Despite the novel coronavirus, the stock market is having an incredible year. The crash of March 2020 seems like ancient history at this point. Stocks make new all-time highs on a seemingly weekly basis. In addition, the month of November was a particularly profitable one for many previously lagging sectors. That has greatly thinned out the list of undervalued stocks.
Indeed, while the gains are great, it raises a question: What’s left to buy that’s still cheap now? There are some sectors that have been in a funk all year. Even after November’s bounce-back, we can still find undervalued stocks there. And there’s also some bargains hiding in plain sight among some other areas such as healthcare.
Add it all up, and here are seven undervalued stocks to take advantage of as we finish out 2020:
- Johnson & Johnson (NYSE:JNJ)
- Wells Fargo (NYSE:WFC)
- Intel (NASDAQ:INTC)
- Cboe Global Markets (BATS:CBOE)
- Reynolds Consumer Products (NASDAQ:REYN)
- Kimberly-Clark (NYSE:KMB)
- TC Energy (NYSE:TRP)
Undervalued Stocks: Johnson & Johnson (JNJ)
Johnson & Johnson checks several boxes at once. Not only is it an undervalued stock, it also pays an attractive dividend and has a balance sheet that is beyond reproach. This combination of factors makes JNJ stock an easy decision in a generally frothy market, particularly as the stock is only up 5% year-to-date.
So why is there an opportunity in JNJ stock right now? The company took a short-term ding this year due to Covid-19. A big chunk of J&J’s business is in medical devices. With many hospitals postponing elective surgeries due to the virus, it caused a steep drop in medical device sales. However, this is a timing issue, not a permanent loss of demand. Once the vaccines are widely distributed, hospitals should be able to catch up on postponed surgeries, which will allow J&J to recapture that revenue.
Meanwhile, the overall business is selling for just 18x earnings, and it’s at just 15x 2022 earnings once things are back to normal. JNJ stock offers a rock solid dividend, and it has hiked it for more than 50 years in a row. In a low interest rate world, J&J’s 2.6% dividend beats most bond alternatives. It’s also one of the few AAA-rated companies left, as its balance sheet is second to none. All this makes J&J a foolproof undervalued stock today.
Wells Fargo (WFC)
The great comeback has finally begun. I’ve been bullish on beleaguered WFC stock for several quarters now, and it has been a turbulent ride. In recent weeks, however, shares have popped from $22 to $29. And there’s plenty more to come. Here’s why.
For one, the recession hasn’t had nearly as bad an impact on the banks as analysts had feared. The government’s generous relief efforts seemingly bridged the gap for many people, and now the economy is starting to recover.
In any case, the banks put up heavy loan reserves this year in preparation for Covid-19. At a national level, banks have doubled their loss reserves, and are at their second-most conservative posture in 25 years; only the 2008 crisis saw them build up more provisions for losses. However, the amount of loans actually going bad is still minimal. This could pick up in 2021, but people that were expecting the banking system to melt down overnight are being proven totally wrong.
You can see it at Wells Fargo in particular. Last quarter, they had to add just $769 million to their bad loan reserves. Analysts had expected a $1.8 billion charge. Professional analysts wildly overestimated how badly the banking system would fare in this recession. As a result, the banks are set to earn far more than anyone expected.
Even in the height of the recession, in Q3 2020, Wells earned 42 cents per share. Annualized, that’s more than $1.60 per year during Covid-19. Just imagine how much Wells can earn as the economy normalizes and its legal problems from the previous account scandal are taken care of. WFC stock was $50 not that long ago, and there’s a good chance it will get back there in the next year or two.
Intel has certainly become a controversial stock lately. Nvidia (NASDAQ:NVDA) has overtaken Intel in overall market capitalization, and AMD (NASDAQ:AMD) has eaten into Intel’s position as well. As such, it’s not hard to find vocal Intel critics.
That said, folks are making too much of short-term swings in the marketplace. The bigger picture is that Intel still spends more than $13 billion per year on research & development. That’s multiples of Nvidia, AMD and other leading rivals. Sooner or later, Intel should find a breakthrough to catch up and surpass its peers once again in its core markets. At the same time, Intel’s heavy investments in other areas such as autonomous driving should pay off.
In any case, given the profound investor disdain for INTC stock, it trades at just 11x earnings now. That’s a tremendous profit stream with which Intel can repurchase its own undervalued stock. Intel also offers a 2.7% dividend yield at the moment.
Cboe Global Markets (CBOE)
My next pick, Cboe Global Markets, is one of the country’s leading market exchange operators. Cboe is an acronym for the iconic Chicago Board Options Exchange, and it has added other various markets to its holdings over the years such as the BATS stock exchange.
However, the company is best known for the “VIX” volatility index. The truth is that Cboe only generates 20% or so of its profits from operating the VIX and related products directly. However, the price of CBOE stock often follows short-term swings in volatility trading. Paradoxically, a high level of volatility can be bad for Cboe in the short-run, as people become nervous to bet against volatility. This was especially true in 2018, after the so-called “Volpocalypse” when an unusually large VIX spike caused many volatility exchange-traded funds (ETFs) to have to shut down. Those ETFs were frequent buyers of Cboe products and thus the disappearance of that business hit earnings.
All that explanation is necessary as a prelude to today. Investors are fearful of another big volatility disruption that would affect Cboe’s earnings. That seemed logical given what happened in March. However, with the market now soaring, the markets are humming and Cboe is pumping out strong earnings. Unless turbulent markets return, Cboe’s stock price is much too low.
Shares currently trade for just 17x earnings. Meanwhile, historically, Cboe has grown earnings at 11% per year over the past 10 years. Get anything close to that going forward, and CBOE stock will deliver great returns from this price. One more thing on Cboe. There was a lot of nervousness around the stock heading into the 2016 election. As soon as that ended, Cboe went on a massive winning streak; the stock doubled in 2017. History could rhyme, as the present year’s election drama is almost over and traders may soon embrace 2021’s more favorable volatility environment.
Reynolds Consumer Products (REYN)
In a year where the special purpose acquisition companies (SPACs) have risen to dominance, some traditional initial public offerings (IPOs) have fallen through the cracks. That’s certainly the case for Reynolds, which had the misfortune of IPOing just before the March crash and thus failed to garner any popular interest.
Regardless, it’s not too late to catch up with Reynolds. The company is the maker of its famous aluminum foil, along with a large line of food storage products, garbage bags and more kitchen items. It’s not a glamorous business by any means, but it’s highly profitable. Many of the things Reynolds makes are niche products that command 50% or more of the market. That leads to solid profit margins.
Not surprisingly, given the pandemic, there has been a resurgence in home cooking, which is right in Reynolds’ wheelhouse. It also sells a variety of things for grilling, which enjoyed a particular boost this summer. All in all, it has led to Reynolds beating earnings estimates and raising guidance going forward. Three different Reynolds insiders also bought stock in November, including Chief Executive Officer Mitchell Lance, who purchased nearly $493,000 of REYN stock a few weeks ago.
What’s the rush to buy? Despite all the positive earnings results and guidance increases, REYN stock is still trading right around its IPO price. The stock received no pandemic benefit, and hasn’t rallied with the other value stocks recently either. As a result, it’s trading for 15x forward earnings. That’s a true bargain in this market.
On a similar note to Reynolds, former quarantine star performer Kimberly-Clark has gone on a downswing. In recent months, people have been selling their Covid-19 winners to buy reopening stocks. That’s all well enough. However, the selling has gotten exaggerated in a few of the stay-at-home names, such as KMB stock.
In fact, it has pulled back from a high of $156 to just $134 as the initial excitement around Covid-19 stockpiling has worn off. And sure, it’s true that consumption of paper products didn’t really increase much, people simply bought more early in 2020 and have needed less since then. This isn’t, say, Clorox (NYSE:CLX), where the ongoing demand for cleaning supplies has sustainably increased.
That said, with the pullback, Kimberly-Clark is only up 0.03% year-to-date. And at this price, it’s selling for just 17x earnings. You also get a greater than 3% dividend yield. It’s not going to be the most dynamic piece of a portfolio. But if you’re looking for safe, high-quality undervalued stocks, you can hardly do better than Kimberly-Clark here.
TC Energy (TRP)
Rounding out the list, we have Canada’s TC Energy, which was formerly known as TransCanada. As of this writing, it’s the third-largest oil and gas midstream company in North America by market capitalization, as it is substantially larger than most of the popular U.S.-listed names.
It’s worth the trip to Canada for TC Energy, as the company has a far more conservative balance sheet and management team than many of the more aggressive operators elsewhere. As a result, TC Energy has remained a faithful and consistent dividend payer despite the oil and gas bust of recent years.
TC also is an undervalued stock. For now, it’s trading at just 13x earnings, and pays a 5.3% dividend yield. That’s one of the best combinations of value and dividend yield that you’ll find from a large and stable company in today’s market. And now, with energy back on the upswing, there could be significant share price appreciation along with the dividend.
On the date of publication, Ian Bezek held a long position in JNJ, WFC, INTC, CBOE, REYN and TRP stock.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.