With the markets trading near all-time highs, it makes sense to go underweight on stocks that have surged in the last few quarters. However, I am not suggesting that investors increase their cash holding. Instead, the market continues to present attractive opportunities in bargain stocks.
Be it through sector rotation or a bottom-up analysis, it’s not difficult to find these discount names. For example, the banking sector has underperformed in the current year, but I would not be surprised if it bounces back in 2021.
So, this article will focus on four bargain stocks that are worth accumulating at current levels. I believe that these stocks can be outperformers in the next 12 months. At the same time, they are also solid picks for your core portfolio.
Here are some of the best undervalued names out there right now:
Bargain Stocks to Buy: Baidu (BIDU)
Over the past one-year period, BIDU stock has been an underperformer, having moved up by just 25%. While broad market valuations look stretched, this stock is trading at an attractive forward price-to-earnings-ratio of 12.92.
Baidu has been in a phase of business transformation and that’s the main reason for it being such a market laggard. However, I believe that its transformation strategy will likely deliver results in the coming year. That makes the stock a strong pick out of the bargain stocks.
In fact, this cloud business is likely to be another game changer challenging Alibaba (NYSE:BABA) in terms of cash flow potential. Last year, Baidu ranked as one of the top five providers in China’s cloud infrastructure market. But the company has been focusing on its AI services and AI platform to deliver growth, too. In the coming quarters, revenue from these segments will probably accelerate.
The company’s smart-living business can also deliver growth and value. After Series A financing, the business has a post-money valuation of $2.9 billion. In addition, data from the fourth quarter of 2019 suggests that Baidu is only behind Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) in the “smart speaker with intelligent personal assistant” market.
Plus, the company recently announced its acquisition of Joyy’s (NASDAQ:YY) “domestic video-based entertainment live streaming business in China.” The acquisition is for a consideration of $3.6 billion.
So, with these developments, I am bullish on BIDU. In the coming years, its business will be more diversified and revenue will probably grow in 2021. That could trigger meaningful stock upside from current levels.
Even with the extremely positive developments related to the Covid-19 vaccine, PFE stock has been subdued. Amidst some volatility, the stock is up just under 14% in the last one year. Now at a forward price-earnings of 13.5, Pfizer is a screaming buy and in my list of top bargain stocks. I expect a breakout from current levels.
For one, the Covid-19 vaccine from Pfizer and BioNTech (NASDAQ:BNTX) has already been approved by the U.K. for rollout this December. In turn, approvals from the United States and the European Union should follow. With a positive impact on revenue and cash flows likely through fiscal year 2021, PFE stock will should trend much higher in the near future.
Plus, from a long-term perspective, the company has a deep pipeline of new drugs. Pfizer expects 6% revenue growth CAGR through 2025 for “New Pfizer.” In addition, the company’s Biopharma revenue growth has been steady.
Besides this business growth, there are also two more reasons to like this name. First, the company has a dividend yield of 3.68% and its dividends are sustainable. Second, it has a low beta of 0.65. Given the fact that markets are now trading at all-time highs, it makes sense to have some exposure to low beta stocks.
MO stock is possibly among the best bargain stocks on the market right now. Currently, it trades at a forward price-earnings of 9. Additionally, the company has a current dividend payout of $3.44 and a dividend yield of 8.25%. So, this name is attractive for both bargain hunters and income investors.
Like others on this list, Altria has been in a phase of business transformation with a vision of transitioning adult smokers to a non-combustible future. The company has been expanding its portfolio of U.S. Food and Drug Administration (FDA) authorized non-combustible products. In the next few years, these initiatives will likely deliver results.
At the same time, Altria is also focused on brands like Marlboro for cash flow generation, even with the transition. Therefore, the stock’s dividends are safe, with MO continuing to generate strong cash flows.
It’s also worth noting that cannabis stocks have surged with the confirmation of President-elect Joe Biden. As the legalization of cannabis gains traction in the United States, Altria is positioned to benefit. In 2018, the company invested $1.8 billion in Cronos (NASDAQ:CRON). In the next five years, this bet on marijuana should deliver more strong returns.
Overall, MO stock is undervalued and its dividends are sustainable. Once the company’s business transformation starts showing results, the stock will be able to surge.
Teekay Tankers (TNK)
Last on my list of bargain stocks is Teekay Tankers. Among smaller companies, I like TNK stock at current levels. The stock — which trades at a forward price-earnings ratio of 4.88 — has declined by over 27% in the last six months. However, in the last one month, it has gained almost 25%. I believe that this positive momentum will sustain at current valuations.
But why has TNK been so depressed? One reason is the fact that its tanker spot rates have been weak of late. However, global GDP growth is expected to be up 5.2% for the coming year. This will translate into relatively higher demand for oil and, as a result, better spot rates for tanker businesses.
What’s more, despite the challenges, Teekay has been able to improve its balance sheet. Net debt has declined from $997 million in Q3 2019 to $502 million for Q3 2020. How? The company has a low break-even for tankers and that has boosted its cash position, even with lower spot rates.
That makes TNK attractive for the near future. As the company’s operating and free cash flow swells, this stock will likely trend higher.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.