Lately, the markets have been somewhat choppy. That’s partly due to the emergence of speculative activity with tech companies, initial public offerings (IPOs), special purpose acquisition companies (SPACs) and more. On top of that, there has also been a frenzy of activity around Reddit stocks like GameStop (NYSE:GME) and AMC Entertainment (NYSE:AMC). So, if the markets are about to get tougher, it might be time to consider undervalued stocks.
There are plenty of those to choose from. The fact is that the top-performers in this market have been limited to a fairly small subset of names.
Now, when it comes to undervalued stocks, there’s always the fear that they will continue to languish. That’s why it’s better to focus on undervalued companies that have growth opportunities as well as attractive dividends.
So, what are some of best undervalued stocks right now? Let’s take a look at these seven picks:
- Allstate (NYSE:ALL)
- NCR (NYSE:NCR)
- UBS (NYSE:UBS)
- Morgan Stanley (NYSE:MS)
- AT&T (NYSE:T)
- Lockheed Martin (NYSE:LMT)
- CVS (NYSE:CVS)
Undervalued Stocks to Buy: Allstate (ALL)
With the Covid-19 pandemic, Allstate’s business has done quite well. This is mainly due to the reduction in driving, which has meant fewer accidents.
Of course, the company did provide rebates for customers. But even with this, Allstate’s performance has been robust. For instance, in its latest quarter, net income spiked by 52% to $2.6 billion.
But what might happen to this company when the pandemic fades away? It seems like there will be high levels of remote-work even after the outbreak. Businesses have realized that working from home can be a much better alternative in some cases — for instance, in terms of lower real estate costs.
However, when it comes to ALL stock, it’s not down-and-out. For one, the valuation is definitely attractive. Right now, this name’s forward price-to-earnings ratio is only 8.2 times. Plus, this pick of the undervalued stocks has a dividend yield of 3.13%.
Next on this list of undervalued stocks is NCR, one of the oldest technology companies in the United States. Founded in 1884, its roots go back more than 130 years.
That said, though, NCR stock has been mostly a disappointment of late. Over the past eight years or so, the return has been essentially zero.
However, this has made the company one of the most undervalued stocks on the market. And it has some potential catalysts in store to get things back on track.
For example, the company has been in a transition to subscription revenues, which will provide more stability. Additionally, NCR has been investing heavily in next-generation approaches like cloud computing, analytics and artificial intelligence (AI).
The company has also been doing some dealmaking. Some of the agreements have been small, like its acquisitions of Terafina — a developer of systems for “customer account opening” — and Freshop — an online ordering platform for retailers. But the most impactful deal on NCR’s horizon is its proposed acquisition of Cardtronics (NASDAQ:CATM).
This deal should boost NCR’s market share in banking and also allow for nice “cost synergies.” By the end of next year, its run rate for expense reductions is poised to range from $100 to $120 million.
For the past five years, UBS has been one of the more undervalued stocks. However, its business continues to do quite well. And now with the global bull market in full force, UBS has benefited substantially.
Just look at the company’s latest quarter. Net profits more than doubled to $1.7 billion. Plus, for the most part, the pandemic has had little impact on its business. That’s because the company focuses primarily on wealthy clients and large businesses.
Granted, there is the nagging issue of the CEO, Ralph Hamers. Regulatory authorities in the Netherlands have launched an investigation against Hamers for possible money-laundering charges. But these accusations come from when Hamer was at ING Groep (NASDAQ:ING) and a settlement had been previously reached back in 2018.
So, yes, these charges are going to be a distraction and could take a while to resolve. However, when it comes to UBS, the company looks solid and will probably be exploring acquisitions in Europe to bulk up its operations. UBS stock is also fetching a forward price-to-earnings multiple of 11.53. Its dividend yield is 2.32%.
Morgan Stanley (MS)
When CEO James Gorman of Morgan Stanley came on board in early 2010, the prospects for the firm looked grim. Back then, the company’s losses were enormous and the economy was sputtering.
But Gorman was able to pull off a great turnaround. The result? Morgan Stanley is very much in growth mode again. For the past year, revenues rose by 16% to $48.2 billion. In addition, profits jumped to $11 billion, an increase of 22%. Basically, there has been strength across all of the company’s business lines.
One of the keys to this growth story is an aggressive acquisition strategy. For example, MS has recently purchased E*Trade and is poised to acquire Eaton Vance (NYSE:EV).
Despite all of this, though, MS stock is still one of the undervalued stocks. Consider that another reason to buy in. Right now, this name has a forward price-to-earnings ratio of only 13.25 and a dividend yield of 1.84%.
Over the years, AT&T has been transforming itself with large acquisitions. But its dealmaking has been mixed. For example, the company’s $67 billion-plus purchase of DirecTv has turned out to be a big dud. Now AT&T is looking to unload the asset at a substantial loss.
On the other hand, though, AT&T’s $85.4 billion acquisition for Time Warner was a winner. The deal allowed for a boost in cash flows but also provided a growth opportunity in streaming. Now the company’s entire HBO platform — both HBO and HBO Max — has over 41 million subscribers.
In the meantime, AT&T’s mobile business continues to throw off strong cash flows. Plus, T should also experience growth from 5G. That will allow the company to tap into opportunities like the Internet of Things (IoT), edge computing, AI and the cloud.
Regarding T stock, it is definitely cheap. Right now, this pick of the undervalued stocks has a forward price-to-earnings multiple at 9.25 times. The dividend is a hefty 7.17%.
Lockheed Martin (LMT)
Lockheed Martin is the next entry on this list of undervalued stocks. With the new Joe Biden Administration, the markets have had concerns about defense spending. Budget deficits are at enormous levels, so it seems inevitable that there will be some cutbacks.
However, there should still be a variety of defense contractors that will do well. This is so long as they have scale as well as a focus on next-generation systems.
Lockheed Martin — the largest defense contractor in the U.S. — fits that bill. Of course, the company is mainly focused on the massive F-35 jet program. But Lockheed still has a wide array of segments that look promising, including missiles and fire control, mission systems and more.
LMT’s space segment may be the most interesting, though. This segment posted net sales of $11.9 billion in 2020 (Page 5). Lockheed is also ramping up its dealmaking in the sector, like with its recent proposal to acquire Aerojet Rocketdyne (NYSE:AJRD), a firm that develops launch systems and hypersonic technologies.
Finally, for LMT stock, the valuation is attractive, too. This pick currently has a forward price-to-earnings multiple of 12.74 and a dividend yield at 3.1%.
The last name on this list of undervalued stocks is CVS. This company’s distribution footprint is massive. In fact, according to the company, about 70% of the U.S. population lives within three miles of one of its pharmacies.
But CVS also has a diversified business. For instance, it has the Rx benefits management segment — which handles as much as 2 billion pharmacy claims — as well as a thriving Medicare line (the company actually owns Aetna).
On top of those pieces, the rollout of Covid-19 vaccines will certainly be a big positive for CVS. Not only will that generate more revenues for the company, but it will also help increase the customer count.
So, it’s no surprise that Wall Street has been buying up CVS stock. Since October, shares have gone from $56 to as high as $77. Right now, the stock is around the $70 level.
Yet, its valuation is still reasonable. CVS has a forward price-to-earnings ratio of 9.47 and a dividend yield at 2.84%. The company has also paid a dividend for 96 consecutive quarters.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s.