Finding undervalued stocks to buy is always important, especially when the U.S. stock market is near all-time highs. The key to finding these picks is to examine a series of important financial metrics and analyze whether there is a margin of safety to invest in them. The higher the margin of safety, the better the odds of having found a high-quality stock that can perform well in the future.
Of course, it’s important to note that the actual price of a stock has nothing to do with whether it is undervalued or not. A stock that is priced at $500 can be a better bargain than one priced at $10. It all comes down to the intrinsic value. So, for this list, I have included three names that my financial analysis shows are deeply undervalued right now. I looked for the following criteria:
- Book value per share of less than 1
- Price-sales (P/S) ratio of less than 1
- Price-earnings to Growth (PEG) ratio of less than 1
- Trailing price-earnings (P/E) ratio between 0 and 20
I used the Yahoo! Finance stock screener to find these metrics. So, without further ado, here are three undervalued stocks to consider buying today:
Undervalued Stocks to Buy: HP (HPQ)
Industry: Computer hardware
First up on this list of undervalued stocks, HPQ stock is up about 10% year-to-date (YTD). This pick has underperformed the broader U.S. stock market, as defined by the performance of the S&P 500. Still, although it has some volatile five-year trends for its net income and earnings per share (EPS), HP also has relatively stable sales growth as well as positive free cash flows.
This name’s beta (5Y monthly) is 1.01, which suggests that HPQ moves almost in line with the S&P 500, at least in theory. However, this has not happened yet in 2021. As such, I believe there is plenty of upside potential from the current price around the $27 mark. With a trailing 12-month (TTM) P/E ratio of just 8.6, the stock is considered cheap. It has expected EPS growth for the next three to five years of 8.23%, according to Zacks.
Finally, I also like the fact that HP has an annual payout of $0.78 as well as forward dividend yield of 2.85%, according to Seeking Alpha. The dividend yield is attractive and can enhance the total return here. When it comes to tech stocks, many names are extremely overvalued right now. HPQ stock is the exception.
Sector: Consumer cyclical
EAT stock is down about 15% so far in 2021 and has significantly underperformed the U.S. stock market. However, I believe it could perform well in the near future — and I don’t think that just to be contrarian. Rather, I see plenty of value that seems to be ignored right now.
When it comes to Brinker International, investors have a company with relatively stable sales growth and volatile net income. But Brinker has also seen net income increase to the tune of 439% year-over-year (YOY) in 2021. Specifically, it reported $131.6 million on Jun. 30, compared to $24.4 million in 2020.
Moreover, this company’s free cash flow (FCF) trend has improved significantly in the past two fiscal years. In 2021, Brinker reported $275.7 million in FCF, an increase of about 96% compared to $140.5 million in 2020. Plus, in the past five years, the company has actively bought back common and preferred stock. So, although the total amount of capital has declined in the past two years, I believe the company may start increasing capital for share buybacks again given EAT’s poor performance.
Right now, this pick of the undervalued stocks has a TTM P/E ratio of 17.71 and expected three to five year EPS growth of 10%. Given that attractive expected EPS growth, I do not consider EAT stock to be a value trap.
Undervalued Stocks to Buy: Sculptor Capital Management
Sector: Financial services
Industry: Asset management
Last up for the undervalued stocks, SCU stock is the only name on this list that has outperformed the U.S. stock market with a return of 74% YTD. However, if you take a look at its TTM P/E ratio of around 6 times, SCU looks cheap despite the rally. Perhaps one of the best factors about this stock, though, is its annual payout and forward dividend yield of $2.16 and 8.28%, respectively.
Had you bought SCU stock one year ago, you would have seen a great return. Plus, the attractive dividend yield makes it defensive in case of any selloff. That said, it does have a beta (5Y monthly) of 1.54. That means it’s a volatile stock.
Still, I like this name’s five-year trend in revenue growth a lot as well as the surge of net income in 2020. For the year, SCU reported $177.63 million, an increase of more than 2,400% compared to the net income of $7.05 million in 2019. Finally, I do not find its financing activities and cash dividend growth excessive, meaning there’s room for any dividend hike as well.
On Marketwatch, SCU stock has an average target price of $40, but maybe more interesting is the fact it only has two ratings. This could mean the stock is going unnoticed by analysts right now. That’s not a bad thing. Rather, it’s often rewarding to find stocks that most investors and analysts are not tracking closely before they score.
On the date of publication, Stavros Georgiadis, CFA 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.
Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.