5 Ultracheap Stocks to Buy With the Best Returns on Investment

Almost universally, investors want the best returns they can get. Individual investors seek the best returns on their individual stock investments; companies, meanwhile, seek the best returns on their invested capital, or ROIC.

We went searching for companies that have done well according to both definitions of “return on investment.” Specifically, we screened for:

• Stocks that returned more than the Morningstar US Market Index on an annualized basis during the trailing 10-year period.
• Companies with average three-year fiscal ROICs exceeding 18%.
• Companies with wide or narrow Morningstar Economic Moat Ratings.
• Stocks that are trading at least 20% below Morningstar’s fair value estimates.

The five stocks here tick all those boxes. While we can’t predict whether these companies and their stocks will continue to generate top returns on investment, we do expect them to be competitive during the coming decade given their economic moat ratings and valuations today.

5 Ultracheap Stocks to Buy With the Best Returns on Investment

These quality stocks of companies with solid ROICs have beaten the market during the past decade—and they’re significantly undervalued, too.

1. Teradyne TER
2. STMicroelectronics STM
3. MarketAxess MKTX
4. Skyworks Solutions SWKS
5. AMN Healthcare Services AMN

Here are some key metrics about each stock, along with insights from our analysts. Data is as of March 8, 2024.

Teradyne

• Price/Fair Value: 0.79
• Morningstar Economic Moat Rating: Wide
• Morningstar Capital Allocation Rating: Standard
• Trailing 10-Year Annualized Return: 18.41%
• Average Fiscal Three-Year ROIC: 27.03%
• Industry: Semiconductor Equipment and Materials

The stock with the best return on investment on our list, Teradyne is trading 21% below our fair value estimate of $135. The firm’s primary semiconductor testing market is weighed down today by modest smartphone demand and a downturn in the memory chip market. We nevertheless think the company is well-positioned to benefit from a cyclical rebound (likely beyond 2024) and view shares as significantly undervalued, argues Morningstar analyst William Kerwin.

Teradyne is a heavyweight supplier of automated test equipment for semiconductors, boasting market-leading capabilities that run the gamut of chips. It is one of two companies worldwide that can produce testers for the most cutting-edge semiconductors, thanks to robust engineering talent across hardware and software and a structural lead in organic investment. The firm is a vital partner to chipmakers across the industry and has impressively strong relationships with Apple and Taiwan Semiconductor. Teradyne’s market leadership exhibits itself in industry-leading margins, strong returns on invested capital, and a top market share. We give the firm a wide economic moat rating.

Beyond its top-tier capabilities, we think Teradyne is a strong operator. It appears to have found a good balance between organic investment in development and profitability, and it is a good generator of free cash flow despite its capital intensity. We approve of the firm’s use of extra cash for shareholder returns and opportunistic mergers and acquisitions, which have recently focused on the high-growth industrial automation market. We also applaud Teradyne’s strong balance sheet, which shows a net cash position.

We expect Teradyne to complement continued investment in chip testing with investment in the high-growth robotics market. We think the firm’s collaborative and autonomous robots will augment top-line growth over the next five years as well as be accretive to gross margins. In semiconductor testing, Teradyne will benefit from increasing complexity, specifically the expansion of 3D NAND memory capacity and advancements to new architectures and smaller geometries in digital chips, like 3-nanometer platforms and gate-all-around transistors. We also expect domestic onshoring and capacity expansion to generate demand for the firm’s automated test equipment in the medium term. We view Teradyne as an agnostic play on the global chipmaking market with muted cyclicality arising from its vital role in the supply chain and nature as a capital expense for customers.

STMicroelectronics

• Price/Fair Value: 0.71
• Morningstar Economic Moat Rating: Narrow
• Morningstar Capital Allocation Rating: Standard
• Trailing 10-Year Annualized Return: 18.16%
• Average Fiscal Three-Year ROIC: 22.89%
• Industry: Semiconductors

STMicroelectronics is a key chip supplier to the industrial and automotive end markets. The company recently provided a soft forecast for 2024, but Morningstar strategist Brian Colello calls STMicro stock “one of our top picks in the technology sector.” We think the company stands to benefit from the long-term secular tailwinds in the automotive end market—specifically, from increased chip content per car, especially in electric vehicles—and we expect the company’s gross margin expansion over the past few years to persist into the future. The topper: The stock is ultracheap, trading 29% below our $66 fair value estimate.

STMicroelectronics is one of Europe’s largest chipmakers and holds one of the broadest product portfolios in the industry. The company has made structural improvements to its product mix and gross margin profile, which has allowed it to carve out a narrow economic moat. We think STMicroelectronics has some promising growth opportunities on the horizon in microcontrollers and automotive products, including silicon carbide-based semiconductors.

STMicroelectronics didn’t always have the best track record, regularly failing to earn robust profitability a decade ago due to investments in money-losing digital chip businesses and share loss in other chip products, among other stumbling blocks. It has turned around nicely as it exited these businesses and reduced its investments in various digital chips. Nonetheless, it is still in some highly competitive segments of the chip industry, such as commoditylike discrete chips that carry lower margins than analog chips and microcontrollers from US-based peers.

Still, STMicroelectronics' leading technologies and strong position in the automotive market are reasons to be optimistic about the future, with especially promising opportunities in silicon carbide-based power products. The automotive industry is focused on safer, greener, smarter cars, which is leading to increased electronic content per vehicle. Broad-based chipmakers like STMicroelectronics stand to profit from greater demand for advanced infotainment systems, battery management solutions, and sensors associated with new safety features like blind-spot detection. Broad-based microcontroller sales also appear to be a nice growth avenue.

We anticipate decent growth and profitability improvement out of STMicroelectronics. However, we see wider moats and even more attractive product mixes and margin profiles across several pure-play US-based analog chipmakers we cover.

MarketAxess

• Price/Fair Value: 0.72
• Morningstar Economic Moat Rating: Wide
• Morningstar Capital Allocation Rating: Exemplary
• Trailing 10-Year Annualized Return: 13.75%
• Average Fiscal Three-Year ROIC: 21.45%
• Industry: Capital Markets

The second of two wide-moat stocks on our list, MarketAxess is trading 28% below our $300 fair value estimate. We think management has invested the firm’s capital wisely and has a significant cash pile on hand to invest more capital in the business or make an acquisition, says Morningstar analyst Michael Miller. The business experienced a downward pressure on pricing once the Federal Reserve began raising interest rates, which weakened results for much of 2023.

MarketAxess operates the leading platform for the electronic trading of corporate bonds. While the company is primarily focused on US securities, 30% to 40% of its corporate-bond trading volume comes from emerging-markets debt and Eurobonds, giving the company a strong international presence. MarketAxess also offers trading in US Treasuries and municipal bonds, bolstering its efforts in these sectors through the acquisitions of LiquidityEdge and MuniBrokers in 2019 and 2021, respectively. That said, corporate bonds are the core of MarketAxess’ business, which we expect will remain true, a consequence of being a relative newcomer to the Treasuries trading market and the smaller size of the municipal-debt market.

Fixed-income markets globally are increasingly moving away from voice-negotiated trading toward electronic trading platforms as the liquidity and workflow enhancement of these electronic networks promises to lower implicit and explicit trading costs for increasingly expense-conscious firms. As MarketAxess rolls out new features such as automated trade execution and expands its Open Trading all-to-all network, the cost and liquidity advantages of electronic trading networks over traditional methods continue to increase.

We expect 2024 to be a better year for growth for MarketAxess as last year the company faced dual headwinds from both low corporate-bond issuance levels and unfavorable mix shift creating downward pressure on its average fees. While these headwinds are still a factor, the company is benefiting from higher trading volume industrywide, and if interest rates fall, the company will see some relief for its average pricing. That said, MarketAxess continues to face significant competition in the electronically traded US corporate-bond market from both Tradeweb and the smaller Trumid, which has led its investment-grade bond market share to be relatively stagnant in recent years. To make matters worse, while MarketAxess retains a dominant position in the US high-yield bond market, performance has been disappointing in recent months. We still see meaningful secular growth drivers for MarketAxess, but competition will be a headwind to volume growth.

Skyworks Solutions

• Price/Fair Value: 0.80
• Morningstar Economic Moat Rating: Narrow
• Morningstar Capital Allocation Rating: Exemplary
• Trailing 10-Year Annualized Return: 12.82%
• Average Fiscal Three-Year ROIC: 18.47%
• Industry: Semiconductors

Yet another semiconductor company on our list of undervalued stocks to buy with the best returns on investment, Skyworks Solutions maintains a narrow economic moat rating and earns high marks for how its management has allocated capital. The company faced a soft demand environment during much of 2023 but is beginning to experience some recovery, notes Morningstar’s Colello. The stock is trading 20% below our $133 fair value estimate.

Skyworks Solutions is a leading supplier of a variety of radio frequency components to smartphone makers and a host of other electronics devicemakers. Although the company faces an intense competitive landscape, it should thrive as the handset industry focuses on 5G devices, which we expect to require higher radio frequency dollar content per phone.

Skyworks earns the majority of its revenue from mobile products, mostly from a variety of products that switch, filter, and amplify wireless signals in smartphones. Given the rise of advanced 5G-enabled smartphones, which use a wider variety of wireless spectrum and frequency bands than in prior generations of networks, RF content per phone has grown exponentially in recent years, lifting Skyworks and its RF competitors. 5G devices are even more technologically complex than 4G ones, making Skyworks’ expertise even more valuable to devicemakers. Meanwhile, Skyworks is one of the few RF firms with the scale to supply hundreds of millions of RF products per year, giving it a leg up on new entrants. That said, Skyworks’ RF prospects might not be rosy forever, given intense competition in RF chips and a customer base of only a handful of tech titans that could put pricing pressure on Skyworks and other RF chipmakers. The company has significant customer concentration with Apple (about 59% of fiscal 2022 revenue), and it would be a catastrophic blow to Skyworks if it were to ever miss out on a future iPhone design cycle. We also don’t see a winner-take-all situation in the smartphone RF space, as handset makers have split their business enough among these RF firms to prevent a single firm from dominating the market over time. We’re highly encouraged by Skyworks’ diversification into nonhandset end markets, especially as connectivity is becoming more ubiquitous in other industries such as automotive. Although the firm has seen robust growth from these end markets, we suspect that its fortunes will remain tied to the wireless industry for quite some time.

AMN Healthcare Services

• Price/Fair Value: 0.64
• Morningstar Economic Moat Rating: Narrow
• Morningstar Capital Allocation Rating: Standard
• Trailing 10-Year Annualized Return: 15.45%
• Average Fiscal Three-Year ROIC: 18.29%
• Industry: Medical Care Facilities

Rounding out our list of ultracheap stocks to buy with the best returns on investment, AMN is one of the largest healthcare staffing companies in the United States. The company’s performance is under pressure as healthcare organizations reduce contract labor costs and cater to normalized medical utilization trends with permanent hires, says Morningstar senior analyst Debbie Wang. “Despite shifting workforce demands across healthcare service providers, we believe AMN still benefits from its leading position as the largest nursing and allied staffer,” she concludes. The undervalued stock is trading 36% below our $95 fair value estimate.

Healthcare utilization is expected to increase at a solid clip over the coming decades, and the pipeline of healthcare professionals is not expected to keep pace, especially in light of the coronavirus pandemic. This combination of factors should serve as a strong foundation for AMN Healthcare through our explicit forecast period. While the firm continues to navigate near-term demand declines as providers return to normalized nonpandemic utilization, we believe long-term demand will remain robust for the firm’s core service—providing temporary and permanent labor for healthcare providers—as projected utilization continues to outpace the net number of nurses the US produces.

AMN is one of the world's largest providers of healthcare workers, with the core of its business in the travel nurse market niche. The firm has a large nationwide client base, which has attracted a quality supply of job seekers. We expect AMN's sizable pool of workers should help the firm to drive top- and bottom-line growth over an economic cycle.

AMN's ability to provide almost any type of medical worker is also highly attractive to its customers, as they can use one vendor for most of their placement needs. These managed services relationships have been a major focus for AMN Healthcare, and the firm has become one of the premier HR managed services providers as a result.

A managed services arrangement entails AMN Healthcare taking over the entire staffing and employee measurement process for a provider system. We believe this strategy will serve to reinforce its narrow economic moat. This service creates higher customer switching costs, allows AMN to gain the first shot at meeting a customer’s entire staffing needs, and gives the firm the opportunity to see real-time leading metrics in the healthcare industry.

Having said that, AMN is exposed to fluctuations in the larger labor markets and any hiccups in the growth of healthcare workers. Healthcare staffing firms have historically been hit hard after economic downturns, and we expect this to hold true in the future.

What Is Return on Invested Capital?

Return on invested capital measures the profitability of a company in relation to the capital it has invested. Expressed as a percentage, ROIC allows investors to compare how efficient one company is versus another when it comes to turning capital into profits. A company with a higher ROIC is more efficiently using its capital than a company with a lower ROIC. In the case of the screening used in this article, we were focusing on companies that generated at least $0.20 of profit on every dollar of capital invested, on average, during the past three years.

Why look back at three years’ worth of ROIC rather than examine just one year?

“When analyzing a company’s historical return on invested capital, we prefer using a three-year average,” explains Morningstar US market strategist David Sekera. “ROIC can be affected by a wide range of factors in any one year. Such factors could include nonrecurring charges, changes in capital structure, and merger activity. The longer average also helps to smooth out changes in profitability for especially cyclical companies.”

What Are the Morningstar Economic Moat Rating, the Morningstar Fair Value Estimate, and the Morningstar Capital Allocation Rating?

Morningstar thinks that companies with economic moats possess significant advantages that allow them to successfully fend off competitors for a decade or more. Companies can carve out their economic moats in a variety of different ways—by having high switching costs, through strong brand identities, or by possessing economies of scale, to name just a few. Companies that we think can maintain their competitive advantages for at least 10 years earn narrow economic moat ratings; those we think can successfully compete for 20 years or longer earn wide economic moat ratings.

The Morningstar fair value estimate represents what Morningstar analysts think a particular stock is worth. Fair value estimates are rooted in the fundamentals and based on how much cash we think a company can generate in the future, not on fleeting metrics such as recent earnings or current stock price momentum.

Lastly, the Morningstar Capital Allocation Rating is an assessment of how well a company manages its balance sheet investments and shareholders’ distributions. Analysts assign each company one of three ratings—Exemplary, Standard, or Poor—based on their assessments of how well a management team provides shareholder returns.