No matter what type of investor someone is, almost all investors like finding undervalued stocks.
As passionate investors, finding a truly undervalued stock is like finding a treasure chest. Digging through all the numbers, SEC filings, and looking at the charts is like looking at a treasure map or set of clues.
Obviously there are times where we don’t find the treasure and we move on to a different name — a different map. But when we find that stock that’s undervalued before the market realizes its value, that’s a rewarding feeling.
Not all undervalued stocks see their worth realized by the market. Sometimes a cheap stock stays cheap. In those cases, it’s not necessarily a loss either. We just end up with an inexpensive stock. The key is not ending up in a value trap. We avoid value traps by buying high-quality companies.
If the business is strong, then the valuation tends to take care of itself. Further, not all undervalued stocks are cheap by traditional observations. Sometimes a seemingly expensive stock gets even more expensive, as the market begins to increase its value. For example, think of Shopify (NASDAQ:SHOP).
With that in mind, let’s look at seven undervalued stocks as we approach the end of 2020:
Undervalued Stocks to Buy: Alibaba (BABA)
By now, a couple of things should be very apparent. First, e-commerce is here. It’s not going anywhere and it will keep growing. Second, China is massive and will only continue to strengthen in the long term. Benefiting from both is Alibaba.
The company has its fingers in so many different value propositions, it’s basically impossible to ignore this juggernaut.
Alibaba has been called the Amazon (NASDAQ:AMZN) of China. That’s somewhat true — more so now than when people first started calling it that. Regardless, that’s the situation we have moving forward.
The company’s own Alibaba.com is a well-known and traversed site, but its Tmall.com property shouldn’t be ignored. It’s by far the most dominant e-commerce site in China and it’s actually the third most popular website in the world (trailing just Google.com and Youtube.com).
Beyond that, Alibaba is pushing into the cloud business — remind you of Amazon yet? — as well as digital entertainment. It also has a one-third stake in Ant, which just went through a bit of hiccup with its IPO. Regardless, the entity was being valued at more than $300 billion.
At 25 times this year’s earnings, Alibaba is undervalued in my mind, given this year’s revenue growth estimate of 46.6% and next year’s expectation of 31%. This company clearly has a long-term runway and while it faces some challenges, it’s undervalued compared to its mega-tech peers.
CVS Health (CVS)
CVS Health is another name on our undervalued stocks watchlist, but it has not gotten much love over the years.
Unlike Alibaba, which only trades at a discount to its peers, CVS trades at a discount to the market. The stock hit its high way back in 2015 and has struggled ever since. For anyone that has been in this name, it’s been a painful ride.
The stock recently had some momentum working in its favor, but the threat of Amazon entering the pharmacy fray has shares back under pressure.
Thankfully, Amazon’s entrance to the pharmacy business was well telegraphed. That’s part of the reason why CVS acquired Aetna for almost $70 billion a few years ago. Still, Amazon’s entrance doesn’t immediately spell doom for CVS. Amazon doesn’t immediately thrive in every industry it touches.
For CVS, analysts expect modest growth this year, with 4.3% revenue growth and 5% earnings growth. At the time of this writing, shares trade at just 9.3 times this year’s earnings. That’s dirt cheap, especially for a company with a 2.9% dividend yield.
Bonus pick: If you want even cheaper with more yield, consider Walgreens Boots Alliance (NASDAQ:WBA). Shares trade at 8.3 times this year’s earnings and pay out a 4.7% dividend yield.
Some investors will see FarFetch on this list and think, “no way, this is not one of the undervalued stocks to watch!”
I disagree. FarFetch is a great company with excellent growth. But investors seemingly have trouble deciphering this business as a tech play rather than a retail play. While FarFetch does operate within retail, it does so from a technological perspective. As a result, I think the market continues to undervalue this stock.
Just look at this growth, regardless of the fact that we’re in a global pandemic due to the novel coronavirus. Analysts expect 60% revenue growth this year and 33% growth next year. Two-year estimates are hard to make with any accuracy, but as of now, consensus estimates sit at $2.77 billion.
Put it all together and this stock trades at about 8.5 times 2021 revenue estimates.
The caveat here is, buy the dip. Shares have more than doubled since the start of November, rallying in 19 of the past 21 trading sessions. Let’s wait for a discount to buy this name.
The love for Pfizer continues to wane back and forth, making this an ideal candidate for our undervalued stocks watchlist.
Pfizer shares spiked 15% on Nov. 9, a move which came on news of the company’s Covid-19 vaccine. However, the stock quickly faded more than 12% from those highs in the days after the announcement.
As time goes on though, Pfizer keeps plugging away. Its vaccine is set for distribution this month. As such, its stock price has not only continued higher, but it’s taken out its post-vaccine high from Nov. 9.
Shares have rallied in five of the past six sessions and if we get a pullback, investors may want to size this one up.
Even after the big run, the stock still pays a dividend yield near 3.6%. Further, at the time of writing, the stock trades at a rather modest 14 times this year’s earnings estimates. This year’s growth is nothing to write home about, with earnings and revenue estimates calling for a decline of 4% and 7%, respectively.
However, Pfizer is in the last quarter of its fiscal year. Next year, revenue estimates call for flat growth and a modest 2% increase in earnings. I think 2021 will be a better year for Pfizer than 2020. Paired with the vaccine and Pfizer could have upside next year.
Bristol-Myers Squibb (BMY)
Another healthcare play, Bristol-Myers Squibb is definitely a name to dig a bit deeper on.
Bristol-Myers stock trades at just under 10 times this year’s earnings estimates. The stock also kicks out a 2.9% dividend yield, which is more than three times the size of the 10-year Treasury payout.
Why like this company? First, Bristol-Myers was a high-quality company when it was a standalone entity. However, after it acquired Celgene, it bought a magnificent business.
Celgene had strong growth and still has a long runway with its treatments. However, it was being mismanaged in the lead-up to Bristol-Myers’ acquisition, thus it had a low valuation.
Since that acquisition, Bristol hasn’t really seen its valuation climb either. Under the right management now, this name has serious potential. And if Wall Street doesn’t recognize that, then investors can buy this stock with a sub-10 price-to-earnings (P/E) ratio, a ~3% dividend yield and double-digit earnings growth.
In other words, you can buy much worse than Bristol-Myers Squibb.
This is perhaps the most difficult name on this list of undervalued stocks. Typically, Apple does not trade with this high of a valuation if we’re looking exclusively at its historic P/E ratio. But life in the investment world goes much further than this simple measure.
Apple trades at about 30 times this year’s earnings estimates, as it recently began its fiscal 2021 year.
When Apple was just selling hardware it was a lucrative business, but it had its limitations. Mainly in regard to profitability. In fiscal 2020 (which just ended), Apple’s hardware business generated gross margin of 31.5%. Its Services business generated gross margins of 66%, more than double the hardware side.
Further, its Services business grew revenue 16.1% last year, making up roughly one-fifth of the company’s total revenue.
In simple terms, Apple’s Services revenue is: Growing faster than its hardware, generates more than twice the amount of gross profit, and is making up a larger and larger portion of overall revenue.
In other words, Apple is trading with a higher valuation because it deserves a higher valuation!
That’s not to mention its product refresh cycle, new 5G iPhone and robust balance sheet. It also doesn’t include the forecasts for double-digit earnings and revenue growth this year or the fact that it held up just fine during a pandemic.
Morgan Stanley (MS)
The banks have done a decent job holding up from a business perspective when it comes to the coronavirus. That’s mainly as the economy has done better than expected. With that said, many of the stocks have really taken a beating.
However, Morgan Stanley isn’t like traditional lending banks. It makes most of its money from trading revenue and deal-making. With a number of M&A deals washing up lately and with some big IPOs on the way — DoorDash and Airbnb should both top $30 billion — it appears that Morgan Stanley belongs on our undervalued stocks list.
The company is forecast to grow earnings and revenue by 9.8% and 9.5% this year, respectively. At 11.2 times earnings, I think Morgan Stanley is worth a look. It’s one of the only big bank stocks to be trading at new 2020 highs, which is a feat in itself. It pays a respectable dividend yield of 2.2% as well.
Lastly, it remains flat-out underestimated. In Q2, the bank generated sales of $13.41 billion. That was up more than 30% year over year and beat expectations by more than $3 billion. Last quarter, revenue of $11.66 billion beat expectations by another $1.04 billion.
I think Morgan Stanley can continue to deliver, especially if bulls can get this name on a dip.
On the date of publication, Bret Kenwell held a long position in AAPL, BABA and BMY.