How do you find undervalued stocks to buy that are ready to take flight?
If you’re like me, it really depends on what you mean by undervalued. Some investors might think that a stock that trades at 30 times sales is undervalued based on the future growth potential.
I mean, look at Tesla (NASDAQ:TSLA).
The Verge published an article in April 2017, around the time Tesla’s market capitalization had passed General Motors (NYSE:GM) in value, suggesting that investors valued it at $53 billion because of hope, not actual results.
Tesla had sales of $7 billion at the time, which means investors were willing to pay eight times sales for the electric vehicle maker. Today, Tesla is worth $572 billion and investors are willing to pay a little more than 23 times sales.
In hindsight, Tesla was an undervalued stock in 2017.
So, it’s not just a matter of saying, “I won’t pay more than ‘x’ times sales.” You’ve got to have a rationale why you won’t pay more than that multiple.
I’ve been tasked with finding 10 undervalued stocks to buy that are ready to take off. To do so, I selected stocks that are both reasonable in price and demonstrate above-average growth in earnings and sales at the moment.
To do that, I used undervalued stocks that have positive free cash flow, an FCF yield of 4% or more, and a PEG ratio of less than 1.5. I’ll also try to recommend one stock from at least seven different sectors.
- Barrick Gold (NYSE:GOLD)
- Camping World Holdings (NYSE:CWH)
- DaVita (NYSE:DVA)
- Dollar General (NYSE:DG)
- Honda Motor (NYSE:HMC)
- Intel (NASDAQ:INTC)
- Noah Holdings (NYSE:NOAH)
- Tempur Sealy International (NYSE:TPX)
- TopBuild (NASDAQ:BLD)
- WWE (NYSE:WWE)
May the undervalued stocks win!
Undervalued Stocks to Buy: Barrick Gold (GOLD)
The gold sector has been hot in 2020. That explains why Barrick Gold has a total return of 27.3% through Dec. 9. This year’s performance has really helped put a shine on the gold miner’s long-term performance as a result. It’s now got a five-year annualized total return of 25.6%, 72% higher than the U.S. markets as a whole.
However, it might not be done just yet.
In late November, BMO Capital Markets analyst Jackie Pryzbylowaki reiterated her “outperform” rating and 12-month price target of $34.50. At current prices, that provides investors with 48% upside.
“[T]he company is moving back to basics through improving orebody knowledge, and a better understanding of these fundamentals is the key to optimizing value,” the analyst wrote. “[It includes] long-term exploration for low-cost accretive value creation as well as mineral resource management for near term asset optimization.”
Trading at 16.7 times forward earnings, it’s currently valued below its five-year history average for price-to-forward earnings, earning a top spot on this list of undervalued stocks.
Camping World Holdings (CWH)
Some of you might know Marcus Lemonis from the CNBC show, “The Profit.” However, his day job is running Camping World, one of the world’s largest sellers of recreational vehicles.
Lemonis holds 52.4% of CWH’s votes and 40% of its equity. Year-to-date through Dec. 9, CWH stock has a total return of 100.5%. Despite these gains, it still has a FCF yield of 17.8% based on $820 million in free cash and an enterprise value of $4.61 billion. As for its PEG ratio, it’s 0.42 according to Finviz.com.
In 2021, Camping World plans to launch a peer-to-peer RV rental marketplace. The move ought to help its Good Sam members generate a return on their RVs when they’re not using them, not unlike the Airbnb concept with vacation properties.
I recently called Camping World one of the 10 best stocks to buy for investors under 30.
The beautiful thing about investing is that no one person owns the right opinion on a particular stock at any given time. Take DaVita, the largest provider of kidney dialysis treatment in America.
Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) is a big supporter of the company. Although its holdings have been trimmed in 2020 — it held 38.6 million shares at the end of 2019; it now holds 36.1 million — it is still the holding company’s eighth-largest holding in its $257 billion equity portfolio.
In December 2019, Institutional Investor published an article that discussed short-seller Jim Chanos’ large bet against the company.
“Chanos, the founder of Kynikos Associates [Hedge Fund], first spoke publicly about his wager against the company on September 19 at the Delivering Alpha conference in New York,” wrote contributor Christine Idzelis.
“There, Chanos pointed to what he alleged to be a massive insurance scam.”
Different strokes for different folks. Up 44.3% YTD, Buffett and company have gotten the last laugh.
Except for price-to-sales, DVA stock is relatively cheap by historical standards. As long as Buffett’s got it in the top 10, I see it as a long-term hold.
Dollar General (DG)
In mid-November, I recommended seven retail stocks to buy that would benefit from 2020’s holiday shopping season. I chose Dollar Tree (NASDAQ:DLTR) solely on the basis that it was the value buy and Dollar General was the growth vehicle.
However, just because Dollar General is more expensive than Dollar Tree on a comparison basis — DLTR has a price-to-sales ratio of 1.1 compared to 1.6 for DG — that doesn’t mean that it isn’t still a good deal.
Over the past three years, Dollar General has grown its sales and net profits by 8.1% and 11%, respectively. Its PEG ratio is 1.57, two basis points less than its five-year average. And yet, in those five years, it’s got an annualized total return of 24.8%, almost double the U.S. markets as a whole.
To keep growing, Dollar General is launching Popshelf, a new concept that’s focusing on non-consumable items, 95% of which will be under $5. Targeting a female demographic with household incomes between $50,000 and $125,000, it’s definitely looking to build a more affluent clientele.
I expect it will be successful.
Honda Motor (HMC)
It’s been a long time since I’ve discussed Honda. More than two years, in fact. I last recommended HMC stock in October 2018. It was one of seven high-value, high-yield stocks that also demonstrated some growth characteristics.
“Honda stock has lost 20% of its value year-to-date and trades at 7.5 times its forward P/E,” I wrote on Oct. 16, 2018.
“Yielding 3.5%, it has been both a good year and a bad year in 2018.”
Fast forward to December 2020. It’s trading at 9.8 times its forward P/E and yields a slightly lower 2.4%. Overall, HMC stock gained just 9% over the past 26 months, not including dividends.
That’s hardly worth celebrating.
So, why am I going back to the well a second time? Analysts like it.
Of the 16 that cover it, 15 have it as a buy with just one hold. The current estimate for 2021 earnings is $2.41, up from $1.36 just a month ago. In 2022, it expects earnings of $3.43; that’s up from $3.06 a month ago.
Based on its 2022 earnings, it’s currently trading at less than nine times its 2022 forward earnings. You can’t get Tesla that cheap. Not by a longshot.
If 2020 were a party, Intel didn’t get the invite.
While Advanced Micro Devices (NYSE:AMD) and Nvidia (NASDAQ:NVDA) have YTD total returns of 96% and 120%, respectively, Intel shareholders are wallowing in their beer, down more than 16% on the year.
Intel used to be the star child of chip makers. Now it can do no right. A sure sign that investors have lost faith in the free cash flow generator: InvestorPlace has stopped writing about it. Our readers tell us what’s relevant. It’s clearly not.
Oh, ye of little faith.
Intel’s guidance in October projected that it would generate at least $18 billion in free cash flow in fiscal 2020, higher than it’s been in recent years despite the sales slowdown. Based on an enterprise value of $223.5 billion, it’s got an FCF yield of 8.1%, putting it squarely in value territory.
While there are some good reasons for its 2020 swoon, I don’t think you can write off Intel just yet. In the meantime, get paid 2.6% to wait for its resurrection.
Like most of my gallery-style articles, I like to spread the love amongst sectors and regions. Noah Holdings is a Chinese asset management company that I’ve followed for some time. If the idea of investing in Chinese companies — even if they are considered undervalued stocks — is too risky a proposition for you, I understand.
However, this is a company that is growing its revenues and assets under management.
I first recommended its stock in June 2013 when it had annual revenues of $87 million. At the end of 2017, I mentioned Noah as one of 10 stocks I wish I’d bought that year. Today, it has annual revenues of $490 million and operating income of $131 million.
Since my November 2017 article, has had a topsy-turvy ride that has seen NOAH stock head as high as $68 in May 2018 and as low as $20 in March 2020. Up substantially from its 52-week low, I see Noah taking another run at $70 in 2021.
In its third-quarter results, its lending business took a hit due to Covid-19. Overall, however, thanks to very strong results from its wealth management business, revenues and operating profits grew by 2% and 48.2% during the quarter.
As for operating margins, they were 40.1% in Q3 2020, 44% higher than a year earlier. Yet, it trades for 11.6 times cash flow, well below its five-year average of 18.5x.
It might be volatile, but over the long haul, you ought to do very well owning undervalued stocks like NOAH.
Tempur Sealy International (TPX)
One of the concepts I like to throw around every now and again is “Everyday Investing,” the act of buying undervalued stocks whose products investors frequently use.
One product I can’t live without is my TempurPedic bed. I bought it when moving to Halifax in February 2018; my back’s been so much better ever since.
A lot has changed in the mattress business since buying my bed — Mattress Firm went bankrupt and Casper Sleep (NYSE:CSPR) had a disastrous IPO — and while TPX stock has gone on a rollercoaster ride up and down and back up again, the long-term consensus is good.
If you bought its stock in early February, you’re barely breaking even some 10 months later. However, help is soon on the way.
The company provided shareholders with a market update Dec. 9 that was extremely upbeat. Sales in the fourth quarter ought to be up by double digits over last year and EBITDA growth in the quarter ought to be 30% higher year-over-year.
U.S. e-commerce, international sales, and higher margins company-wide are all helping Tempur Sealy finish the fiscal year in strong fashion. Whether it’s wholesale, direct-to-consumer or private label, the company continues to invest in its capacity expansion.
TPX currently has an FCF yield of 7.6% — based on $510 million in FCF and an enterprise value of $6.7 billion — providing investors with a nice entry point to ride its next leg up from $25.
In early October, TopBuild made my list of 10 small-cap stocks to buy from some of America’s best ETFs. It’s lost some of its momentum in the final three months of the year–and that’s okay. It was due for a breather.
As it stands, BLD stock has a YTD total return of 61.5%, and a five-year annualized total return of 41.4%. In other words, it’s hotter than a pistol.
You’re probably wondering why I’ve included a momentum stock like TopBuild in a story about undervalued stocks. It’s simple really. The two aren’t mutually exclusive. As I’ve already said, you can possess both value and growth attributes at the same time.
In the case of the distributor and installer of insulation products, it has everything to do with the fact it’s grown its net income by 38% annually over the past three years, while its forward P/E has increased by 27% over the same period.
Assuming its forward P/E grew at the same pace as its net income, BLD stock should be trading at $204, or 23 times its 2021 earnings per share estimate of $8.87. Perhaps that’s why the average and median target price for BLD is currently $195.90 and $200 respectively.
As long as people keep renovating homes and businesses and new homes continue getting built, TopBuild will keep growing by leaps and bounds.
World Wrestling Entertainment (WWE)
How old is Vince McMahon? He’s got to be closing in on 80. According to its proxy statement, the grand gent of wrestling entertainment is 75 years young.
McMahon, his wife Linda and daughter Stephanie, own 100% of WWE’s Class B shares — 10 votes per share compared to one vote per Class A share — which gives the family 87% voting control and 40% of the equity.
In August, the WWE launched ThunderDome, a state-of-the-art virtual arena that recreates the live-event atmosphere of a SummerSlam wrestling extravaganza. In November, ThunderDome moved to Tropicana Field in Tampa Bay for a new residency after four months at the Amway Center in Orlando.
During Covid-19, WWE has done everything in its power to keep the excitement for live wrestling events alive and well. The work has paid off financially. In the first nine months of 2020, WWE’s revenues were $736 million, 15.4% higher than a year earlier despite a significant reduction in live events. On the bottom line, operating income was $172 million or 249% higher than a year earlier.
If that doesn’t tell you how popular wrestling is on television, nothing will. Down 32% YTD, WWE’s free cash flow has never been this strong. It’s probably the most undervalued stock in this list.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.