In a sense, adding undervalued stocks to one’s portfolio is the ultimate contrarian move. That’s simply because what is contrary is inherently unpopular. It is often en vogue to move toward flashy, attractive growth stocks. The market bore witness to this phenomenon over the past year. Growth stocks garnered massive attention and investment evidenced by the rise of electronic vehicles (EVs) particularly, and speculative investment vehicles including special-purpose acquisition companies (SPACs).
The truth is that it can be harder to criticize growth stock investment. When growth stocks catch on, those with positions therein tend to look brilliant. Undervalued stocks on the other hand catch a lot of flak for being boring and overly conservative. So the argument here is that in choosing to seek value now is a contrarian move.
I probably can’t convince readers that undervalued stocks are sexy, but it is important to consider stability. Value stocks weather the ups and downs better than their growth counterparts.
And in the turbulent economy that we’re all dealing with it is arguably more important than ever to find stability. That said, let’s get into a few undervalued stocks that really deserve your attention right now. If these stocks are truly undervalued, then the market is wrong and investors will look very smart indeed.
- Alibaba (NYSE:BABA)
- KeyCorp (NYSE:KEY)
- Barrick Gold (NYSE:GOLD)
- Intel (NASDAQ:INTC)
- eBay (NASDAQ:EBAY)
- Verizon (NYSE:VZ)
- Toyota (NYSE:TM)
Undervalued stocks: Alibaba (BABA)
I’ve been keen on Alibaba over the last few weeks in spite of, or perhaps because of the trouble it is facing. The Chinese government levied a record $2.8 billion fine against one of its own dominant e-commerce forces in Alibaba on April 9. Shares jumped up immediately following the news. That seemed odd, but the logic was that the worst was behind the company with a $2.8 billion fine, a mere drop in the bucket given the company’s revenues. Share prices have come back down and are now at the same levels they were prior to the fine being announced.
That’s why I’d argue that now represents a moment in which Alibaba is undervalued and attractive. Investors who look at Alibaba from the perspective of a traditional value determinant like price-to-earnings (P/E) ratio may miss the point. After all, BABA stock carries a P/E ratio of 25.6, worse than about 57% of competitors.
Make no mistake though, Alibaba share prices will rise again taking that P/E ratio higher. But it won’t matter because Alibaba is essentially one of a kind. That’s why I’d argue that its P/E ratio is somewhat irrelevant. The company’s revenues increased nearly 30% in 2020, which is far more important than temporary headwinds.
A few weeks ago, on April 20, KeyCorp reported first-quarter earnings. Fortunately, they were strong. The company announced that net income attributable to shareholders increased to a record $591 million in the quarter. KeyCorp reported EPS of 61 cents per share. Both of these figures exceeded those from the previous quarter at $549 million net income, and a 56 cent EPS.
That difference was strong in and of itself. However, looking back at the year-over-year growth tells an even more compelling story. In Q1 2020, KeyCorp reported a net income of $118 million and a corresponding EPS of 12 cents.
While the growth is undeniably a good thing, it does represent a bit of a double-edged sword for investors currently. KEY stock now trades at a higher price than in the past few years. Its P/E ratio puts it in the middle of the pack relative to other banks. I’d ignore that along with the historically high price as well. The company’s growth will attract investment as more learn about it. Those who establish a position now will benefit from that.
Undervalued stocks: Barrick Gold (GOLD)
To be completely honest, Barrick Gold is pretty much fairly valued. Investors who consider the company’s P/E, price-to-book (P/B), and price-to-sales (P/S) ratios — three common value metrics — will see it trades where it should.
What then makes it “undervalued?” That is, what about this stock is the market missing, and why should it actually be trading higher? The company’s name, stock ticker, and business sector should make that obvious. GOLD stock is a play against inflation and a bet that the shiny commodity metal can serve as a buffer.
Barrick Gold is not a household name, but it is a major force in the gold sector. It produced 4.76 billion ounces of gold in 2020. That was second only to Newmont (NYSE:NEM) and its 5.91 billion ounces.
The company is debt free. That’s a clear financial strength for any company to possess. From a profitability perspective, Barrick Gold really deserves a bit more love. Its operating margin, net margin, return on equity, and return on assets all rank well above the 80th percentile of metals and mining peers.
Barrick Gold also either owns, or has interest in 6 of the 13 mines in the world that have the capacity to produce 500,000 ounces of gold annually at below average operating costs. Even if investors weren’t looking at gold in light of inflationary concerns, Barrick Gold would be worth strongly considering.
In the summer of 2020 the main headline regarding Intel was that it had been overtaken by Nvidia (NASDAQ:NVDA) as the world’s most valuable chipmaker. According to pundits, Intel was dead in the water and smart investors ought to pile into Nvidia or AMD (NASDAQ:AMD).
The truth is, Nvidia remains the more valuable company from a market capitalization perspective. While Intel’s market cap sits at $223 billion, Nvidia is worth $356 billion. AMD sits at a relatively small $93 billion in market cap.
However, the fact also remains that investors are simply willing to pay more, much more, for a dollar of Nvidia’s earnings than they are for a dollar of Intel’s earnings. Nvidia’s P/E ratio sits at 82.7, while Intel carries a very low 12.96 P/E ratio.
Yes, Nvidia has cornered the market for desktop gaming CPUs and GPUs. However, Intel remains a force to be reckoned with and the true contrarian will disregard the negative headlines and consider its chances moving forward.
Does it really make sense to believe that Intel will stay down for the long term? No.
Undervalued stocks: eBay (EBAY)
eBay seems to be perpetually undervalued. Investors who look back at its performance over the past few years will see that it certainly hasn’t received the love that some of its more prominent ecommerce peers have. I’m largely referring to Amazon (NASDAQ:AMZN) here. While this isn’t perhaps fair, the two firms are intertwined as early American e-commerce success stories.
It’s clear that investors are much more interested in AMZN stock than EBAY stock based on the traditional P/E ratio as a measure of value. Amazon sits at about 62.57, and eBay, 16.21. Thus, Amazon is about four times as attractive. Anyway, enough of the comparison because eBay is attractive in its own right.
Recently announced earnings validate that idea. Revenues increased by 42%, to $3 billion in Q1. Further, eBay saw strong growth in its customer base. Annual active buyers grew 7%, to 187 million customers. And annual active sellers grew 8%, to 20 million. eBay expects that its revenue figures in Q2 will be similar to the $3 billion it recorded in Q1. If that is indeed the case, eBay will grow on a Q2 year-over-year basis of about 9%.
So, if eBay continues on this trajectory, it’s hard to imagine that investors won’t soon give it some love.
There’s a lot for investors to like about Verizon as an underappreciated stock. From a high-level perspective the company looks reasonable as a 5G play. The markets have hyped up 5G buildout in the U.S., and indeed there will be massive windfalls to be had. Verizon is almost always a part of that conversation as a data provider consumers know as a household name.
Earlier in the year Verizon made a heavy investment to secure its spot as a leader in the 5G revolution. The U.S. government held a spectrum auction in February in which $81 billion worth of airwave rights were sold. Verizon spent $45.5 billion in that auction, securing midrange spectrum rights.
Part of the reason Verizon was so willing to spend so much was the T-Mobile (NASDAQ:TMUS) Sprint merger in 2020. Verizon simply understood the land grab opportunities present in the auction.
This win represents a big part of the narrative behind a Verizon investment. Yet, VZ stock remains discounted. Its P/E ratio of under 13 is quite low. Roughly three-quarters of the telecommunications industry can garner more money for a dollar of their earnings. But that’s the contrarian play here. Investors who follow the narrative that Verizon is undervalued will also be purchasing a stock with a nice dividend. Verizon’s quarterly dividend carries a 4.22% yield at 63 cents.
Undervalued stocks: Toyota (TM)
I’d be willing to bet that most readers have a certain image of Toyota. The brand is associated with reliability and longevity. I’d argue that it’s one of the best companies in the world and that its conservative stance is attractive. However, conservative companies which build vanilla vehicles tend not to inspire the market.
That’s fine. It’s a good part of the reason that Toyota carries P/E and P/B ratios that are lower than two-thirds of the automotive sector.
I’d argue that Toyota ticks many of the boxes that automotive investor dollars have flooded into of late. Yet, the market hasn’t caught on to the value Toyota presents.
Toyota announced it will have 70 electrified vehicles in its lineup by 2025. Of course EVs were all the rage in 2020, much of which has settled. But Toyota is an established name in EVs and it’s safe to say that it will be producing EVs for decades to come. By that time, a good number of 2020’s SPAC EVs will be dustbin relics.
Another often discussed automotive technology is solid state EV batteries. While QuantumScape (NYSE:QS) garnered massive headline space recently, Toyota has quietly plodded along with its own battery development. There is good reason to believe that it will bring a solid state battery EV to market before any other manufacturer does. I believe that Toyota remains undervalued due to its staid, conservative nature. Perhaps it will pay to view it differently.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.