In order to make money as a value investor, you’ve got to be willing to go against the grain and buy when the market has turned its back on a particular company.
Bargain hunting on Wall Street can be a tricky business, as it is difficult to find up-and-coming stocks without the help of glowing analysts’ reports. However, if you’re buying after the analysts weigh in, you’ve likely already missed a huge wave of momentum.
There are two ways to find underappreciated stocks in today’s market — by finding little-known companies with a lot of promise and not much coverage or by picking up beaten-down blue chips that have been abandoned.
Here’s a look at four stocks that meet our criteria and make for great value buys.
Underappreciated Stocks to Buy: International Business Machines (IBM)
I’ve written before about tech company International Business Machines’ (NYSE:IBM) comeback and, admittedly, we’ve been waiting a while for it to materialize. However, you’ve got to keep in mind that IBM’s massive size makes it difficult for the firm to make an about-face quickly, and although progress has been slow, there has been progress.
IBM has been expanding its strategic imperatives businesses, including cloud computing and artificial intelligence, but most of the optimism from those segments has been overshadowed by poor performance in the company’s legacy businesses, which have seen declining sales and dragged margins lower.
However, this week Big Blue is due to report earnings and the company has a good chance to beat analysts’ expectations and finally impress investors. The key metric for IBM is margins — once they turn in a positive direction, analysts will be all over the stock once again.
So before that happens, you might want to take a position.
Underappreciated Stocks to Buy: Starbucks (SBUX)
Another blue-chip that has taken a beating over the past year is coffee chain Starbucks (NASDAQ:SBUX). Analysts like Morgan Stanley have been downgrading their expectations for the coffee chain, which has hurt the company’s share price and caused investors to abandon it.
However, that makes for a great entry point for value investors. It’s worth noting that Starbucks’ days of aggressive growth are firmly in the rearview mirror at this point, but that doesn’t make it a bad investment.
The company is focusing on bolstering its food sales in its core U.S. market and thinning out its footprint by closing underperforming locations. Plus, the firm is making a major push into China, where exponential growth in the middle class is likely to be a boon for the coffee chain.
Not to mention that SBUX stock is likely to raise its cash returns to investors through dividend payments and a stock repurchase plan, making it a great long-term stock.
Of course, until SBUX starts to see some momentum in China and its food sales make a sizable impact on overall revenue, the stock is unlikely to see much positive coverage — but if you’re willing to bet on the chain’s long-term promise, now is a great time to buy at a reasonable valuation.
Underappreciated Stocks to Buy: Walgreens Boots Alliance (WBA)
Another big name that has been deflated by analyst downgrades is drug-store chain Walgreens (NASDAQ:WBA). The firm’s share price has fallen nearly 20% so far this year, largely on worries about Amazon’s (NASDAQ:AMZN) entry into the pharmacy sector.
While I’m the first one to sing AMZN’s praises, I think the worries that Amazon is going to be a huge disruption to WBA are largely overdone. Yes, Amazon turned the entire brick-and-mortar retail industry on its head a few years ago, but we’ve all learned from their mistakes and AMZN’s entry into the pharmacy sector is likely to be much less disruptive.
For one, Amazon’s PillPack acquisition isn’t the end of the world for Walgreens. PillPack has “tens of thousands of customers” according to the startup’s CEO. WBA has more than 13,000 stores across 11 different countries. In order for Amazon to scale PillPack’s reach to that level it’s going to take time, time Walgreens will use to defend its market share.
Look at Walmart (NYSE:WMT), which people expected to shrivel away in Amazon’s shadow once the e-commerce giant stepped into the grocery space — WMT has successfully fended off Amazon’s advances and the two co-exist in the same industry.
Of course, it will take time for analysts to see and believe that WBA can stand against AMZN, but if you’re willing to wait, now makes a great time to get in ahead of the rush.
Underappreciated Stocks to Buy: Medical Properties Trust (MPW)
As I mentioned above, another way to select up-and-coming stocks is to seek out smaller companies who don’t have the same kind of high-profile coverage as their blue-chip counterparts. That’s certainly the case for REIT Medical Properties Trust (NYSE:MPW).
The biggest thing to love about MPW is the company’s near-7% dividend yield — but the company’s overall real estate investment portfolio is also enticing. The firm leases healthcare properties primarily in the U.S. but also owns a few in Europe. Two of its largest customers are the fourth and fifth largest for-profit hospital chains in the U.S., making its income relatively stable.
Investments in the healthcare space tend to make for pretty reliable long-term bets considering that baby-boomers are aging quickly and demand is unlikely to slow-down anytime soon. In the case of MPW, you’re getting an impressive yield that looks to be secure in the long run as healthcare demand continues to rise in the U.S.
As of this writing, Laura Hoy was long SBUX and AMZN.
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