Finding undervalued stocks — or even fairly priced ones — isn’t an easy task right now.
The S&P 500 is currently trading at more than 20 times earnings — its price-to-earnings ratio of 20.7 is 42% higher than its historical median P/E of 14.6. Simply put: Stocks, as a whole, are richly valued.
But not all stocks are overvalued right now.
A recent look across the market has revealed a few currently undervalued stocks — two of which have some pretty big, familiar brands. And, as a perk, all three of these stock picks are yielding at least 3% in dividends. (That’s a pretty nice sweetener while you wait for the market to truly appreciate these companies.)
Each of these companies operates in different industries, so you’ll have to be on the watch for different catalysts to spark each of these undervalued stocks. But a little diversity isn’t exactly going to hurt your portfolio.
Lastly, two of the three companies are smack-dab in the realm of what I consider “sleep soundly” companies, which means while they might ebb and flow, they’re not going to just up and disappear anytime soon. These are stocks that are worth buying most of the time anyway, but they look particularly attractive based on valuations right now.
So, here’s a quick look at these three undervalued stocks:
3 Undervalued Stocks to Buy: International Business Machines (IBM)
A few years ago, Warren Buffett surprised the investing community when he bought a stake in blue-chip tech company IBM (IBM).
Remember: This is a man who said he focused on “simple businesses” because “if there’s lots of technology, we won’t understand it.”
Buffett has been buying shares of IBM since 2011 at an average purchase price of $158. He has continued adding share recently, increasing his holdings in IBM stock by more than 9% in Q4 2014, then by another 3% in in the first quarter of 2015. IBM is one of Berkshire Hathaway’s (BRK.A, BRK.B) largest holdings, at nearly 12% of the portfolio.
Shares are currently trading at $165, which is roughly 4% higher than Buffett’s average purchase price. Meanwhile, they also trade at just 14 times trailing earnings, and roughly 10 times its estimated 2016 earnings.
Not convinced Buffett has it right? How about the fact that IBM is trading at a trailing P/E of 13.8 and a forward P/E of 10.1? That’s thanks in large part to a 20% decline since peaking in 2013.
However, IBM will pay you roughly 3.1% in dividends annually while you wait for management to turn the tech company around. The potential catalyst? Watson, the supercomputer of Jeopardy fame.
Watson is far more than a gimmick. Already, Watson has been hired out to advise doctors on post-traumatic stress disorder, and has potential applications has far-ranging as cloud computing to banking.
3 Undervalued Stocks to Buy: Chevron (CVX)
Chevron (CVX) is one of the largest oil and gas companies in the world. Due to the weakness in the space, CVX is trading at a trailing P/E of 11 and a forward P/E of 16.2 — lower than the S&P 500 is currently trading, which gives investors a nice margin of safety.
Although not all analysts agree, management believes it will be operating free cash flow neutral in 2017 if Brent Crude is trading at $70 a barrel. Clearly, the price of oil and gas is the main catalyst with Chevron and most would argue the price of both energy sources will rise in the future. The only question is when.
The two main reasons for higher energy prices are low supply or high demand. If OPEC continues to keep prices low in an attempt to push high-cost producers, mainly U.S. shale operators, out of the market, the supply side will eventually take care of itself — at least, that’s what the Saudis are hoping for.
As for the demand side, the U.S. and European economies, while slow, are continuing to get stronger. Healthy world economies use more oil and gas than depressed ones. So again, increasing demand will take time but eventually happen.
Investors who have the time to wait for energy prices to recover and CVX stock to move higher will be collecting a healthy 4.2% dividend in the meantime.
Like IBM, buying CVX today means buying a blue-chip company at a depressed price offering big upside return in the future.
3 Undervalued Stocks to Buy: Textainer Group Holdings (TGH)
I must admit, Textainer Group Holdings (TGH) is not a household name and even the first time I heard about the company I had to ask a second time what the name was. But, sometimes the lesser-known, boring companies are the best to own.
TGH operates in the shipping container business; it rents and sells the big metal intermodal shipping containers you see on cargo ships, trains and trucks. These containers are used to ship dry goods all around the world — and TGH operates the largest fleet in the world at roughly 2.1 million containers.
In the most recent quarter TGH reported that container utilization was at 97.6%.
But despite the high demand for containers TGH has seen its shares price fall in recent months — it is down 19% year to date and 29% over the past 12 months. The decline is due to a number of issues TGH is facing; a slow economic growth around the world, low costs for new shipping containers due to a fall in the price of steel, and cheap credit around the world, that combined with low-cost containers has allowed both its customers and competitors the option to buy their own.
These factors have put downward pressure on container rental rates. So despite renting 97% of their containers, the rental price per container has recently fallen, hurting revenue and profits.
But, the good news is that the shipping industry is very cyclical and we are just currently in bit of a lull period, which shouldn’t be a problem for a company that has been in the business for more than 30 years.
With utilization high, when world economic activity begins to increase, rental rates should soon follow. And while investors buying today wait for that to happen, they can collect a healthy 6.8% dividend yield.
As of this writing, Matt Thalman did not hold a position in any of the aforementioned securities. Follow him on Twitter at @mthalman5513.