Right now, I think one of the best moves for investors is to look into undervalued stocks. That’s because there are several positive factors that continue to take the markets higher. Today, the global economy is on a gradual path to recovery. Furthermore, the worst of the Covid-19 pandemic might just be over. At the same time, the Federal Reserve has continued to pursue expansionary policies. It’s very likely that interest rates will increase in baby steps in 2023 and beyond.
However, even with these positives, it’s important to remain cautious — in particular, at a time when the S&P 500 is trading at a price-earnings (P/E) ratio of 45.93. Dr. Mark Lee Levine of the University of Denver wrote in an email to InvestorPlace:
“[…] If heavy inflation is present, we will see a greater price increase in hard assets, such as real estate and a reduction in the purchasing power of the current dollar currency. That is, the value of the dollar will drop.”
In my view, it makes sense to go overweight on defensive stocks and undervalued stocks. As such, this column will discuss seven bargain picks that seem to have minimal downside risk from current levels. However, their upside potential is still significant as markets start looking for value.
So, let’s take a deeper look into these undervalued stocks.
- Altria (NYSE:MO)
- Pfizer (NYSE:PFE)
- Costamare (NYSE:CMRE)
- Alibaba (NYSE:BABA)
- Vale (NYSE:VALE)
- Kinross Gold (NYSE:KGC)
7 Undervalued Stocks to Buy: Altria (MO)
MO stock has been an under-performer in the last 12 months. At a forward P/E of 10.29, the stock is a screaming buy. Additionally, the stock offers an annualized dividend of $3.44. This translates into an attractive dividend yield of 7.29%. So, even if MO stock is sideways, it’s worth considering for steady cash flows.
Altria is in a business transformation phase, with cigarette sales volume on a gradual decline. The company has been focusing on expanding its non-combustible portfolio. However, its cigarette segment is still the cash flow driver. For 2020, the company reported operating cash flow of $8.4 billion.
Strong cash flows will ensure that its investment in business transformation continues. At the same time, Altria is positioned to pay dividends and deleverage. Further, the net-debt-to-consolidated-EBITDA ratio of 2.2 does not seem to be a concern.
In terms of progress in the non-combustible segment, the company’s On! product is already available in 93,000 retail stores. The company has also expanded its Marlboro HeatSticks and IQOS devices in several states. Over the next five years, the non-combustible segment is likely to have a meaningful impact on cash flows.
Finally, this pick of the undervalued stocks also has exposure to the cannabis segment through its investment in Cronos (NASDAQ:CRON). So, the growing possibility of federal-level legalization in the United States is another catalyst for stock upside.
PFE stock is another name among undervalued stocks that’s worth adding to your portfolio. Currently, the stock trades at a forward P/E of 10.99 and offers a dividend yield of 3.80%.
One of the key reasons for PFE stock being undervalued is several of the company’s drugs losing their exclusivity. However, I don’t see that as a huge concern. There are two key reasons why.
First and foremost, Pfizer’s Covid-19 vaccine is likely to deliver revenue of $26 billion for 2021. For the next year, the company also expects to have a manufacturing capacity of at least 3 billion doses. This should ensure that the vaccine against Covid-19 continues to support growth. Possible booster doses could also support growth beyond 2023.
Further, Pfizer already has a deep pipeline of vaccines and drugs. Excluding the impact of its Covid-19 vaccine, the company expects revenue growth at a compound annual growth rate (CAGR) of 6% through 2025. If this holds true, PFE stock is due for meaningful upside from current levels.
Pfizer remains strong from a balance sheet perspective. Cash flows are robust to support investment in research. Additionally, its dividends will sustain and potentially increase in the next few years.
7 Undervalued Stocks to Buy: Costamare (CMRE)
Given the broad market valuations, I would not think twice before considering exposure to a stock that trades at a forward P/E of 5.15. Further, Costamare has a healthy track record of dividends and offers a current yield of 4.51%.
As an overview, Costamare is an owner of containerships around the globe. As of June 2021, the company reported an order backlog of $3 billion. Additionally, the average remaining time-charter duration for the fleet was 4.2 years. This provides clear cash flow visibility.
It’s also worth noting that charter rates increased by 54% in 2021. With global economic recovery, charter rates are likely to remain firm. This will support Costamare’s EBITDA margin expansion.
From a growth perspective, CMRE announced the acquisition of 16 dry bulk vessels in June 2021. Of these, two ships have been already delivered. The company expects the remaining containerships to be delivered by January 2022. Once these vessels are operational, there is visibility for revenue and cash flow growth.
Finally, Costamare has total adjusted debt and financial lease of $1.69 billion. However, I don’t see this as a concern. For Q1 2021, the company reported an adjusted EBITDA interest coverage ratio of 5.77. Therefore, debt servicing is likely to remain smooth. All in all, CMRE stock is a solid pick.
Alibaba has faced regulatory headwinds and that’s the key reason for BABA stock remaining depressed. However, at a forward P/E of 21.6, the stock seems to have bottomed out.
It’s important to note that even with the regulatory concerns, Alibaba has still maintained healthy growth. For 2020, the company reported revenue growth of 41%. The core commerce and cloud segment remained the key growth drivers.
Today, I expect growth to sustain in BABA’s core commerce business, with Alibaba also having strong presence in Southeast Asia. The company already has a leading position in Asia’s cloud business.
Further, for March 2021, Alibaba reported cash and equivalents of $72.3 billion. The company also reported operating cash flow of $3.7 billion. This would imply an annualized cash flow of around $15 billion.
The key point here is that Alibaba has robust financial flexibility for aggressive organic growth. At the same time, the company is likely to continue scouting for attractive acquisitions. I also believe that its cloud business might be spun off as a separate entity in the next few years. This could create incremental shareholder value.
Overall, BABA stock is worth holding patiently in your portfolio. Once regulatory headwinds wane, this pick of the undervalued stocks has ample upside potential.
7 Undervalued Stocks to Buy: Vale (VALE)
VALE stock has not been among the under-performers. In the last 12 months, the stock has surged by over 92%. However, the stock was significantly undervalued and still trades at a forward P/E of 4.23. At a dividend yield of 8.06%, VALE stock is worth accumulating for further upside.
When it comes to Vale, an important point to note is that iron ore sales are the company’s key cash flow drivers. Goldman Sachs believes that sustained surplus in iron ore markets is unlikely until 2023. Therefore, as iron ore prices remain firm, dividends should sustain and further stock upside should continue.
To put things into perspective, Vale reported adjusted EBITDA of $8.4 billion for Q1 2021 (Page 15). For the same period, the company’s free cash flow was $5.84 billion. With an estimated annualized FCF of over $23 billion, Vale is well positioned for value creation. At the same time, Vale is likely to deleverage in the next few years.
Another stock upside factor is the increase in iron ore capacity. For 2020, the company delivered production of 318 metric tons (MTs). Now, the company expects production to increase to 400 MTs by 2022 as well as to 450 MTs in the next few years. Vale is therefore positioned to benefit from higher iron ore prices coupled with incremental increases in production.
As such, this pick of the undervalued stocks is worth considering even after recent upside. The stock looks good for further rallying over the next 12 to 24 months.
Next up on this list of undervalued stocks is Newmont. With the S&P 500 trading at a P/E of 45.93, NEM stock looks attractive at a forward P/E of 17.32. The stock also offers an attractive dividend yield of 3.64%.
It’s also worth noting that NEM stock has slipped to around $60, down from highs in the $75 range. This means it now seems like a good accumulation opportunity. Additionally, the Federal Reserve will likely go slow on rate hikes and the inflationary environment could potentially persist. That’s good news for gold and gold mining stocks.
Newmont also has a number of quality assets which will help it sustain stable production into the 2040s. Furthermore, the company expects all-in-sustaining-cost (AISC) to decline to between $800 and $900 an ounce by 2025. Even if gold trades at $2,000 an ounce, Newmont is positioned to deliver healthy EBITDA and cash flows.
Finally, if the price of gold is at $2,100 an ounce, the company has guided for an annual dividend in the range of $2.8 to $3.7 (Page 11). From a financial perspective, Newmont also has a liquidity buffer of $8.5 billion (Page 9). So, with a net-debt-to-adjusted-EBITDA ratio of 0.2, the company has ample flexibility for value creation.
7 Undervalued Stocks to Buy: Kinross Gold (KGC)
Last up on this list of undervalued stocks, KGC stock is another name from the gold mining stocks that’s trading at attractive valuations. At a trailing 12-month P/E of 7.41, the stock is worth adding to any portfolio.
Currently, Kinross is well diversified through a number of mines around the globe — in the Americas, West Africa and Russia. For 2020, the company delivered gold equivalent production of 2.4 million ounces. Now for the current year, the company has guided for flat production at an AISC of $1,025 an ounce.
However, this company’s production is expected to increase to 2.7 million ounces for 2022 and further to 2.9 million ounces for 2023. Therefore, even with stable gold prices, Kinross is positioned to deliver higher revenue and cash flows in the next few years.
It’s also worth noting that, even beyond 2023, this company has a robust pipeline of projects. Further, as of March 2021, the company reported cash and equivalents of $2.6 billion. Therefore, like others on this list, there’s ample flexibility to fund growth here.
Finally, Kinross is positioned for higher dividends as its free cash flow accelerates as well. Currently, the company offers an annual dividend of 12 cents and a dividend yield of 1.97%.
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. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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 over 1,500 stock specific articles with focus on the technology, energy and commodities sector.