On the surface, it appears as though investors searching for undervalued stocks face a daunting task. The S&P 500 index trades at 27.69x earnings, which isn’t exactly cheap.
Further muddying the waters for bargain hunters is that until very recently, value stocks long lagged growth stocks. Said differently, for more than a decade, it was far more rewarding to embrace expensive equities rather than undervalued stocks.
There are two other issues vexing investors looking for good deals. First, as the past decade proves, value can remain out of fashion for a significant stretch of time, leading to sub-par returns for cheap stocks.
Second, traditional metrics such as price-to-book and price-to-earnings ratios aren’t always as reliable as they once were due to an evolving economy that’s increasingly technology-intensive. Old-school valuation metrics don’t cover elements such as research and development spending and other technology-based expenditures necessary for some companies to gain market share in today’s market climate.
So it’s possible that some companies that look expensive based on P/E ratios actually aren’t as pricey as they appear. With those factors in mind, here are some undervalued names investors may want to consider today.
- Century Casinos (NASDAQ:CNTY)
- Kohl’s (NYSE:KSS)
- Pfizer (NYSE:PFE)
- CVS Health (NYSE:CVS)
- Wynn Resorts (NASDAQ:WYNN)
- Altria (NYSE:MO)
- Johnson & Johnson (NYSE:JNJ)
Century Casinos (CNTY)
With a market capitalization of $193.41 million as of Nov. 27 and higher by almost 45% for the month ending on that day, Century Casinos has all the trimmings of a small-cap growth stock, not a value play. Small-cap growth is the accurate classification for this regional gaming company, but there is value to be unearthed here.
In fact, there are multiple levers of value with CNTY stock. First, regional casinos are already on the mend and recovery for this properties is materializing far more rapidly than in Las Vegas. Good news: Century has no Nevada properties. Second, one of Century’s primary U.S. markets is Colorado, which is home to one of the fastest-growing sports betting markets in the country. Add to that, voters in that state recently approved elimination of limits on table game bets at the state’s casinos, which should drive a higher end clientele in the future.
Third, Century has a reputation for prescient acquisitions and has the balance sheet to go shopping next year and it likely will.
Finally, one analyst who covers the stock says the name could get to a 4x enterprise value/EBITDA in 2022, implying a rise to $19, which would still be steep discount to the 9.1x EV/EBITDA on comparable names.
Broadly speaking, it’s easy to be pensive about most brick-and-mortar retailers this year and the long-term outlooks owing
to the rise of e-commerce. Down 34.25% year-to-date, Kohl’s isn’t exactly allaying those concerns, but even after a 58.32% gain over the past months, KSS has legitimate value credentials.
Adding to the long-haul case for KSS stock is that the company sees the writing on the retail wall and is evolving into an e-commerce player in its own right, which should facilitate earnings momentum in a couple of years.
“Kohl’s has faced big challenges from the pandemic, but it produced about $4.5 billion in e-commerce last year and should benefit from problems of rivals like JCPenney,” according to Morningstar. “While Kohl’s has reported loss this year, it was consistently profitable before the pandemic, and we expect profits going forward. We forecast Kohl’s will earn over $3 per share in 2022.”
The retailer’s move this week to expand the beauty offerings in partnership with Sephora could be a real game changer.
Buoyed by its prominent role in the Covid-19 vaccine competition, in which it partners with BioNTech (NASDAQ:BNTX), Pfizer has ample momentum, gaining almost 11% over the past month after its vaccine showed a 95% efficacy rate in late-stage trials. The two companies recently filed plans with the Food & Drug Administration (FDA) for an emergency use authorization (EUA) designation and a decision on that matter could arrive on Dec. 10.
These days, PFE stock has the look of a novel coronavirus name, but there’s much more to the story. The company has a deep pipeline and one of the strongest balance sheets of any company in the pharmaceuticals space. Additionally, Pfizer has the capabilities to ward of generic and off-market competition via its recent Upjohn spinoff.
Beyond the Covid-19 vaccine, Pfizer’s pipeline includes treatments for cancer, heart disease and immunology — each of which has major market potential. The company is already an established vaccine player via its Prevanar vaccine, the dominant product for pneumococcal pneumonia.
With a dividend yield of 4.08%, a rich pipeline and a longer patent cliff than many rivals, Pfizer qualifies as a solid undervalued stock to wager on.
CVS Health (CVS)
CVS Health is a prime example of a healthcare name that’s being hampered by the pandemic. While it’s an essential retailer, the company’s brick-and-mortar business is suffering at the hands of Covid-19 and now there’s a new headwind: Amazon (NASDAQ:AMZN) is getting into the integrated pharmacy-services arena.
It’s easy for investors to overreact when Amazon forges into a new space previously dominated by older, slower-moving companies, but CVS has some avenues to stave off this new competition. Amazon has already owned PillPak for more than two years and that operation doesn’t really provide any services that customers can’t get at a CVS store. Bottom line: online orders only account for 20% of overall prescription drug sales.
Additionally, CVS has levers it can pull to bolster sagging earnings, including buying back stock, lowering interest obligations by retiring debt and more swiftly integrating the legacy pharmacy benefits business (PBM) with the medical insurance businesses it recently acquired.
But that pandemic impact may turn around for the pharmacy operator: CVS stock popped more than 3% yesterday after the company said would administer Eli Lilly’s (NYSE:LLY) experimental antibody treatment to Covid-19 patients in their homes and long-term care facilities via a government-back progam.
Wynn Resorts (WYNN)
Wynn Resorts is an undervalued stock in a classical sense. As of Nov. 27, the Encore operator has a market capitalization of $11.32 billion. Alone, that doesn’t qualify as deeply discounted, but here’s at least one reason why WYNN stock is inexpensive: real estate.
While many gaming companies don’t own all of the land on which they operate integrated resorts, Wynn does and the real estate of its five venues — Wynn and Encore in Las Vegas, Encore Boston Harbor and Wynn Macau and Wynn Palace in Macau — is likely worth at least, if not more than $11 billion.
Macau is Wynn’s most important, accounting for two-thirds of revenue and earnings in a normal operating environment. While the Chinese territory has been depressed by the pandemic, things are trending in the right direction in the fourth quarter, potentially setting the stage for an earnest resurgence in the world’s largest gaming center in 2021.
Something that would add more value here is if Wynn can push more deeply into iGaming and sports betting, something it’s doing via baby steps. With those being the growth areas of this industry, investors would likely tolerate an acquisition of some form or a more overt push by Wynn to bolster its in presence in those landscapes.
Admittedly, Altria has some of the hallmarks of a value trap. It’s got a whopper of a dividend yield, at 8.52%, and operates in a controversial, slow-growth industry that’s being disrupted. All that and earlier this year, the company had to write down its stake in electronic cigarette maker Juul to just $1.6 billion.
Still, the case for MO stock isn’t lost. It’s actually benefiting from the pandemic, which when you think about it, makes sense because folks are bored, lonely and stressed out — voids that smoking can, albeit temporarily, fill.
“Other factors tobacco firms cited include: reduced international travel, which has helped domestic sales in some countries, and tighter border controls, which reduced cigarette smuggling,” reported Reuters.
Altria is a steady dividend grower and with earnings poised to rise modestly this year, the payout looks safe despite the elevated yield.
Johnson & Johnson (JNJ)
Johnson & Johnson, a component stock of the Dow Jones Industrial Average, has coronavirus vaccine exposure like rival Pfizer with its “ENSEMBLE 2” vaccine that commenced Phase 3 trials last month, so there’s potential for an imminent catalyst JNJ stock.
Beyond the vaccine fray, there’s a lot to like with JNJ. It’s got a fortress balance sheet with one of the best dividend growth track records of any pharmaceuticals company. The company also has ways to augment pipeline and patent cliff issues via robust growth in its medical devices unit and steadiness in its consumer products division, which essentially acts as consumer staples unit within a healthcare company. Medical devices account for a third of JNJ revenue while pharmaceuticals chip in 50%.
With industry-leading immunology drugs Remicade, Stelara and Tremfya, as well as cancer drugs Darzalex and Imbruvica and some of the best free cash flow among healthcare equities, JNJ stock qualifies as undervalued at less than 16x earnings and less than 6x book value.
On the date of publication, Todd Shriber did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Todd Shriber has been an InvestorPlace contributor since 2014.