With second-quarter earnings season in the rear-view mirror, it is easy to make the mistake of turning to the news. Headlines spark fear — and poor buying and selling decisions. That is why the astute investor seeking undervalued stocks will take advantage of post-earnings reactions. Companies that rallied but then pulled back are on sale again, while those that sold off are at a steeper discount.
Investors may consider price-earnings values as one metric when seeking undervalued stocks. Andrei Simonov, chair of the finance department at Michigan State University’s Broad College of Business, highlighted it in an email to InvestorPlace:
“A similar concept is Tobin’s Q (Tobin’s Q — also known as q ratio and Kaldor’s V — is the ratio between a physical asset’s market value and its replacement value). High P/E or M/B or Tobin’s Q is evidence of possible overvaluation. Also, many people are looking at the variation of those variables within the industry. The rationale is that some industries naturally have [a high or low] growth rate.”
If you are looking for something simpler, the price chart following earnings season is another useful graphical interpretation. For example, if a stock experienced a big dip in the last month and barely rebounded, it suggests the market lost interest in it. This gives patient investors an opportunity.
With that in mind, here are seven undervalued stocks to buy now:
- Intel (NASDAQ:INTC)
- Micron (NASDAQ:MU)
- Western Digital (NASDAQ:WDC)
- Seagate Technology (NASDAQ:STX)
- Teva Pharmaceutical (NYSE:TEVA)
- Walgreens Boots Alliance (NYSE:WBA)
- AbbVie (NYSE:ABBV)
Undervalued Stocks: Intel (INTC)
After hovering in the low $60 range, Intel investors gave up when the company posted strong second-quarter results but delayed its next chip release. Intel stock fell to around $48 the next day. The company reported revenue rising an impressive 20% year-over-year. Data-centric revenue rose by 34% and contributed to more than half of its total revenue. Intel generated $17.3 billion in cash from operations and paid dividends of $2.8 billion.
Those numbers all sound good — and they are. But investors sold INTC stock when the company confessed to a 7-nanometer product delay. The 10-nanometer acceleration may tie the company to the next phase of growth, but the misstep gives its competition a chance to take market share.
Fortunately, management recognizes the discount and announced a $10 billion common stock buyback. Value investors should follow this lead and accumulate a dividend-paying technology stock. While Advanced Micro Devices (NASDAQ:AMD) gets all the attention, Intel is still the preferred chip supplier for notebooks and desktops. Vendors feature Intel-powered computers and only give AMD a passing mention on the front page.
If sentiment on INTC stock reverses, investors will win.
Micron (MU)
Micron Technology peaked in the low-$50 range, although its stock now has a forward P/E near 10 times. Unfortunately, MU stock sold off when its CFO shared that the company faces revenue pressures. At the peak of the pandemic earlier this year, orders surged as customers built inventory on anticipation of a shutdown. When supply exceeded demand in the months that followed, prices for DRAM and NAND fell.
A price drop of 10%-15% for memory and solid-state drives will pressure the industry. Investors betting on excess supplies easing could buy Micron at these levels. Eventually, the downtrend in the cycle will end and the rebound will send MU stock higher.
On Wall Street, 25 analysts cover Micron and have an average price of $62. However, one discounted cash flow model suggests MU stock is worth $66 per share.
Undervalued Stocks: Western Digital (WDC)
Just as Micron shares fell on a weak outlook, storage supplier Western Digital plunged from $45 to below $35 last month. WDC stock now trades with a forward P/E of just 9.2 times.
In the last quarter, WDC posted revenue growing 18% YOY. And just as Intel posted strong data center revenue, WDC shares that its Data Center Devices and Solutions division grew revenue 32%. It earned 49 cents a share, which includes a $96 million charge related to Covid-19. Looking ahead, the company does not expect much negative impact from the virus.
Western Digital forecast revenue for the first quarter of 2021 in the range of $3.7 billion to $3.9 billion. That, my friends, is where the disappointment comes in. Also hurting matters is the fact that the company did not specify why its guidance is coming in lighter than expected. Management may be sandbagging results to account for unexpected pandemic-related costs. The lighter demand for memory and storage will pressure margins, too.
But given the cyclical nature of the storage business, patient investors may buy WDC stock at its lowest point and wait for profits to start rising again.
Seagate Technology (STX)
Seagate Technology fell in sympathy with its competitor Western Digital. Although it lacks its own downside catalysts, the downtrend in STX has been underway since January 2020. At a forward P/E below 10 times, investors should look at the strong execution in the fourth quarter
Seagate will record a Covid-19 EPS charge between 25 cents and 30 cents. But the news is not all that bad. The company notched record shipments and strong revenue, driven by cloud data center strength. It took advantage of low interest rates by restructuring debt.
Looking ahead, management may grow the business through the 16TB, 18TB and HAMR sales. Customers are currently testing and validating heat-assisted magnetic recording (HAMR) drives. The new product line has a high storage density, improved reliability and simplicity. Expect profit margins to increase as HAMR’s weighting in the product mix increases.
Undervalued Stocks: Teva Pharmaceutical (TEVA)
In the pharmaceutical space, Teva’s sharp drop from its quarter-long trading range of $11-$13 should not go unnoticed. The company is amid a multi-year turnaround under the leadership of CEO Kare Schultz. If Teva fights current opioid lawsuits or negotiates a significantly lower fine, the stock may bounce back to its former trading range.
On Aug. 18, the New York State Department of Financial Services filed charges against Teva and Allergan, which is now a part of AbbVie. Governor Andrew Cuomo alleges fraudulent marketing and promotional campaigns. Specifically, Cuomo blames Teva and Allergan for “flooding” New York with opioid products between 2006 and 2014. Shareholders know all too well the legal risks that linger from the opioid crisis that plagued the U.S.
Teva could fight the lawsuit and argue for the legitimacy of opioids as a pain management tool. It may also argue that the abuse of the medical system is outside its control. If doctors and patients are at fault for the excess prescriptions leading to overdoses, then Teva should pay a significantly lower fine.
Walgreens Boots Alliance (WBA)
Walgreens is stuck in a downtrend. Despite a dividend cushion and a yield of close to 5%, investors are dumping the stock. Why? The weak Q3 report is frustrating shareholders. The company posted a GAAP EPS loss of $1.95.
Walgreens said on its quarterly earnings presentation that a variety of factors, including the absence of football, weighed on sales. Thankfully, online orders were able to offset some of that damage. It raised its cost-savings target to $2 billion by fiscal 2022, up from $1.8 billion. Markets do not care about expense reduction. Instead, investors are looking for sales and income to rebound.
Investors betting on sales growth above the 0.1% YOY rate in future periods will also expect profits ahead. To get there, Walgreens needs prescription volumes to increase. In June, comparable script volume rose 8%, suggesting that July and August figures will grow in the double-digit range.
Undervalued Stocks: AbbVie (ABBV)
AbbVie peaked over $100 in July but then fell toward its 50-day moving average. At a dividend yield in the 5% range and a forward P/E near 7.4 times, this drug manufacturer is trading at a discount.
In the second quarter, AbbVie posted an EPS loss of 46 cents and a $2.34 gain on an adjusted and diluted basis. While the Allergan acquisition may weigh on its debt, investors should look at the latest clinical results. On July 29, the company announced positive results from its Phase 3 ADVANCE trial.
The drug, used for the prevention of migraines, met the primary endpoint. This drug will compete with Teva’s Ajovy drug. And with 1 in 4 U.S. households including someone with migraine, the revenue potential from AbbVie’s drug is enormous.
The average analyst price target on AbbVie stock is around $112.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.
