No matter which way the market moves, investors understandably seem to like bargains. Being able to buy a potentially lucrative stock at a discounted price increases the chances of above-average returns.

Fortunately, the market often offers such stocks at discounted prices. Even with a modest investment budget of around $1,000, investors can likely gain an advantage by investing in the following three cheap stocks:

1. Alibaba

Alibaba (BOY 0.88%) has disappointed investors since its IPO 10 years ago. The stock rose to over $300 per share at the height of the COVID-19 pandemic, but then gave back all of its gains. Since its launch, the stock has lost about 15% of its value.

BABA data from YCharts

Admittedly, the decline is largely due to geopolitical challenges. Investors became increasingly nervous as relations between the US and China deteriorated. A threatened delisting after the Securities and Exchange Commission (SEC) was denied access to internal audits also raised doubts about the stock.

However, the US and China agreed to avoid delisting. And despite all the difficulties, it is still China’s equivalent of Amazon as the company continues to be a leader in the retail sector and in the cloud.

Even though Alibaba’s stock is down, net profit has tripled since 2014, from 23 billion renminbi in fiscal 2014 ($3.2 billion) to 71 billion renminbi ($9.9 billion) in fiscal 2024. Such increases significantly reduce the likelihood that Alibaba will give up all of its profits.

In addition, the P/E ratio has fallen to 18 with rising earnings and stagnating share price. By comparison, Amazon trades at 41 times its earnings, and its Latin American counterpart, MercadoLibreis sold at a P/E ratio of 68.

With relations between the US and China still strained, Alibaba stock remains at risk. However, its market leadership and low P/E ratio make the stock worth the risk for many investors.

2. Carnival

Carnival Corp. (CCL 0.91%) The stock has sailed in rough waters in recent years, becoming volatile when the pandemic forced the company to suspend operations for more than a year. Although Carnival returned to sea in mid-2021, it took several more years to return to 2019 revenue levels.

Still, the cruise line’s stock appears to have recovered, with bookings at record levels. The cruises are so popular that the company plans to increase its capacity by 5% in fiscal year 2024.

What may have put off investors is Carnival’s enormous debt, which still stands at over $30 billion. The debt skyrocketed as the company had to borrow to maintain its solvency.

Still, debt due within a year is $2.2 billion, an amount that is less than the $2.7 billion in free cash flow the company generated over the past six months. This means the company can reduce debt without having to refinance significant debt at higher interest rates. This rate allows it to stabilize its balance sheet while reducing interest costs.

Additionally, the P/E ratio is 22. While that’s not a record low, it seems reasonable given Carnival’s improving financials and its leadership in the cruise industry. With more passengers cruising and debt decreasing, that should provide a significant boost to Carnival shareholders.

3. Roku

Roku (ROKU 5.77%) has disappointed investors since its massive price drop in the 2022 bear market. The company’s platform continues to attract new audiences and, as a neutral site aggregator, appears to offer competitive advantages over the megatech companies competing in the space.

Despite its strengths, Roku appears to be struggling in key areas. For example, the company has not made a profit since the pandemic. Although net losses declined significantly compared to the same quarter last year, Roku still lost $34 million in the second quarter of 2024.

Still, investors should take note of the company’s positive free cash flow of $318 million in the quarter. With only non-cash expenses like stock-based compensation hindering profitability, the company is likely in better financial shape than its losses suggest.

In addition, the lack of growth in average revenue per user (ARPU) may have disappointed investors, as quarterly ARPU of $40.68 was flat over the last 12 months. Still, this figure is under pressure due to Roku’s efforts in international markets, where the company has only just begun to monetize content.

However, such challenges play into the hands of new buyers, as the price-to-sales ratio (P/S) is at 2. That’s a massive drop from the height of the pandemic, when it was briefly above 30. If Roku becomes profitable again, it is unlikely to maintain that valuation for long.