They say that value is in the eye of the beholder. Today, I will test that theory with my picks for undervalued stocks. I am positive that some of the readers will gawk at labeling today’s picks as cheap. In reality, value is not a number, but rather, a state of relativity.
But first we have to discuss the prism of the whole market where these stocks trade. It’s not all about how good each individual case is for undervalued stocks. If the whole market falls, then cheap stocks will get cheaper. My assumption is that the indices are too high and we could see a correction. However, I don’t see the doom and gloom that some experts advertise. Given the current conditions, the buyers are in control, so they will buy the dips.
Wednesday was the first red day in almost two weeks and the anxiety was palpable on Wall Street. I had dozens of discussions with people panicking, looking to buy the dips. It is amazing how quickly the FOMO panic set in as stocks were still falling. Traders have become too used to the upside motion. Consequently the conclusions today will have to fit inside the overall threat of a correction. Meaning these stocks can also fall if the indices go through a selling stint. Investors should take positions in tranches, thereby leaving room to add and manage the risk.
These three undervalued stocks definitely have support on the charts, but they are not foolproof. Sentiment is still key and it favors the bulls, but it is fickle. The courage stems from the idea that the Federal Reserve has got our backs. The Fed and the European Central Bank are fully invested and there is no turning back now. I can only imagine what fallout can come from that a few years down the line.
With that in mind, here are the three undervalued stocks to consider today:
Undervalued Stocks to Buy: Home Depot (HD)
HD stock has traded inside a clear horizontal range for the last few months. If it were not for the extrinsic factors, I’d say this is a full-sized position. Fundamentally, the company is beyond reproach. It just reported strong earnings and its management is still executing very well on its plans. Lowe’s (NYSE:LOW) is its only competitor and they are pushing each other to perfection. LOW currently holds a slight edge vis-à-vis Wall Street opinions. That perception adds to charm behind Home Depot today.
It has already corrected over several times, so there are no weak hands holding on to it. Each time it bounced off of the $260 level pivot on a dime. The thesis today is that this support zone will continue to hold at least one more time. This leaves the upside potential as the more likely scenario from here.
There will be resistance as it approaches $275 per share, but it won’t be insurmountable. With the proper tailwinds, the HD stock bulls are fully capable of breaking out. Once they are successful in closing above $280, the rally from there will set new all-time highs.
I believe in the support because the buyers and the sellers have fought over the $255 zone for months. Furthermore, the volume profile suggests that there’s going to be a lot interest below if and when they approach it. This gives me confidence in trading it several ways. I can buy the shares or upside calls and wait for the rally. Or I can sell the Jan $245 put and collect $2.50 for it. This way, even if the stock falls 10%, I still reap maximum profits.
All of this makes HD stock a solid member of the undervalued stocks club this week.
NVDA stock is not cheap by any standard. It has a relatively high price-to-earnings ratio and an even higher price-to-sales ratio. Those who own the stock have high expectations for its future. That’s why they pay a premium for it today. Technically, this one does not belong in any basket of undervalued stocks and there is room for disappointment. However, the price action makes it undervalued, because the recent selloff brought it down into a solid support zone.
Similar to Home Depot, I expect buyers to step in as long as NVDA stock is above $500 per share. I’m not aiming to time the perfect bottom with this one. But I know that going forward, if the markets do not correct Nvidia will be higher in 2021. As such, I can buy shares now and wait for the breakout, which will happen above $549 per share. That’s where the rally will intensify. It’s going to need that intensity because of the huge resistance at the all-time highs.
Three months ago, the stock failed miserably into one daily candle on Sept. 2. The process repeated again two times, once in October, and the other in November. Needless to say, Nvidia has a bad history there. The bulls will need all the momentum they can muster once they break out from $549 per share. They can do it, but they will need the cooperation of the entire market as well.
NVDA stock is not going to rally all by itself. If it fails, then I will also buy the dip. The company has set itself up for success in the new world. The demand for tech products and services is growing exponentially. This is because the digital revolution went into hyper growth mode because of the novel coronavirus pandemic. The quarantine woke everybody up that they can no longer postpone the inevitable. Everyone now has to embrace the change. If the you-know-what hits the fan, I bet Nvidia will find a lot of buyers anywhere near $480.
Yum China (YUMC)
YUMC stock is a bargain when you compare it to Chipotle (NYSE:CMG). The 22x price-the-earnings ratio is seven times smaller than CMG’s ratio of 160x. Even if you compare it to McDonald’s (NYSE:MCD), which has a P/E of 33x, the stock is still cheap. Furthermore, the owners of the stock are realistic with their expectations because its price-to-sales is barely over 2x. MCD is four times as much. Any which way you slice it, YUMC definitely belongs in a basket of undervalued stocks.
It is not always good to have cheap as a determining factor for investing. It is important to know why there is a disconnect between buyers and sellers. In this case there are exigent circumstance adding to the woes. Part of the recent downside pressure stemmed from the worry over U.S. regulation for foreign stocks. They will de-list stocks who’s companies remain opaque. Today this has already started. I doubt that YUMC will have a problem with that. The 7% correction it suffered is a buying opportunity.
Technically, the chart also suggests that there is support above $55 per share. This zone has been in contention for half the year. For over a week the buyers have stepped in regularly. And what makes it interesting is that the stock is setting lower highs. Now the price action has tightened into a point and there needs to be a move. My contention is that the upside scenario will start with a spike and accelerate once it exceeds $58.
Those who own it today should not panic out of it. Prospective investors should be open to these levels. The worst case scenario is that YUMC stock corrects and the downside potential is small. The zone above $53 should have a ton of buyers willing to step in.
Once the vaccines start to really work in the world, this stock will do much better. It is definitely worth holding as part of a basket of undervalued stocks today. Nothing is guaranteed and as we’ve said, cheap can get cheaper. All we can do is look for entry points that are not obvious mistakes. All three tickers we’ve discussed today have solid footing below. This reduces the odds of that happening anytime soon.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.