10 Undervalued Stocks With Breakout Potential

These 10 undervalued stocks are positioned to make big moves higher

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The stock market has rushed to all-time highs in 2019 and — despite recent trade-inspired turbulence — is still on pace to have one of its best years in recent memory. But not all stocks have joined in on the rally. Instead, a handful of stocks have actually had a rough 2019, dropping big year-to-date into historically undervalued territory — even while the market trades at a decade-high valuation.

Some of these undervalued stocks are undervalued for a reason, and should be avoided for the foreseeable future. The fundamentals simply don’t warrant a turnaround.

But some of these undervalued stocks look primed for a breakout. That is, some of them appear unreasonably undervalued, with big catalysts on the horizon — a combination which paves a tangible pathway for big upside.

With that in mind, let’s take a look at 10 undervalued stocks with breakout potential in the back-half of 2019.

Foot Locker (FL)

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The Valuation: Because the athletic apparel sector sources a lot of production from China, many athletic apparel stocks find themselves at the epicenter of the U.S.-China trade war. Foot Locker (NYSE:FL) is no exception. The company’s margins have come under significant pressure thanks to tariffs, and in response, investors have sold off FL stock to an anemic 8-times forward earnings multiple, versus a five-year-average forward multiple north of 12, a consumer discretionary sector average multiple north of 20, and a footwear sector average multiple north of 28.

The Breakout Catalyst: Foot Locker’s demand trends are healthy. Last quarter, Foot Locker reported nearly 5% comparable sales growth. Thus, the whole problem here is the trade war. If the trade war cools, FL stock will presumably rally in a big way. It increasingly appears that this will happen. U.S. President Donald Trump has delayed the next round of tariffs, while China is coming under intense internal pressure with the Hong Kong riots. Consequently, it appears both sides want to de-escalate trade tensions. Such a de-escalation should couple with strong demand drivers at Foot Locker to propel a breakout rally in FL stock into the end of 2019.

CVS (CVS)

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The Valuation: Pharmacy giant CVS (NYSE:CVS) is in the midst of multi-year downtrend thanks to adverse consumption and legislation trends, the sum of which have weighed on revenues, profits, and investor sentiment. Net net, CVS stock today trades at a depressed 8.5-times forward earnings multiple, versus a five-year-average forward multiple of over 13.

The Breakout Catalyst: Both consumption and legislation trends are finally progressing in the right direction for CVS. On the consumption side, CVS reported a robust 4.2% increase in same store sales last quarter, including an impressive 2.9% increase in front store sales. This is mostly because, thanks to the Aetna acquisition, CVS is pushing forward on a promising local healthcare plan. Meanwhile, on the legislation side, the White House scrapped a PBM rebate program which would’ve been disastrous for CVS. Broadly, then, it increasingly appears that CVS stock is the early innings of massive multi-quarter rebound.

AT&T (T)

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The Valuation: Telecom-giant AT&T (NYSE:T) has featured a persistently cheap stock for the past several years. T stock trades at just 10-times forward earnings today and has averaged an 11-times forward earnings multiple over the past five years. In other words, T stock has been stubbornly cheap forever.

The Breakout Catalyst: AT&T stock has been stubbornly cheap forever because the company has been staring at huge cord-cutting headwinds. Much like Disney (NYSE:DIS) has done over the past few months, though, AT&T is prepared to shake off those cord-cutting headwinds over the next few months thanks to the launch of a new content-packed streaming service in HBO Max. At the same time, the forthcoming 5G wave promises to provide a big boost to the company’s wireless business. Thus, over the next twelve months, two big catalysts — a full blown pivot into the streaming space and the mainstream roll-out of 5G — will finally “wake up” T stock and spark a big breakout rally in this stubbornly cheap stock.

American Airlines (AAL)

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The Valuation: Airline stocks have been hit hard over the past twenty months, dragged down by rising oil prices in early 2018, slowing global air travel demand in late 2018 and the 737 MAX crisis in 2019. American Airlines (NYSE:AAL) has been no exception to the trend. If anything, it’s been an out-sized loser, with AAL stock down more than 50% since early 2018. At present, given the the airline industry’s sizable headwinds, AAL stock trades at just 5.5-times forward earnings, versus an airline average forward earnings multiple north of 8.

The Breakout Catalyst: The fundamentals underlying the airline industry are positioned to meaningfully improve over the next few quarters. Oil prices will drop, as supply continues to outstrip demand in a slowing global manufacturing economy. Air travel demand will remain robust, as the global consumer economy remains on solid footing. 737 MAX planes will get back into the air by early 2020. Net net, by early 2020, top and bottom line trends across the whole airline industry should meaningfully improve, and that improvement should lead to a breakout recovery rally in depressed and beaten-up AAL stock.

AMC Entertainment (AMC)

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The Valuation: It’s been a rough year for movie theater operator AMC Entertainment (NYSE:AMC), as sluggish box office trends in the first half of 2019 have breathed life back into the thesis that movie theaters are going extinct. As that thesis has gained traction, AMC stock has plunged to dirt cheap levels. Today, AMC stock trades at less than 0.3-times trailing sales. Three years ago, the trailing sales multiple was above 1.

The Breakout Catalyst: July 2019 box office trends showed meaningful improvement from the January through June trend. August is off to a good start, too. The outlook for the rest of 2019 is also favorable, headlined by a second Frozen movie and the final installment in the latest Star Wars trilogy. As box office trends continue to improve into the end of the year, the “movie theaters are dying” thesis will start lose steam. As that thesis drowns out, investor sentiment will improve, and the stock will meaningfully recover.

Ford (F)

What's It Gonna Take for Ford Stock to Hit $20 in 2, 4 or 6 Years?  
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The Valuation: After several years of red hot growth, the global auto market is cooling off. In that cooling market, U.S. auto giant Ford (NYSE:F) is losing share. The company’s margins are also coming under intense pressure thanks to U.S.-China tariffs. Net net, revenue, margin and profit trends at Ford have been depressed for some time. This has led to an equally depressed Ford stock, which presently trades at just 7.2-times forward earnings.

The Breakout Catalyst: The recent surge of proactive fiscal stimulus in the U.S. economy in the first half of 2019, should have a positive impact on auto market demand in the back half of 2019. Continued healthy labor conditions should similarly help reinvigorate auto demand. At the same time, Ford is aggressively reshaping its car portfolio to be more electric and thereby, more relevant. Tariffs are also being pushed back, and the trade war looks like it will cool down from here. Putting all that together, then, Ford’s underlying fundamentals are positioned to improve significantly over the next few quarters. As they do, Ford stock should bounce back from today’s depressed levels.

Intel (INTC)

Intel stock INTC Stock
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The Valuation: When it comes to playing the next-gen AI and data revolution, chipmaker Intel (NASDAQ:INTC) offers investors arguably the cheapest way to do it. The company has exposure to all of those secular growth end markets (self driving, machine learning, hyper-scale data centers, so on and so forth). Yet, INTC stock trades at just 11-times forward earnings, mostly because Intel is a slow growth player in those market that is rapidly losing share to faster growing rivals.

The Breakout Catalyst: INTC stock could charge higher for three big reasons. First, Intel’s next-gen chips are finally here (and more are coming soon), so the company may finally be able to win share back from Advanced Micro Devices (NASDAQ:AMD). Second, the trade war appears to be cooling, and that’s big for both Intel’s demand and margins. Third, there are rumors out there that hyper-scale data center spend – which has taken step back thus far in 2019 – is finally starting to ramp back up. Those three catalysts together could push INTC up towards $60 within the next few quarters.

IBM (IBM)

Linux-maker Red Hat Purchase Adds Risk to Owning IBM Stock
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The Valuation: Much like shares of AT&T, shares of blue chip tech giant IBM (NYSE:IBM) have been stubbornly cheap for the past several years as the company has dealt with sluggish revenue, margin, and profit growth trends. Investors keep waiting for things to turn around. They never do. As such, IBM stock has been depressed for a long time.

The Breakout Catalyst: IBM’s sluggish growth trends could finally turn around over the next few quarters, thanks to the integration of Red Hat. Last year, IBM announced its intention to acquire hybrid cloud company Red Hat. That acquisition just closed. Importantly, Red Hat is growing revenues at a much faster rate than IBM, and operates at higher gross margins. Red Hat also opens up IBM’s cloud business to Red Hat’s long list of hybrid cloud customers. Thus, the integration of Red Hat into IBM’s business will provide a meaningful lift to IBM’s revenue and profit growth trends. That lift should breathe life back into depressed IBM stock.

Skechers (SKX)

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The Valuation: As mentioned earlier, the athletic apparel sector finds its square in the middle of the U.S.-China trade war. Athletic footwear brand Skechers (NYSE:SKX) is no exception. Consequently, as trade tensions have heated up in August, SKX stock has retreated. The stock now trades at less than 15-times forward earnings, versus an apparel retail sector average multiple of nearly 18 and footwear sector average multiple of nearly 30.

The Breakout Catalyst: Prior to trade tensions heating up, Skechers reported blowout second quarter numbers which comprised big revenue growth, big margin expansion, and big profit growth. SKX stock soared in response to that print. The stock has since given up nearly all of those gains because of Trump’s proposed new tariffs. But, those new tariffs are being edited and delayed — and may never actually come into existence. As such, as fear surrounding those new tariffs eases and disappears over the next few months, SKX stock should bounce back to its post-earnings highs.

Kohl’s (KSS)

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The Valuation: The physical retail sector has been killed over the past several quarters, mostly because a disappointing holiday 2018 season has flowed into continued sluggish sales trends through the first half of 2019. Kohl’s (NYSE:KSS) — one of the largest physical retailers in the U.S. — has not been immune to the sell-off. In 2019, Kohl’s comparable sales have dropped into negative territory, while margins have retreated. In response, KSS stock has dropped big, and now trades at a dirt cheap 9.6-times forward earnings multiple (versus a five-year-average forward earnings multiple of 12-plus).

The Breakout Catalyst: The macro retail backdrop will meaningfully improve over the next few quarters, thanks to: 1) proactive fiscal stimulus in the first half of 2019, 2) continued favorable U.S. labor conditions, 3) plunging interest rates and 4) de-escalating trade tensions. Against that improving retail backdrop, Kohl’s growth trends should bounce back because this company has a unique value prop (off price and off mall) and winning omni-channel growth strategy based on multiple Amazon (NASDAQ:AMZN) partnerships. As such, by the end of 2019, Kohl’s comps should inflect back into positive territory, while margins should march higher. If so, KSS stock should bounce back in a big way from today’s depressed valuation levels.

As of this writing, Luke Lango was long FL, CVS, T, DIS, AMC, F, INTC, and AMZN. 


Article printed from InvestorPlace Media, https://investorplace.com/2019/08/10-undervalued-stocks-with-breakout-potential/.

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