[Editor’s note: This story was previously published in February 2019. It has since been updated and republished.]
Overall, the stock market continued its huge improvement throughout 2019, compared to where it ended in 2018; it has been a complete turnaround from last year’s drop, when stocks entered bear-market territory. Markets started slipping again in the month of August, traded in a range, and then turned to rally to new all-time highs.
But even though many stocks have completely erased all of their losses and made it back into the green, not all stocks have done so well. What this means is that while there are still plenty of duds out there, there are also a few undervalued stocks to buy; it has just become a little trickier to find them amid all the flashy comeback stories.
To find the best stocks to buy now, disciplined investors might start with their own watch list, which should contain “wish list” stocks that are usually too expensive or have been put there to be on the back burner for later. Among such stocks, companies that got left out of the rally are the most compelling. Even better, some of the best undervalued stocks to buy are those that dropped by double-digit percentages during the current rally.
Why is that?
Stocks that have already priced in current and possible negative news typically lower the risk for investors. Such companies may work to resolve the business problem at hand, which improves its prospects and leads to a higher share price in the long run. As long as the bad news reported is a temporary setback and the business model is not broken, the risks behind buying a stock on a dip are lower.
With all of that in mind, here are five undervalued stocks to buy that aren’t as scary as they seem.
Investors who held Sony (NYSE:SNE) stock through the Q2 2019 earnings report posted on July 30 enjoyed the rally that followed. The stock rose from $54.50 to nearly $60 recently. The company reported revenue falling just 1.4% year-over-year but operating income rose 18%, up 35.9 billion yen (US $332.2 million).
Now that Sony is trading at yearly highs, investors need not sell the stock just yet.
In a Sept 13 report, video game sales in August fell again by 18%, to $666 million. The industry could not count on any big game title hits to lift monthly sales. But the gaming sector has some hope ahead. When Sony’s Playstation 5 arrives, SNE will have more power than ever. Though the PS5 release will release no sooner than mid-2020, 8K support and game refreshes should give Sony another boost in revenue when the time comes.
Sony faced a few headwinds in the quarter. Contributions from first-party software titles fell. Sales of non-first party titles declined. But PS4 hardware sales rose, as did network service sales, including sales of PlayStation Plus.
In July, Celestica (NYSE:CLS) reported weak Q2/2019 results that sent the stock to as low as $6 by the end of August. Celestica reported revenue of $1.45 billion, down 15% from last year. Its aerospace and defense segment etched out a 2% revenue growth in the period, offset by a 23% decline in revenue from its Connectivity and Cloud Solutions (CCS) division. Adjusted EPS was $0.12, down from $0.29 last year. In September, the stock staged a major rally.
The company supplies equipment in ATS — aerospace and defense, industrial, smart energy, health tech and capital equipment. Its enterprise unit consists of servers and storage. Why then, should investors believe the company will offset the weakness it faces in the eroding semiconductor market?
Celestica is cutting costs in operations to align the business with the lower revenue. It will continue to build its capital equipment business. Management believes the fundamentals in this space will only improve in the long run. As next-generation adoption in display continues, its OLED business, for example, will add to its bottom line.
Celestica stock is still an undervalued play worth considering. The stock may underperform a while longer and risks disappointing investors. Again. Consider watching the stock’s next earnings report before committing to a position.
Celestica stock is an undervalued stock worth considering.
Back when I first wrote this list of undervalued stocks, Allergan (NYSE:AGN) was the pick in this slot. And it paid off. Investors buying Allergan at the start of 2019 may have made up to $50 a share, peak to trough. In June, the stock fell below $115, only to peak at around $165 in July when my new pick, AbbVie (NYSE:ABBV), agreed to buy out the firm for $63 billion. AbbVie’s rationale for acquiring Allergan is two-fold.
First, it views Allergan’s portfolio of products, including Botox, as attractive. Second, it has the time to use the strong cash flow from Humana to pay off its Allergan acquisition. Once Humana faces fierce competition from generics, AbbVie will have paid off much of the debt related to the AGN buyout. And in a few years time, Allergan’s drugs in the development pipeline will be ready for market.
AbbVie’s long-term future planning through the AGN acquisition makes AbbVie stock appealing for dividend-income investors. Even though shares rose from a $62.66 52-week low to $71.55, the stock still pays a dividend that yields 6%.
At a Sep. 10 Healthcare Conference, AbbVie reiterated its commitment to cut debt and to continue growing its dividend. It will also allocate some cash for smaller mid- to late-state pipeline opportunities. Management has a good handle on integrating Allergan into its business but it will not let its existing pipeline suffer in any way.
ABBV trades at an ~10% discount to the analyst price target of $79, but I think the AGN acquisition brings ABBV far more upside than that.
Innoviva (NASDAQ:INVA) is another stock in the drug space whose large drop starting in late January continued throughout 2019. The stock may not yet be done falling. Why not?
The fell began when the FDA approved Mylan’s (NASDAQ:MYL) generic version of Advair, which GlaxoSmithKline (NYSE:GSK) produces. This forced investors to worry about Innoviva’s prospects because the company is paid royalties from Glaxo. In the third quarter, Innova received $65.1 million in royalty revenues from Glaxo.
Investors appear to be overreacting to the generic competition. If demand for Innoviva’s formulation does not drop and prices hold, royalty revenues should not fall as much as markets think, which makes INVA an ideal undervalued stock to buy now.
Innoviva shares trended lower throughout 2019, as the stock lost $3 on its stock price by late-July. Investors sold the stock following the company’s weak Q2 report. Innoviva reported Glaxo (NYSE:GSK) royalties falling 18% to $313.9 million. Overall, there was a net income decline of 31% (an EPS of $0.34).
In its press release, the company said:
“Management and the board continue to examine potential strategic actions to maximize future shareholder value.”
Innoviva incurred expenses related to the evaluation of strategic options. But it will need to deliver on better shareholder value to attract stock buyers.
Telecom stocks were out of favor heading into 2019. Now, telecom stocks are no longer out of favor. But Vodafone (NASDAQ:VOD), which after cratering in May, has just barely climbed back to it’s pre-Christmas levels. So VOD is definitely still an undervalued stock.
On July 26, Vodafone reported revenue stabilizing, falling just 2.3% Y/Y. The results sent VOD stock up 9% on the day. And ever since the stock bottomed at $16, it continues to run higher, closing recently at close to $20. In the fiscal Q1 2020 report, Vodafone said it enjoyed record low mobile contract churn. The deepening customer engagement will only strengthen as the telecom company launches 5G in all major EU markets.
Service revenue in Q1 was mostly flat, down 0.2% and 0.5 pp sequentially.
Simplifying the mobile plan offering will likely lead to higher revenue growth ahead. For example, Vodafone migrated 500,000 SIMs to a new unlimited offer. This will also increase ARPU and keep customers from switching to competitor services.
Vodafone shares pay a dividend yield of 5.2%. If Vodafone grows its U.K. business as it signs on users to its 5G services and cuts costs as it signs on more customers, VOD stock will finally move higher.
As of this writing, Chris Lau owned shares of Innoviva and AbbVie.