not an incredible discount, it’s a discount nonetheless. Accordingly, for those looking to buy MSFT stock on the cheap, now may be a great time.

Cheap Stocks to Buy: Chipotle (CMG)

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Chipotle (NYSE:CMG) is a stock I really wish I bought following a series of E. coli outbreaks which saw the stock tumble to the $300 level. Now trading around $1,600 per share, this quick-service restaurant company looks anything but cheap.

In fact, on a valuation basis, Chipotle is even more expensive than Microsoft, with a multiple of around 60x earnings. Additionally, this stock is down only 16% from its 52-week high, suggesting perhaps there’s more downside potential.

Perhaps.

However, Chipotle’s overall business model provides a very defensive option for investors looking to manage through the market volatility. Folks need to eat. And it’s the company’s combination of quality ingredients and attractive cost profile that makes this stock noteworthy.

Right now, Chipotle’s EPS growth rate, which is expected to average around 26% for the next five years, looks juicy. This valuation is one that Chipotle can certainly grow into. At least, that’s what the market is pricing in right now.

On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.

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