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Typically, when investors think of "cheap stocks," images of beaten-down value plays come to mind. But there's more than one way to catch a cheap stock by the tail.
Surprisingly, today's cheapest stocks are masquerading as expensive growth stocks. Once we take future potential earnings into account, we can see that suffering from a case of short-term-itis can cause us to miss out on some of today's best stocks.
I believe that's the case with social media giantFacebook (NASDAQ: FB), Russian search engine Yandex (NASDAQ: YNDX), and Chinese auto-buying website Bitauto (NYSE: BITA). Here's why.
Data platforms are the new gold
The one thing that all three of these companies have in common is that their core offering is the maintenance of a platform. Facebook offers a platform for people to share and communicate with one another. Yandex provides a platform similar to Alphabet's, a place to search, store information, read email, and keep one's life organized. And Bitauto creates a marketplace where auto dealers and car buyers in China can come together and make the car-buying experience more convenient and seamless.
There are two huge benefits to investing with popular platforms. First, they accumulate gobs of data, and as Kevin Plank, CEO and founder of Under Armour,recently said, "Data is the new oil."
Second, both of these companies benefit from the network effect. For every car buyer who starts using Bitauto -- for instance -- car dealers are incentivized to join. And with each auto dealer that joins, each car buyer is incentivized to join. It's a virtuous cycle once it reaches critical mass, and it appears that all three of these companies have already reached that point.
But aren't these "cheap" stocks expensive?
This is a fair question to ask. Based on traditional metrics, all three of these companies look very expensive. Consider each one's price-to-earnings ratio, the most popular of all valuation metrics.
Data source: E*Trade. All based on non-GAAP earnings.
Compare this to the S&P 500's P/E of 25 and these three look pretty pricey. But these companies have business momentum in their favor that the typical S&P 500 company does not, namely that revenue is growing quickly.
Consider the growth rates over the past four years for these companies.
Data source: SEC annual reports.
Another interesting fact about these three: They have reported EPS ahead of analyst estimates in at least 11 out of the past 15 quarters. It seems fair, then, to assume that these companies have a good shot at meeting analyst estimates for future fiscal years.
So, if we compare today's price tag to what analysts expect these three to earn in 2018, how expensive are they?
Data source: E*Trade.
They appear much cheaper.
This is, admittedly, an inexact science. There are thousands of variables at play between now and Dec. 2018 -- almost none of which are predictable. That being said, it's undeniable that all three of these companies have powerful platforms that benefit from the network effect, booming revenue growth, and a history of outperforming expectations. Put those three together and Facebook, Yandex, and Bitauto all look surprisingly cheap today.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Brian Stoffel owns shares of Alphabet (A shares), Alphabet (C shares), Bitauto Holdings, Bitauto Holdings, Facebook, Under Armour (A Shares), Under Armour (C Shares), and Yandex. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Facebook, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool recommends Yandex. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.