As America heads into the Fourth of July weekend, the summer of 2021 is giving us reason to believe that we may be getting back to normal. Of course, vaccination levels are creeping upward and things are opening up. Yet, it doesn’t seem like things are fine everywhere.
To be sure, many are saying that “back to normal” will never be back. The characteristics of this new economy have major implications for investors.
One of those characteristics is that investment dollars are increasingly being directed to value plays. That means traditional value stocks as well as “undervalued” stocks that the market may not appreciate fully. Here are summer such picks head into the holiday weekend.
- Toyota Motor (NYSE:TM)
- Apple (NASDAQ:AAPL)
- Alibaba (NYSE:BABA)
- Amazon (NASDAQ:AMZN)
- Micron Technology (NASDAQ:MU)
- Taiwan Semiconductor Manufacturing (NYSE:TSM)
- Snap-on (NYSE:SNA)
Undervalued Stocks: Toyota Motor (TM)
Toyota Motor remains undervalued in my opinion. Based on its relatively low price-earnings ratio of 12.38, it is indeed undervalued compared with its automotive peers. Investors are willing to pay more for a dollar of earnings from 77% of automotive peers before Toyota.
So, TM stock is clearly undervalued based on that metric. But I think it’s also fair to argue that Toyota is undervalued as it relates to the EV sector. The narrative proffered by Andrew Hawkins, senior transportation reporter for website theverge, a few months ago was that Toyota was a luddite as it relates to EVs. It stated that Toyota had finally chosen to “get off its ass” when it announced 15 new battery-EVs by 2025 back in April.
Toyota isn’t known for being flashy or building vehicles that are anything other than smart, economical and reliable. I wouldn’t have expected it to do an about face and market itself as a car company that embraces the EV shift without careful consideration. That’s basically not what the company seems to do.
What I do expect is that Toyota will release EV models that are smart, economical, and reliable. In terms of automotive stock, Toyota is a bargain pick. It will always be conservative, but smart money often piles into undervalued and conservative picks like Toyota. Now there’s just a flashy reason to do so.
Given President Biden’s recent appointment of Lina Khan to the post of chair of the Federal Trade Commission, Apple may seem an odd pick for value now. After all, Khan is a vocal tech critic who will favor the five bills aimed at tech and recently introduced into the House of Representatives.
It could be argued that America’s tech darlings Amazon, Facebook (NASDAQ:FB), Alphabet (NASDAQ:GOOGL), and Apple are facing more trouble than ever before. The narrative is that the threat is more tangible now than in the past.
Maybe that’s true. It seems that there’s real motivation from both sides of the aisle in Congress this time. My thesis is that Facebook and Alphabet are in much more danger than Amazon and Apple, though.
The reason is simple: Facebook and Alphabet anger both Democrats and Republicans. Democrats might like to punish all four of the companies above, but Republicans are angrier at the media. They’re likely to punish Facebook and Alphabet, if given a chance.
That’s a long-winded explanation of why Apple is a smart contrarian bet right now given the rising anti-monopoly rhetoric.
Apple has had strong quarters recently, in fact some of its strongest ever. Yet, it was already down and has been for some time. Essentially, there are multiple headwinds keeping it down. I’m suggesting that as a buy-and-hold stock, AAPL is priced really attractively now.
Alibaba is, despite the wild year it’s had, only down a relatively modest 6.8%. Yet, there’s plenty of potential for BABA stock to rise for patient investors willing to get in now.
According to the value screener on Gurufocus, Alibaba is fairly valued at a price of $270 and is therefore trading at significantly undervalued prices right now. The problem is that there are multiple strong headwinds which are serving to keep it lower than it should otherwise be. That, of course, implies that value is there for those willing to look past those issues.
As I mentioned, there are some real issues at present. China set up Alibaba as its whipping boy and ultimately levied a $2.8 billion fine against it for anti-competitive behavior. And the country is running a fine-toothed comb through its economy in an attempt to understand what needs to be regulated moving forward. Cryptocurrency and fintech are squarely in the country’s crosshairs.
But Alibaba is still growing and it witnessed 35% revenue growth in 2020. There are emerging e-commerce challengers in China as well. But none replace Alibaba and most of the headwinds should dissipate in the future. That’s when the decision to buy in now will pay off for BABA stock investors.
I’ve already laid my cards down in regard to Amazon. I don’t think that it’s nearly as likely to be broken up as the other tech giants are. Like I said, Facebook and Alphabet made more enemies on both sides of the aisle.
I understand the argument that its private label merchandise has an unfair advantage on its marketplace. That’s just one argument against it. But it isn’t as if sellers on the platform weren’t aware of what was going on. Many profited handsomely while knowing that Amazon was farming their respective data and building products around it. I know several sellers who did so on the platform. I was one of them as well. Not that the private label argument is the crux of the argument, but users understand what Amazon is.
I tend to side with thinkers like Ted Mortonson, a tech strategist with Baird who looks at the latest developments as more of the same old calls to regulate tech.
The prospect of Amazon being broken up hasn’t affected the price of AMZN stock yet, but I suspect it will exert a negative force soon. The rhetoric will ratchet up as more and more people become aware of the proposed laws. That’s when it’ll make sense to buy in and get Amazon while it’s undervalued.
I’d like to borrow a thought from my InvestorPlace colleague, Bret Kenwell, as it relates to Micron’s value. Writing about Micron raising its outlook in the face of the microchip shortage, Kenwell noted that: “Consensus estimates call for nearly 26% revenue growth this year and an acceleration to nearly 32% growth next year. Further, expectations call for more than 90% earnings growth for both this year and next year.”
The narrative here that favors MU stock is that Wall Street reacts positively to Micron’s announcement. Micron’s share price is beaten down right now, that much is sure. It has shed nearly 20% of its value since mid-April in fact. But there’s massive potential based on the company’s outlook and that of Wall Street. Wall Street’s average target price for MU stock sits at $120.64 right now. That’s far above its current trading levels of just under $77. Even the lowest analyst projection puts MU shares at $90, a nice return based on current prices.
The current chip shortage is a challenge, but out of challenge there is massive opportunity. Based on price, there’s every reason to believe in Micron right now and capitalize on its value.
Taiwan Semiconductor Manufacturing (TSM)
At first blush, Taiwan Semiconductor Manufacturing might not appear undervalued. If we consider that it’s middle of the pack (50th percentile) based on its P/E ratio of 29.3, then this is true.
But if we consider how vitally important Taiwan Semiconductor Manufacturing truly is, its value becomes apparent. A recent article in The Wall Street Journal summarized the somehow-overlooked company well:
The company makes almost all of the world’s most sophisticated chips, and many of the simpler ones, too. They’re in billions of products with built-in electronics, including iPhones, personal computers and cars — all without any obvious sign they came from TSMC, which does the manufacturing for better-known companies that design them, like Apple and Qualcomm (NASDAQ:QCOM).
TSM’s value is doubly true in the context of the ongoing chip shortage. In the past few years the company has become recognized as the world’s most important semiconductor maker.
There is a caveat, though. Industry is now also recognizing that relying so heavily on a single company for the tech world’s foundry needs has its limits. Production is ramping up elsewhere. However, the capital requirements and time required to do so still favor TSM for the mid-term.
That’s why there’s likely more value in TSM stock now than current prices might suggest.
Snap-on is essentially an old-world value stock. While many of the other names on this list might not tick traditional “value” boxes, Snap-on does. The tools, equipment and diagnostics company comes with P/E and forward P/E ratios putting it among the top third of industrial product manufacturers.
SNA stock isn’t a sexy stock to be sure. But what it lacks in appeal, it makes up for in profitability.
Its operating margin, net margin, return-on-assets and return-on-equity percentages are all close to or above the 90th percentile of industrial product peers. The company is financially strong and pretty much all around solid.
And beyond those attractive metrics, Snap-on has another strong catalyst in the recent boom in used car sales. There is historically high demand for used cars currently. That should be a boon for Snap-on as used cars break down more often, necessitating increased tool purchases.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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.