The stock market has proven to be a competent wealth-building machine for those who respect and abide by a strict process. Today’s most prolific traders and investors are living proof that the convergence of a proper education and a proven system can result in a very lucrative career. That said, there’s more than one way to invest in Wall Street. While day traders depend on timely volatility to incur quick profits, long-term and income investors are more inclined to follow trends that can compound growth over time.
Regardless of their investment strategy, there’s one thing most investors have learned to covet: undervalued stocks. If for nothing else, undervalued stocks suggest they have room to grow. Equities that have demonstrated a unique propensity for upside are great additions to any portfolio, which begs the question: What are the best undervalued stocks to buy now?
Before we get to the best undervalued stocks to buy now, however, let’s first look at what an undervalued stock is.
What Is An Undervalued Stock?
The concept of an undervalued stock is more or less subjective. Two different investors with unique strategies can look at a single equity and come to two different conclusions based on its valuation. On the one hand, an undervalued stock may be an equity that has been sold off due to an overreaction from an earnings report. On the other hand, an undervalued stock could just as easily be an equity with plenty of unrealized potential. Either way, underlying fundamentals typically suggest undervalued stocks aren’t priced accurately. When all is said and done, an undervalued stock is simply an equity with room to grow.
What Is Value Investing?
In its simplest form, value investing is the practice of identifying and investing in under-appreciated equities. That’s not to say value investing accounts solely for long-term potential, but rather that the current valuation is attractive relative to where the stock has already been. Thus, value investors inherently seek out stocks and equities which may currently be acquired at a low cost; some people call it “buying on the dip.” Inversely, the same concept may be applied to “expensive” stocks: Value investors intentionally avoid building positions in “overvalued” stocks for fear of missing out on returns.
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Value Vs. Value-Based Investing
Whereas value investing emphasizes undervalued stocks, the concept of value-based investing is centered on personal opinions. Value-based investing brings in a larger element of subjectivity than its value investing counterpart. Consequently, value-based investors have developed a reputation for blazing their own trail, regardless of what market indicators suggest. When exercising a value-based investing strategy, investors prioritize their own opinions on a stock over market fundamentals. As John Li, the co-founder of Fig Loans, is quick to point out, value-based investing is when investments “are made based on the popularity of the stock and the high expectations surrounding it.”
10 Best Undervalued Stocks To Buy Now
Investors looking to capitalize on value and increase their potential profit margins should pay special consideration to undervalued stocks. Few strategies are more capable of simultaneously mitigating risk and realizing attractive returns than value investing. Instead of spending valuable time looking at every business on Wall Street, consider the following list of undervalued stocks to look out for right now:
United Parcel Service
Lowe’s Companies, Inc.
Zoom Video Communications
Ally Financial Inc.
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United Parcel Service, Inc. (NYSE: UPS)
As its name suggests, United Parcel Service operates primarily as a letter and package delivery service. With a fleet of approximately 121,000 package cars, planes, vans, tractors, and motorcycles, the company’s air and ground services cover about 200 countries. In doing so, UPS has become a global leader in the freight and logistics industries. As one of the world’s premier delivery service providers, UPS has seen its shares realize a great deal of success in its more than two decades as a publicly traded company.
United Parcel Service’s latest success story transpired over the course of the pandemic. After bottoming out at around $90 when COVID-19 was officially declared a global emergency, the prevalence of e-commerce served as a growth catalyst for UPS. As more people shopped online and avoided in-store purchases, shares of UPS reached an all-time high of $233.72. In fact, UPS’s services were so in demand that it could barely keep up with its own business.
UPS became what is known as a “pandemic play,” as COVID-19 actually created a great deal of business for the company. However, as the light at the end of the pandemic tunnel grows brighter, it is becoming more obvious UPS’s growth was merely temporary. The pandemic pulled a lot of business forward, making it difficult for the company to beat estimates in future earnings reports. Now, as inflation increases and the threat of a recession looms heavily, UPS is attempting to adjust to a slowdown in deliveries. As a result, shares are down year-to-date.
Down about 39.5% from their 52-week high, shares of UPS are trading at a discount to where they were this time last year. At its current price, UPS’s price-to-earnings ratio is right in line with the industry average—12.91x and 11.08x, respectively. While the company’s PE ratio is higher than the freight and logistics industry average, it’s not by much; that means investors can buy shares of an industry leader for the same price as an average company in the same business.
UPS hasn’t yet proven it deserves to trade at a premium. After all, the company’s latest earnings report acknowledged a drop in package volume. The number of packages shipped in the second quarter of this year fell 4% in the United States and more than 13% on a global scale. At the very least, fears of a recession and higher inflation rates are preventing more people from shipping packages.
Despite short-term headwinds, UPS still has a lot going for it. Adjusted earnings per share in the most recent quarter increased year-over-year from $3.06 to $3.29. Sales in the same period reached $24.8 billion, just barely beating analysts estimates of $24.6 billion. The earnings beats were primarily the result of better profit margins. Driven by the CEO’s strategy to focus on quality over quantity, profit margins increased 0.4% year-over-year. Better margins enabled the company to increase its revenue per domestic package by 12%, and international packages jumped 15%.
The shift to quality over quantity helped UPS beat estimates in the second quarter. If the company is able to weather the storm of a recession with its new strategy, there’s no reason to think it won’t come out on the other end even stronger. As inflation cools down and people continue to transition to e-commerce, UPS’s business should see a lot of growth in the future. More importantly, it appears as if the market is looking at UPS from a short-term narrative. Those who are able to stomach a little short-term volatility may find UPS is one of the most undervalued stocks to buy and hold for years.
Lowe’s Companies, Inc. (NYSE: LOW)
Higher interest rates and the looming threat of a recession have culminated in a tough marketplace for the better part of this year. That said, the selloff appears to be overdone, or—at the very least—close to an end. Whatever the case may be, there are more undervalued stocks today than there were at the beginning of the year. Now may be a great time to add some undervalued stocks, not the least of which include Lowe’s Companies, Inc. With significant ties to both the housing and consumer industries, shares of Lowe’s have had a less than spectacular year, but the home improvement retail company appears to be a promising stock with plenty of room to run.
The combination of the Fed hiking interest rates and the housing market slowing down has taken a toll on Lowe’s. Shares are now down about 44.5% from their 52-week high and trading at a much more attractive multiple. With a price-to-earnings growth ratio of 1.50x, shares of Lowe’s are trading at a discount, relative to the specialty retail industry median of 1.73x; that means investors looking for undervalued stocks may buy shares of an industry leader at a discount.
Shares of Lowe’s have come in so much that analysts appear to be growing more bullish on the company’s future. The majority of analysts covering Lows maintain a buy rating with the most recent target prices resting north of $200. To be clear, there’s no guarantee Lowe’s share price will end up anywhere near analysts’ predictions, but the optimism does suggest room for growth.
Despite the recent performance of Lowe’s on Wall Street, it looks like one of the best undervalued stocks to buy now. Current valuations will help share prices stay afloat in today’s inflationary economy, but a number of tailwinds appear to be lining up at the company’s back.
For starters, Lowe’s latest stock price decline has resulted in an attractive 2.30% dividend yield. Shareholders will receive about $4.20 annually for every share they own. While it may not look like much on the surface, dividends are great hedges against inflation. Starting a position in Lowe’s today could help investors build a new income stream to stave off economic instability. Subsequently, the dividend should help hold over investors until the stock makes a comeback.
Lowe’s looks set to benefit from a slowing housing market. With interest rates eclipsing seven percent and inventory levels remaining low, few people are inclined to buy or sell. The lack of activity suggests more people will stay in their current homes. If that theory holds true, and there’s no reason to think it won’t, more people will rely on Lowe’s for projects around the house; if they can’t move they will probably put more money into their own homes (and Lowe’s pockets).
According to CEO Marvin Ellison, “More than half of the homes in the U.S. are over 40 years old and millions more built at the peak of the housing boom in the early 2000s are now starting to turn 20 years old, which is a key inflection point for big-ticket repairs.”
The growing age of homes in the United States and Canada suggests Lowe’s will benefit from homeowners looking to make improvements to their properties for years (more likely decades). The tailwinds working in Lowe’s favor will give it a long growth runway. Perhaps even more importantly, however, today’s investors can buy one of the most undervalued stocks of 2022 for a discount and hold for the long haul.
Autodesk, Inc. (NASDAQ: ADSK)
Autodesk is a software company which provides an entire suite of 3D design, engineering, and entertainment software and services. The company’s tools have become synonymous in the engineering world and are used for a variety of important tasks: surveying, design, analysis, and documentation solutions for civil engineering. Most notably, Autodesk offers AutoCAD, a software for professional design, drafting, detailing, and visualization. Simply put, Autodesk enables the creation of accurate 3D models necessary to facilitate real world engineering products.
The sheer volume of businesses that have become reliant on Autodesk’s products has catapulted the company to the forefront of the software industry. As a result, Autodesk has seen its share price increase significantly in as little as five years. Nonetheless, shares are down a lot from their 52-week high, which was about the midpoint of last year.
The stock has been on a steady decline over the last year, but the drop appears to be related more to a broader market selloff than an indictment on the company itself. If for nothing else, investors sold Autodesk when the Fed announced it would be increasing interest rates, much like they did with every other technology company.
The selloff appears overdone, and may even represent a great opportunity to start a position in a strong company for much less than it was trading for 12 months ago. On top of the recent drop, Autodesk looks relatively cheap compared to its peers in the software industry.
Since Autodesk is one of the rare software companies with positive earnings, one of the best tools to evaluate the company’s valuation is to look at its PEG ratio. Otherwise known as the price/earnings-to-growth ratio, the PEG ratio gives insight into the relationship between the price of shares, the earnings generated per share, and the company’s expected growth. Autodesk has a PEG ratio of 3.34x, which makes it one of the most undervalued stocks in today’s tech sector.
If the PEG ratio isn’t enough to convince investors Autodesk is one of today’s best undervalued stocks, perhaps growing tailwinds will. In particular, Autodesk is becoming the gold standard for developing and analyzing buildings with 3D software. Otherwise known as Revit, Autodesk’s software is being required by many countries for building information modeling. In a way, Autodesk is a “picks and shovels” play in the real estate development industry.
The tailwinds don’t stop at the real estate sector, however. Autodesk is looking to become a staple in every industry where 3D modeling is an integral component. The optionality is encouraging, especially at a time when shares are trading as low as they are.
Alphabet Inc. (NASDAQ: GOOGL)
With more than a few undervalued companies being brought to the surface by the latest market correction, value investors may have a hard time choosing which undervalued stocks are worth starting a position in or adding to. If for nothing else, an abundance of equities on Wall Street are more attractively valued today than they were at the beginning of the year. Out of the most undervalued stocks, however, one is becoming too inexpensive to ignore: Alphabet Inc.
More commonly referred to as Google’s parent company, Alphabet is a multinational technology conglomerate holding company. As a holding company headquartered in Mountain View, California, Alphabet’s subsidiaries are primarily centered on the tech sector. Key acquisitions made by Alphabet over the years include (but are not limited to) Mandiant (a cybersecurity company), Fitbit (a wearable fitness company), Looker (a business intelligence software and data analytics company), Nest (a smart-home company), Waze (a mobile navigation application), DoubleClick ( an ad management and ad serving solutions business), and YouTube (an online video-sharing platform).
Alphabet’s subsidiaries combine to give the company a total market cap somewhere in the neighborhood of $1.3 trillion, enough to make it one of the largest companies in the world. While Alphabet is more than happy with the companies it has acquired over the years, none are more conducive to a great investment in 2022 than Google. At the very least, Google gives Alphabet the cash position it needs to thrive in today’s inflationary economy.
As Alphabet’s flagship subsidiary, Google is responsible for the overwhelming majority of the company’s revenue. More specifically, 80% of Alphabet’s revenue is generated from advertising across all of its subsidiaries, with 70% of the total ad revenue coming from Google Search ads. According to Alphabet’s latest quarterly report, revenue generated from Google’s ads reached $56.3 billion, up 11.6%. Google has proven to be a cash-generating machine and is the primary reason Alphabet has $125 billion in cash. With a mere $14.7 billion in long-term debt, Alphabet has more than enough capital to thrive in today’s economy, which is unusual for a tech company.
Alphabet’s cash position makes it a strong defensive play with the economy on the brink of a recession. At a time when many tech companies will struggle to gain access to cash with affordable interest rates, Alphabet can take the money it already has on the books to make smart investments and take market share from competitors. Despite its unique position, however, Alphabet looks like one of the most undervalued stocks today.
With a price-to-earnings growth ratio of 2.10x, Alphabet current valuation appears to be inexpensive when compared to the Interactive Media & Services industry median PEG; that means investors can pay less for the percentage of an industry leader’s future growth potential than many of its less-promising peers.
In addition to trading at a better valuation than many of its peers, Alphabet is well below its 52-week high. Down about 41% year-to-date, share’s of Alphabet are reflective of a mediocre second quarter earnings report. In fact, several of Alphabet’s segments underperformed in the second quarter of this year, just barely missing analysts’ expectations. In particular, YouTube, Google Cloud and growth all underwhelmed investors, which explains the latest drop in share price.
To be clear, today’s share price doesn’t look like an indictment on the company itself, but rather an opportunity to buy a great business at a discount. With a number of promising ventures in the pipeline and enough cash to survive just about any market conditions, Alphabet looks like a great offensive and defensive play for the rest of the year. The company’s pristine balance shit will simultaneously allow it to make more key acquisitions and fund important projects, all without having to borrow money at higher interest rates. Subsequently, with a pretty clear path to navigating any sort of recession, Alphabet’s ventures into the cloud, AI (artificial intelligence), self-driving cars, advertising, and a number of ambitious segments will support one of Wall Street’s most promising long-term theses. In conclusion, Alphabet isn’t only one of the most undervalued stocks to buy in 2022, it is also one of the safest bets for long-term upside.
QUALCOMM Incorporated (NASDAQ: QCOM)
Qualcomm has become synonymous with the world’s greatest digital wireless telecommunications products and services. Advancements in technology ushered in by Qualcomm have contributed more to mobile devices and other wireless products than just about any other company. Most recently, however, Qualcomm’s contributions are facilitating the transition to a fifth-generation mobile network, otherwise known as 5G.
Qualcomm has established itself as a premier 5G product and service provider. In doing so, shares of Qualcomm have increased significantly since they bottomed out due to the pandemic. Those unfamiliar with what has transpired in the last year may be quick to assume Qualcomm represents anything but a value at the moment. However, it is safe to say the 5G revolution is in its infancy, and Qualcomm is positioned to lead the industry in the transition. As a result, today’s price does represent a significant increase year-over-year, but underlying fundamentals suggest there’s plenty more room to run.
If Qualcomm can remain a major contributor to the 5G revolution, there’s no reason to think it is not one of the best undervalued stocks to buy now. In fact, if 5G turns out to be the “game-changer” many are expecting, this could be just the beginning of a historic run.
If Qualcomm is setting itself up for years of growth, 5G will most likely be the company’s greatest catalyst. However, the global technology giant has another trick up its sleeve: major contributions in the automotive industry. Earlier this year the company announced the design and development of Qualcomm Digital Chassis. As their names may suggest, the digital chassis apply 5G, telematics, location, and other technologies into a single cloud-connected platform for automobiles. Perhaps even more importantly, Qualcomm estimates that these chassis will help the company grow its total addressable market to $100 billion by 2030.
Outside of Qualcomm’s intrinsic value, the company’s PEG ratio all but confirms this tech giant is as appreciated by Wall Street as it should be. With a PEG value of 0.89x, Qualcomm has one of the lowest PEG ratios in the Semiconductors & Semiconductor Equipment industry. Well below competitors like NVIDIA and AMD, Qualcomm’s share prices look like a bargain and an opportunity to capitalize on one of today’s best undervalued stocks.
Qualcomm has a lot of tailwinds lining up at its back, but they have yet to play out fully. As a result, the company has a promising future but faces some near term volatility. The current macroeconomic environment will hold the company back as interest rates make it hard for the overall technology sector to increase revenue. However, today’s volatility looks like nothing more than a minor speed bump. If anything, today’s poor performance has made Qualcomm one of the most undervalued stocks for long-term investors.
Zoom Video Communications, Inc. (NASDAQ: ZM)
Zoom Video Communications, the same company responsible for turning videoconferencing into a verb by the same name, currently looks like one of the most undervalued stocks on the market. Wall Street doesn’t seem to appreciate what the burgeoning tech company has done for the entire communications industry. It was Zoom, after all, that single-handedly changed the way businesses interact and people remain in touch with each other around the globe.
Looking at Zoom from a purely technical standpoint, shares are objectively inexpensive. With a price-to-earnings ratio somewhere in the neighborhood of 24.72x, shares of Zoom are valued in line with the software industry’s median price-to-earnings ratio. Simply put, consensus suggests Zoom is an industry leader with plenty of upside that’s trading at an industry average. As one of the best undervalued stocks to buy now, Zoom can offer industry leading growth potential at a relatively affordable price.
From a slightly more subjective perspective, shares of Zoom are currently trading below their pre-pandemic price; that means Wall Street doesn’t seem to care about all of the business created in the wake of the pandemic. Instead of focusing on two consecutive years of growth, investors appear content trading pandemic stocks in an inflationary environment for value stocks which won’t be weighed down by more expensive borrowing costs. As a result, shares have declined for the better part of two years, and are now significantly down from their all-time high in the fourth quarter of 2020.
It is worth noting, however, that the selloff in Zoom appears to be overdone. In the time since Zoom reached its all-time high, the company has done nothing but produce. By the end of 2021, Zoom was providing a service for 2,725 customers, each of whom generated more than $100,000 in sales over the trailing-12-month period; for some perspective, that’s an increase of 66% over the previous year (the first year of the pandemic). Zoom also reported a 9% growth in smaller accounts (businesses with at least 10 employees) over the same period of time.
Despite increasing sales and earnings, investors continued their exodus out of Zoom’s stock due to concerns over declining pandemic tailwinds. If for nothing else, Zoom has pulled a lot of business forward. In 2022 alone, shares are down because investors can’t fathom the idea of business growing in a post-pandemic world.
Investors may be right about the upcoming deceleration in growth; management has even said as much. In a recent report, Zoom acknowledged it expects to see earnings drop approximately 31% this fiscal year. Still, even with the decline in earnings, Zoom’s investment thesis remains intact: society is growing more and more dependent on videoconferencing and communication software, even in a post-pandemic world. Zoom has nothing less than massive upside, an industry leading advantage, and a discounted stock price to mitigate risk.
Zoom’s free cash flow remains strong, increasing 5.4% year over year to $1.46 billion. While inflation will impact revenue, Zoom’s cash position will help it weather the storm, and perhaps even improve the company at an opportune time. Perhaps even more importantly, however, forward guidance is calling for revenue of $4.54 billion for fiscal 2023, up 10.7% year over year.
There is no doubt about it: the slowdown in pandemic tailwinds and an increasingly inflationary economy will weigh on Zoom for the foreseeable future. However, the headwinds appear to be short term. As a result, Zoom looks like one of today’s best undervalued stocks with a massive runway and plenty of potential.
The Boeing Company (NYSE: BA)
Boeing has simultaneously become one of the largest defense contractors and aerospace engineers in the world. Boeing designs, develops, manufactures, sells, services, and maintains aircraft across several commercial and military sectors in conjunction with its many subsidiaries. The company is probably most known for its 737 Max (the fourth generation of Boeing 737), a typical commercial jetliner used to transport people worldwide. If you have flown on a plane, you have probably been on a 737 Max.
However, as a primary contributor to the travel industry, Boeing’s share prices have been weighed down by the pandemic. In response to COVID-19, fewer companies ordered planes from Boeing, and maintenance was required less frequently. For the better part of two years, in fact, Boeing has been marching in the wrong direction because of self-inflicted wounds and sentiment surrounding the pandemic.
Just when it looked like Boeing could receive some support from what is expected to be a busy travel season, inflation reigned in expectations. Higher fuel and labor costs, in particular, look like the straw that broke the camel’s back, as shares of Boeing are now trading under their March 2020 low, when the market originally crashed on news of the pandemic. Now around $133, shares are now trading near their lowest point in almost ten years.
Discounted shares are well warranted because Boeing’s debt has ballooned in a very short period of time. However, Boing is starting to look more and more like one of today’s most undervalued stocks to buy now. If for nothing else, the long-term bull case for Boeing remains intact. As one of two primary airline manufacturers, Boeing is part of a duopoly with a lot of staying power. Despite their recent track record, Boeing is an industry leader in the aviation industry at a time when air travel demand is expected to increase 2% annually over the next two decades.
With inflation expected to pick up in the coming months and whispers of a recession on the horizon, Boeing will certainly face significant headwinds. That said, the headwinds look to be short term, and may simply present investors with one of today’s most undervalued stocks to buy now. Those who are willing to weather the short-term storm may find themselves with an attractive entry point for a stock with a long runway.
Ally Financial Inc. (NYSE: ALLY)
One of the most undervalued stocks trading on Wall Street may be Ally Financial. Rebranded from General Motors’ old automotive financing branch and spun off as an IPO in 2014, Ally is a financial technology company. Otherwise known as a fintech company, Ally provides an entire suite of financial services online, not the least of which include auto loans, online banking, corporate lending, vehicle insurance, mortgage loans, and even a trading platform.
Ally boasts a lot of potential for patient investors, but the latest third-quarter earnings report leaves a lot to be desired. At $2.09 billion, adjusted revenue missed Wall Street’s expectations of $2.16 billion. At the same time, Ally missed on the bottom line. Adjusted earnings per share came in at $1.12, instead of the consensus estimate of $1.73. For all intents and purposes, Ally disappointed in its most recent report, but that doesn’t mean investors shouldn’t consider adding it to their portfolios. If for nothing else, the valuation is almost too attractive to pass up.
Ally appears to be undervalued in almost every sense of the word. For starters, Ally is trading at a relative discount compared to this time one year ago. Over the course of 12 months, shares have done nothing but decline based on the fears of a looming recession and headwinds in the automotive industry (Ally’s primary lending specialty). As a result, shares of Ally are trading at about half the price they were at the beginning of this year and hovering just above 52-week lows.
From a fundamental perspective, Ally’s 4.41 price-to-earnings multiple suggests it is trading at a discount relative to the consumer finance industry’s median PE of 4.67. In other words, Ally’s investors are expected to pay less per dollar of expected earnings than the industry average. Furthermore, Ally’s price-to-book ratio suggests the financial technology company is undervalued. With a price-to-book ratio of 0.783, Ally’s market cap looks attractive when compared to its assets and liabilities. For context, anything in the banking sector with a price-to-book ratio under 1.0 may be attractive to value investors.
It is hard to argue against Ally being anything but undervalued. Both relative and fundamental analyses point to more upside at the stock’s current price. If that wasn’t enough to convince you that Ally is one of the best undervalued stocks to buy right now, however, you may want to borrow a page from Warren Buffet’s playbook. Widely regarded as the greatest value investor ever, Warren Buffet (via Berkshire Hathaway) has invested heavily in Ally over the last year. That’s not to say Buffet bought Ally because it was one of the most undervalued stocks, but rather that one of the greatest value investors ever approved enough of Ally’s share price to add a sizable position to their portfolio.
While undervalued stocks look great on paper, they must show an inherent level of promise relative to their current price. Fortunately, Ally is one of today’s underperforming stocks which looks to have a bright future. For starters, Ally already has a track record of growth and positive earnings. Ally’s revenue has increased at a steady rate since the company went public.
Ally also offers investors an attractive 4.60% dividend yield; something that’s invaluable at a time when higher interest rates are making it harder for many companies to turn a profit. Perhaps even more importantly, Ally has increased its dividend payout by more than 150% over the last five years, suggesting more increases are certainly in the cards.
Last, but certainly not least, Ally is gaining market share in the auto loan industry. Even at a time when auto sales are struggling, Ally expects to originate 32% more auto loans this year than it did in 2019, before the pandemic and supply chain constraints crippled the auto sector. The increase is expected to originate $48 billion in consumer auto loans.
Ally has had a rough year, but that doesn’t mean it isn’t one of today’s most undervalued stocks. In fact, the latest drop in price looks more like an opportunity than anything else. At today’s price, investors can rest assured they are getting a good deal on a solid company with plenty of room to grow.
Target Corporation (NYSE: TGT)
Target is a nationwide retailer that needs no introduction. With somewhere in the neighborhood of 1,897 physical store locations, the massive retailer has already become a trusted provider of several consumer stables and commodities: food, apparel, accessories, home products, electronics, toys, seasonal offerings, and other merchandise. Offering just about everything someone would ever need, Target has become one of the most important businesses in the country at a time when supply chain resiliency is in question. That said, even Target isn’t immune to today’s supply chain weakness, and its share price suggests as much. In lieu of the latest earnings report, Target has gone from one of the best performing equities on Wall Street to one father most undervalued stocks to buy now.
For some context, few companies performed as well as Target did over the course of the pandemic. In the two years following the onset of COVID-19, Target’s share price went from about $92 to an all-time high of $268.98. The increase was directly correlated to the physical retailer’s designation as a necessary business. Target remained open over the course of the pandemic and gained market share as smaller competitors went out of business. That, in addition to a budding e-commerce business, made Target one of the best stocks to buy over the last two years.
That said, Target’s success appears to have caught up to it. In the company’s latest earnings report (May 18), sales increased 4.0% from the same quarter last year to $25.2 billion. It is worth noting, however, that the cost to fulfill those sales increased dramatically in the face of inflation. Target’s cost of doing business increased to $18.5 billion, up from $16.7 billion in the same quarter last year. Simply put, the company had to pay more for just about everything: inventory, storage and transportation. Inflation dropped Target’s gross profit margin 4.3% year over year.
Following the disappointing earnings, Target’s share price dropped and now sits around $155. At its current valuation, Target now trades at a better price-to-earnings multiple, which isn’t exactly cheap, but it gives investors an opportunity to buy an industry leader at a fair value; that means shares of one of the best retailers in the country can be purchased at the same multiple as the retail industry median.
To be perfectly clear, the drop in Target’s share price was justified. Inflation will pose a short-term headwind for just about every physical retailer. However, it’s hard not to consider Target as one of the best undervalued stocks to buy now. With a dividend yield of 2.91% and a very encouraging long-term outlook, there’s little doubt Target won’t weather the current inflationary environment. At the very least, the latest drop should give today’s investors a chance to buy a great stock for much cheaper than it was right before its last earnings report.
Amgen Inc. (NASDAQ: AMGN)
In addition to being one of the largest pharmaceutical businesses on the planet, Amgen is also starting to look more and more like one of the most undervalued stocks right now. The company’s unique combination of market-beating dividends and reasonable valuations make it the perfect addition to any portfolio at a time when the economy is anything but certain. In fact, it’s Amgen’s proven track record and dependable cashflow which make it the ideal company to invest in when the Federal Reserve is tightening its grasp on the economy.
From a technical perspective, Amgen doesn’t exhibit the same telltale signs as many of today’s most undervalued stocks. If for nothing else, the company’s price-to-earnings growth multiple is one of the highest in the industry; that means investors will have to pay more for expected future earnings than many of its peers. Fortunately, Amgen’s price-to-earnings multiple is slightly easier to digest. With a price-to-earnings multiple of 20.96x, Amgen is only trading for a modest premium over its industry peers who boast an average PE of14.10x.
A simple technical analysis of Amgen won’t reveal one of today’s most undervalued stocks. At best, technicals suggest Amgen is relatively expensive when compared to its peers; that makes sense when shares are hovering right around their all-time highs. It is worth noting, however, that it’s growing a lot easier to argue Amgen is one of the best undervalued stocks to buy in a market where inflationary pressures are indiscriminately weighing on just about all of Wall Street.
There’s no doubt about it; Amgen isn’t the most exciting stock at the moment. With more than four decades in the pharmaceutical industry, investors know what they are getting with Amgen: excellent returns accompanied by a high margin of safety. That said, returns won’t come in the form of high-growth appreciation but rather high-yielding and sustainable earnings. When most companies are struggling to survive against several significant macroeconomic headwinds, Amgen is continuing to test new highs while simultaneously offering investors a dividend yield north of three percent. With a payout ratio of less than 65% of distributable earnings, the company’s dividend is safe and dependable.
Amgen’s dividend yield will help investors take a defensive position at a time when the threat of a recession looms heavily. However, Amgen isn’t merely a defensive play; it will also allow investors to play a little bit of offense. The pharmaceutical giant is investing heavily in its pipeline of future treatments. The globe’s aging population and increasingly unhealthy habits all but ensure future demand for Amgen’s products.
How To Find Undervalued Stocks
Finding undervalued stocks will mean something different to just about every investor. In fact, the definition of an undervalued stock is contingent on the respective investor’s investment style. Some investors, for example, search for undervalued stocks based on their current price relative to their intrinsic value. In other words, some view undervalued stocks as those with a lot of potential or perhaps with the ability to disrupt entire industries. By that definition, finding undervalued stocks requires an inherent knowledge of each industry and how the stock in question can disrupt it.
The other way to find undervalued stocks is to use fundamental indicators to determine their “true” values. Depending on the company’s maturity, investors may use the price-to-sales ratio, price-to-earnings ratio, or several other metrics that gauge the company’s value. A good P/S ratio, for example, rests somewhere between one and two. Thus, anything less than two is considered a good value. Likewise, if using the P/E ratio, anything less than 16 is typically considered a value.
Undervalued stocks have proven they belong in a diversified portfolio. For that matter, few equities allow investors to tap into more potential than stocks with plenty of room for growth built-in. However, to invest in undervalued stocks, traders need to know which indicators to look into and which valuations actually represent a buying opportunity. Proper due diligence will reveal many undervalued stocks in today’s market, but for those of you with less time, the equities listed above should be a good place to start.
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