2022 has started on a weak note for the U.S. stock market. All three major stock indexes have losses year-to-date, and Nasdaq has underperformed by 10%. Seeking undervalued stocks in a broader stock market that is still near all-time highs seems like a challenging task.
The world is waiting for news about whether or not Russia will invade Ukraine. If this occurs, a global selloff in financial assets should follow, even if it is a short-term one. Nevertheless, investing in undervalued stocks makes sense right now as investors will have a margin of safety to use even as volatility may increase. Let’s not forget that rich-valued tech stocks have rewarded investors who ignored valuation in 2022 with hefty losses in contrast to a booming market in 2021.
Here are five stocks that are undervalued, have strong earnings growth rates, and relatively low P/E (price-to-earnings) and PEG (price-to-earnings-to-growth) ratios. The current S&P 500 P/E ratio stands at 25.5. All of these stocks have a much lower P/E ratio, and overall, they have strong fundamentals:
- Dow (NYSE:DOW)
- Toll Brothers (NYSE:TOL)
- Synchrony Financial (NYSE:SYF)
- Academy Sports and Outdoors (NASDAQ:ASO)
- Stellantis (NYSE:STLA)
The bottom line is that these five stocks are now relatively undervalued and have strong growth prospects. They could become even cheaper in a scenario of a general market selloff due to rising interest rates and geopolitical concerns. From a long-term perspective, their current stock prices are very attractive.
Undervalued Stocks to Buy: Dow (DOW)
DOW stock is up 9% in 2022, defying the broader negative investing sentiment. Dow has an extensive portfolio of silicon-based products and solutions.
In 2021 sales growth surged 43% to $55 billion and net income skyrocketed 415% to $6.3 billion. The forward dividend and yield of $2.80 and 4.6% respectively are attractive.
Dow’s trailing twelve months (TTM) P/E is 7.4, and its forward P/E is 9. With a PEG ratio of 0.30 and expected earnings per share (EPS) growth of 30%, there is a strong bullish case in favor of DOW stock.
The price-to-sales (P/S) ratio of 0.8 is also indicative of an undervalued stock while the return on equity of 41% is excellent.
Toll Brothers (TOL)
Shares of home-building company Toll Brothers have lost nearly 24% year-to-date. The U.S. housing market remains robust: “The NAHB housing market index in the US fell by 1 point to 83 in January of 2022 from a 10-month high of 84 in December, and slightly below market forecasts of 84.”
In 2021, Toll Brothers revenue increased 24% to $8.8 billion, and net income grew 87% to $834 million.
Diluted EPS rose to $6.63, an increase of 95%. The TTM P/E is 8.2 and the forward P/E is 5.3. The stock has a PEG ratio of 0.45 and an expected EPS growth of 26%. The P/S of 0.77 is very attractive.
Undervalued Stocks to Buy: Synchrony Financial (SYF)
Synchrony Financial provides credit products such as credit cards, commercial credit products and consumer installment loans. Rising interest rates in 2022 build a positive narrative that has the potential to turn year-to-date losses of nearly 3% into gains.
A forward dividend and yield of 88 cents and 2% respectively do not impress, but the dividend still adds to the total holding return. This undervalued stock converging to its intrinsic value will provide both capital gains and income from dividends.
In 2021, revenue declined 12.5% to $11.2 billion. On the positive side, net income increased 202% to $4.2 billion, and diluted EPS grew 223% to $7.34.
The TTM P/E is 6, and the forward P/E is 8.1. The PEG ratio is 0.6 and the expected EPS growth is 23%. That’s not bad at all for a financial services company.
Academy Sports and Outdoors (ASO)
Academy Sports and Outdoors is a sporting goods and outdoor recreational products retailer in the U.S. selling a variety of products like sporting equipment, backyard and outdoor gear, and health and fitness tools.
ASO stock has lost 18% year-to-date but is up 41% in the past year. 2021 revenue increased 18% to $5.7 billion, net income soared 157% to $308.8 million and diluted EPS rose 155% to $3.39.
The TTM P/E is 5.3 and the forward P/E is 5.9. The PEG ratio is 0.42 and the expected EPS growth is 15%.
The P/S of 0.5 and enterprise value-to-revenue ratio of 0.69 confirms that ASO stock is relatively undervalued and a value stock pick among specialty retail companies.
Undervalued Stocks to Buy: Stellantis (STLA)
It has been a little over a year since Fiat Chrysler and PSA Group merged to become Stellantis. The company is the No. 3 automaker by revenue and operates a host of internationally known brands.
Many investors focused on electric vehicle makers in 2021 for their growth and gains while ignoring the big picture in the automotive industry. Most of these hot EV stocks have delivered big losses year-to-date. But STLA stock is nearly flat in 2022 with a nearly 4% gain year-to-date.
Stellantis presents an opportunity for exposure to the internal combustion engine cars that still dominate the car industry worldwide while also participating in the future of electrification for mobility. Economies of scale should have a long-lasting positive impact on profitability.
The P/S of 0.27 is attractive, though the net margin of 0.03% is not so much. Still, a very small positive net margin is better than a negative one. The TTM P/E is 4.6, and the forward P/E is 4.2. The PEG ratio is 0.12 and the expected EPS growth is an impressive figure of 38%.
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.