Barron’s published an article mid-June characterizing Nvidia (NASDAQ:NVDA) as the pricey AI play. It offered up seven AI alternatives that trade for much cheaper valuations. Think of them as AI stocks to buy instead of Nvidia.
Krane Funds Advisors senior investment strategist Anthony Sassine told Barron’s that AI companies operating in emerging markets in Asia are trading at half the valuations of U.S. companies like Nvidia.
Nvidia’s share price has lost more than 12% since June 20. Yet, it still trades for 37x sales and 66x cash flow. That would put these Asian bargains at 18.5x sales and 33x cash flow.
We can find even cheaper stocks to buy outside the tech space. As I write this, NVDA stock is trading for $124.
Here are three stocks to buy from three different sectors whose P/S and P/CF multiples are less than 18.5x and 33x, respectively. Most importantly, the three stocks’ share prices add up to one Nvidia share.
Knife River (KNF)
Knife River (NYSE:KNF) currently trades around $72. Its market capitalization is $4.09 billion, and it accounts for 58% of Nvidia’s share price.
I have to admit that I’m unfamiliar with this South Dakota-based basic materials company. It supplies aggregates, ready-mix concrete, asphalt and contracting services to infrastructure builders across 14 states.
It turns out that Knife River was spun off from MDU Resources (NYSE:MDU) in June 2023. While MDU focused on its utility background, Knife River was free to be a pure-play construction materials and contracting services company.
While MDU stock has performed well over the past year, up nearly 25%, KNF stock has more than doubled those returns. It could be in for more in the future.
Of the six analysts covering Knife River stock, five rate it a buy. Their target price is $88, 22% higher than where it’s currently trading.
With P/S and P/CF ratios of 1.40x and 12.19x, respectively, it’s considerably cheaper than Nvidia and any of the stocks mentioned in Barron’s piece.
Color me intrigued.
American Eagle Outfitters (AEO)
American Eagle Outfitters (NYSE:AEO) currently trades around $21. It has a market capitalization of $4.11 billion. It accounts for 17% of Nvidia’s share price.
American Eagle is a smaller competitor to Abercrombie & Fitch (NYSE:ANF), one of the hottest stocks listed on a U.S. stock exchange. Its shares are up nearly 90% in 2024 and 364% over the past year. Meanwhile, AEO has been down slightly year-to-date and up 79% over the past year.
Usually, you would be pleased with an annual return of over 80% with dividends included. However, relative to ANF, it doesn’t feel as good.
The specialty retailer, whose brands include American Eagle and Aerie, reported Q1 2024 results on May 29. Revenues were up 6% year over year to $1.1 billion. They comprised a 4% increase in in-store revenue and a 12% increase in digital revenue. Aerie’s same-store sales rose 7%, while American Eagle’s rose 8% over last year.
On the income statement, its operating income was $77.8 million, 76% higher than a year earlier. Its earnings per share were $0.34, 278% higher than a year earlier.
It continues to execute its Powering Profitable Growth strategy. Trading at 0.77x sales and 7.57x cash flow is considerably cheaper than ANF, which is trading at 2.02x sales and 14.55x cash flow.
While I don’t think there’s any question that ANF has the better business, American Eagle is priced to move.
Hormel Foods (HRL)
Hormel Foods (NYSE:HRL) currently trades at around $31. Its market capitalization is $16.71 billion, and it accounts for 25% of Nvidia’s share price.
If American Eagle was the value play, Hormel is the contrarian play. Of the 14 analysts covering its stock, just one rates it a Buy, with a target price of $32.48, 6% higher than where it’s currently trading.
Hormel reported its Q2 2024 results at the end of May. Its net sales were down slightly, to $5.88 billion, from $5.95 billion a year ago. While volumes were up in its Foodservice segment (accounts for 32% of sales), they were offset by lower volumes from its Retail and International segments.
Due to lower volumes and revenue in its largest segment, its net income was $189.3 million, 13% lower than in Q2 2023.
The good news is that its operating cash flow in the first six months of 2024 was $640 million, 55% higher than a year ago. Annualizing this number, its P/CF is reasonably low at 12.8x, while its P/S ratio is 1.4x, considerably lower than its five-year average of 2.1x.
Yielding 3.7%, it gets paid to wait for its share price to return to the $50s, where it traded as recently as August 2022.
It doesn’t hurt that it’s got strong brands like Planters, Skippy, SPAM and Hormel to lean on.
On the date of publication, Will Ashworth 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.
