Recently, Goldman Sachs opined that “investors may be underestimating the negative impact of the coronavirus on corporate earnings.” Goldman sees high risk of a stock market correction, which is what brings undervalued stocks to mind.
I agree that the broader market valuations look stretched and that it makes complete sense to go to overweight stocks. If markets do correct, low beta undervalued stocks will protect the portfolio capital.
This column will discuss four undervalued stocks from the large-cap space. Besides being undervalued and looking good for upside, three of these stocks offer a healthy dividend pay-out and are low beta stocks.
Let’s take a deeper look into these undervalued names.
4 Undervalued Stocks: Lockheed Martin (LMT)
Without a doubt, LMT stock tops my list of undervalued stocks in the large-cap space. The stock has been an underperformer, having declined by 22% in the last year. Even as Lockheed Martin continues to report strong quarterly numbers.
For the current year, the company has guided for earnings per share of $26.15, which is mid-range guidance. Considering the stock price of $338, LMT stock is trading at a price-to-earnings ratio of 12.9. The S&P 500 index trades at a P/E of 40.0. Clearly, the stock is significantly undervalued and I expect a rally relatively soon.
In terms of fundamentals, the company closed fiscal year 2020 with a record order backlog of $147 billion. The company’s order backlog has increased steadily in the last few years. This provides clear revenue and cash flow visibility.
Lockheed Martin has also guided for operating cash flow of $8.3 billion for the current year. As OCF and free cash flows remain robust, dividends will sustain. LMT stock has a current annual dividend payout of $10.4. I will not be surprised if dividends increase in the coming years.
With minimal downside risk and significant upside potential, the stock is worth considering at current levels.
JPMorgan Chase (JPM)
In the last six months, JPM stock has trended higher by 37%. However, the banking stock remains undervalued at a P/E of 13.6. In addition to attractive valuations, JPM stock has a current dividend yield of 2.55%.
The pandemic-triggered economic slowdown was the key reason for JPM stock underperforming in FY2020. However, with economic expansion likely in the current year, JPMorgan is well-positioned for growth in the core business.
For FY2020, JPMorgan continues to report healthy numbers. Its decline in net interest income was offset by an increase in non-interest income. In particular, the corporate and investment banking division delivered strong growth. As the outlook for asset markets remains bullish, the segment will continue to report strong numbers.
Further, for the current year, it’s very likely that net interest income will witness a gradual recovery. This is a key trigger for more upside. From a fundamental perspective, the bank is well-positioned with $1.4 trillion in liquidity. Unlike the financial crisis of 2008-09, the banking sector has emerged unscathed.
Overall, JPM stock is attractively valued and I believe that the positive stock momentum is likely to sustain through the year. Fresh exposure can therefore be considered at current levels.
Undervalued Stocks: Altria (MO)
MO stock is also among the grossly undervalued stocks with the potential to be a performer in the coming quarters. At a P/E of 9.48, the stock is a screaming buy considering broad market valuations.
At the same time, MO stock offers a dividend yield of 7.9%. Importantly, dividends are sustainable even as the company is in a phase of business transformation.
Last month, Bernstein analyst Callum Elliott opined that the “tobacco stock is disconnected from fundamentals” and “regulatory winds could be shifting in the company’s favor.” Altria landed with an “outperform” rating from the analyst.
In terms of business transformation, Altria expects to expand its portfolio of U.S. Food and Drug Administration authorized non-combustible products (vapes, e-cigarettes and the like). As the portfolio of non-combustible products expands, a strong retail presence is likely to deliver results.
At the same time, the company’s core portfolio of combustible products has continued to deliver strong operating and free cash flows. For the first nine months of FY2020, the company reported a healthy operating cash flow of $5.8 billion. Therefore, Altria has strong financial flexibility for growth and to deleverage. At the same time, dividends are likely to sustain and potentially grow in the next few years.
Alibaba Group (BABA)
Considering the rally in e-commerce stocks in the last year, BABA stock has been a big underperformer. Competitor JD.com (NASDAQ:JD) surged 146% in the last year. On the other hand, BABA stock has moved higher by just 23.2%.
While there’s been much discussion over the Ant Financial debacle, I believe that the focus is likely to shift to the company’s growth. Earlier this month, Alibaba announced Q3 2020 results and there were several positives to note.
Alibaba Cloud continued to deliver strong top-line growth. In addition, the cloud business was adjusted-EBITDA-positive for the first time. It’s very likely that the cloud business will be a major cash flow drive in the next few years.
At the same time, the company’s core commerce business growth remained robust. For Q3 2020, top-line growth was 38% on a year-over-year basis. Core commerce growth in China and Southeast Asia will ensure that the business segment continues to deliver strong results.
Alibaba Group has also continued to report strong free cash flows. This provides the company with ample financial flexibility to pursue organic and inorganic growth. Financial resources will help the company invest in the innovation initiatives segment of the business.
Overall, BABA stock is undervalued at a P/E of 26. With strong top-line and earnings growth likely in the coming years, the stock is likely to be a value creator.
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 more than 1,500 stock specific articles with focus on the technology, energy and commodities sector.
