The longevity of the U.S. bull market for over a decade has been music to investors’ ears. Meanwhile, investors are wondering if valuation levels of many Wall Street darlings can be sustained. As a result, investors, who want to diversify their portfolios, are looking for shares that offer value. Therefore, today I’ll discuss seven undervalued stocks to buy before the bounce.
Value and dividend investing styles lagged in recent years. On the other hand, growth and momentum clearly outperformed. Yet, many analysts point out that the price gap between growth and value shares could well decrease in the rest of the year.
Although they seem hard to find, there are nonetheless many high-quality businesses that do not have frothy valuation levels. They also have clean balance sheets, robust brands, and strong competitive positions. On a final note, most investors realize value investing usually needs patience.
Where will equities go next? Up or down? Sideways? It is not quite possible to give a correct answer, at least in the short run. A better approach might be to build a long-term diversified portfolio that also has exposure to value shares. Here are seven undervalued stocks to consider:
- Ford Motor (NYSE:F)
- International Paper (NYSE:IP)
- iShares Russell 1000 Value ETF (NYSEARCA:IWD)
- Lakeland Industries (NASDAQ:LAKE)
- Lennar (NYSE:LEN)
- Molson Coors Beverage (NYSE:TAP)
- Sprouts Farmers Market (NASDAQ:SFM)
Undervalued Stocks: Ford Motor (F)
First on the list of undervalued stocks to buy, Legacy auto manufacturers have been increasing their commitment to the electric vehicle (EV) segment. Dearborn, Michigan-based Ford Motor is one of them. In addition to a full line of Ford cars, trucks, and sport-utility vehicles (SUVs), it also manufactures Lincoln luxury vehicles. Management also has ambitious plans to become a leading player in EV sales.
Ford reported fourth-quarter and full-year results in early February. Revenue fell 9% to $36 billion due to lower sales volume amid the novel coronavirus pandemic. However, Ford managed to offset this with higher net pricing and a diverse product mix. Adjusted EBIT margin increased to 4.8%, up from 1.2% a year ago.
GAAP net loss was $2.8 billion, compared to net loss of $1.7 billion in the prior year quarter. Adjusted diluted EPS was 34 cents. A year ago, it had been 12 cents. Adjusted free cash flow came in at $1.9 billion.
“The transformation of Ford is happening and so is our leadership of the EV revolution and development of autonomous driving,” CEO Jim Farley said recently. “We’re now allocating a combined $29 billion in capital and tremendous talent to these two areas, and bringing customers high-volume, connected electric SUVs, commercial vans and pickup trucks.”
F stock’s forward P/E and P/S ratios at 10.45 and 0.36, respectively. Year-to-date (YTD), the stock is up more than 33%. The company’s shares could still appeal to investors who are looking to invest in the EV space without paying high valuations. On a final note, management axed the dividend in 2020 during the early weeks of Covid-19. Now, many shareholders are hopeful that Ford will re-introduce the dividend in the coming quarters.
International Paper (IP)
Memphis, Tennessee-based paper and packaging group International Paper has operations worldwide. Its segments include industrial packaging, global cellulose fibers, printing papers and consumer packaging.
On Feb. 4, the company announced full-year and fourth-quarter 2020 results. Net sales for the quarter were $5.24 billion, compared to $5.50 billion in Q4 2019. Quarterly net earnings and EPS came at $153 million and 39 cents per diluted share. A year ago, the metrics had been $165 million or 42 cents per diluted share. Finally, free cash flow for the quarter stood at $695 million.
Analysts noted the strength in packaging products. However, paper sales declined.
“In 2020, we returned $800 million to shareholders and reduced debt by $1.7 billion,” CEO Mark Sutton said. “As we enter 2021, we anticipate continued strong demand for corrugated packaging and pulp and are poised to grow earnings.”
IP stock’s forward P/E and P/S ratios are 15.34 and 1.09, respectively. YTD, the stock is up 14%. The company’s dividend yield is about 3.6%.
If you are looking for a global old-school industrial giant that generates significant free cash flow, you need to keep the shares on your radar. Potential investors would find better value around $52.50.
Undervalued Stocks: iShares Russell 1000 Value ETF (IWD)
Our next choice is an exchange-traded fund (ETF), namely the iShares Russell 1000 Value ETF. It invests in large- and mid-capitalization U.S. businesses that fund managers judge to be undervalued relative to peers. IWD, which has 851 holdings, tracks the returns of the Russell 1000 Value Index.
The fund started trading in May 2000 and currently has 857 holdings. Net assets stand around $54 billion.
As far as sector weightings are concerned, financials leads the ETF with 20.42%, followed by industrials (13.67), healthcare (12.78%) and information technology (9.45%). The top 10 names have approximately equal weights and make up around 17% of net assets. Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B), JPMorgan Chase (NYSE:JPM), Johnson & Johnson (NYSE:JNJ), and Walt Disney (NYSE:DIS) head the roster.
IWD, which is up about 14% in YTD, hit a record-high in mid-April. Despite the recent gains, interested investors might want to keep the fund on their radar. It is a stable dividend payer with blue-chip stocks. It’s dividend yield is 1.7%, and the ETF has an expense ratio of 0.19% per year.
Lakeland Industries (LAKE)
2020 became the year when personal protective equipment (PPE) was important for individuals and businesses. Decatur, Alabama-based Lakeland Industries manufactures and sells protective clothing for the public and industry both in the U.S. and overseas. The pandemic meant a boost for the company’s operations.
On April 15, Lakeland released Q4 and full-year results. Net sales for the quarter was $36.9 million, up 31% YoY. Full-year revenue was $159 million, up 47% YoY. Q4 net income was $7.9 million, increasing 658% YoY. Net income for the year was $35.1 million, versus $3.3 million a year ago. Diluted EPS for the quarter was 96 cents. For the year, it was $4.31. As of Jan. 31, 2021, free cash flow was $42.3 million, an increase of 961% YoY.
“We did not let the crisis go to waste,” CEO Charles D. Roberson said. “We used it to our advantage as a catalyst for transformation. Now, as we enter fiscal 2022, Lakeland has a new roadmap to drive top line growth at improved profit levels, while meeting the needs of our growing customer base, optimizing our manufacturing and supply chain, and deploying our substantial and growing capital base to deliver solid returns for shareholders.”
LAKE stock’s forward P/E and P/S ratios are 15.17 and 1.40, respectively. Over the past 52 weeks, the shares have returned about 4%. Going forward, as the economy opens up further, industrial users are likely to rely on protective clothing, helping make this an undervalued stock to buy.
Undervalued Stocks: Lennar (LEN)
Despite various economic uncertainties posed by the pandemic, there has been a steady growth in demand for new homes. Miami, Florida-based Lennar is the largest homebuilder stateside in terms of sales, with 2020 consolidated revenues of $22.5 billion. Lennar’s financial-services segment also provides mortgage financing and related services to homebuyers.
The company announced its Q1 2021 results in mid-March. Quarterly revenue grew 18% YoY and reached $5.3 billion. Meanwhile, the company’s backlog increased 32% YoY and reached $6.5 billion level. Net earnings and diluted EPS jumped both by 150% YoY and stood at $1 billion and $3.20, respectively. The company ended the quarter with $2.4 billion in cash.
“The housing market has proven to be resilient in the current environment and we expect it to continue to be a significant driver in the recovery of the overall economy,” CEO Stuart Miller said. “As we look ahead to our second quarter, we expect to deliver approximately 14,200 – 14,400 homes (vs. 12,314 home deliveries in Q1 2021) while we expect homebuilding margins to remain at 25.0% despite rising material and labor costs.”
LEN stock’s forward P/E and P/S ratios stand at 10.20 and 1.40, respectively. So far in the year, the shares are up about 33%. Potential investors could regard a dip toward the $95 level as a better entry point. Analysts highlight that low interest rates, restricted housing supply, and pent-up demand from different segments of the population will continue to provide tailwinds for the housing stocks.
Molson Coors Beverage (TAP)
Golden, Colorado-based Molson Coors Beverage markets a range of beer brands, including Carling, Coors Light, Miller Lite, Molson Canadian and Staropramen, as well as craft and specialty beers. It is one of the largest beer producers worldwide. In addition, TAP has a partnership with the cannabis group Hexo (NYSE:HEXO).
Molson Coors reported results for the 2020 fourth quarter and full year on Feb. 11. Net sales decreased 8.3% in constant currency to $2.3 billion. Declines in Europe and Canada due to lockdowns were the main reason behind the fall in revenue. Non-GAAP earnings per share (EPS) was 40 cents, a decline of 60.8% YoY. Additionally, free cash flow was $1.3 billion for the twelve months in 2020.
“We built on the strength of our iconic core and in the second half of 2020, we achieved a record high portion of our U.S. portfolio in above premium products,” CEO Gavin Hattersley said. “We expanded beyond the beer aisle and we set the stage to build our emerging growth division into a $1 billion revenue business by 2023.”
Investors noted its two top brands, Miller Lite and Coors Light, have high margins and contribute to most of the operating profit. As economies open up, on-premise sales levels are likely to improve substantially. Forward P/E and P/S ratios stand at 13.52 and 1.19, respectively. The company might reinstate the dividend in the coming months. Long-term investors might consider buying the dips.
Undervalued Stocks: Sprouts Farmers Market (SFM)
Grocery stores benefited from the pandemic as many of us spent more time at home. The Phoenix, Arizona-based Sprouts Farmers Market is a specialty grocery store, offering health-oriented products such as organic, plant-based and gluten-free items. The company operates more than 360 stores in 23 states. The company went public in 2013.
In late February, it announced Q4 and full-year metrics. Q4 net sales of $1.6 billion meant a 17% increase YoY. Full year net sales was $6.5 billion, up 15% YoY. Q4 adjusted net income was $70 million, an increase of 119% YoY. Full year adjusted net income was $294 million, up 96% YoY. Finally, adjusted diluted EPS for Q4 was 49 cents, up 81% YoY. Adjusted diluted EPS for the full year was $2.39, an increase of 91% YoY.
“In 2020, we generated record earnings and cash flow from a 15% increase in sales while absorbing costs associated with a 340% increase in ecommerce sales, paying record bonuses to our frontline team members, and opening 22 new stores,” CEO Jack Sinclair said.
SFM stock’s forward P/E and P/S ratios are 14.62 and 0.49, respectively. The shares increased over 34% since the start of the year. A potential decline toward $25 or even below would improve the margin of safety. Management has plans to expand the brand in this niche market further.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.