The term “value stocks” refers to shares of companies that appear to be underpriced relative to their fundamentals. In the column below, I will provide you with information about seven undervalued value stocks that investors should buy now. I used multiple criteria, including financial results, price-earnings ratios, and analysts’ price targets to determine which stocks are in the latter category.
Investors can contrast value stocks with growth stocks which often appear overpriced relative to their fundamentals.
Value stocks have come into their own in 2022 because this year has been particularly brutal on growth stocks. As the Fed raises interest rates, the cost of borrowing increases. That makes growth firms, which often have a great deal of debt, particularly risky. That is why capital has flown out of tech and other growth equities and into value stocks.
Despite that trend, there are still plenty of undervalued value stocks for investors to buy.
|BMY||Bristol Myers Squibb||$68.50|
|PG||Procter & Gamble||$124|
Bristol Myers Squibb (BMY)
I’d argue that Bristol Myers Squibb (NYSE:BMY) stock is significantly undervalued due to multiple factors. Bristol Myers Squibb is, first of all, quite profitable.
Specifically, the pharmaceutical company boasts a gross margin above 79%. That is higher than all but 8% of the more than 1,000 pharma firms in its peer group. Investors who recognize that analysts’ average price target for BMY stock is roughly 15% above the stock’s current level can start to understand why many see it as a strong value pick.
There is some irony in the fact that BMY stock remains underpriced because it has bested analysts’ average earnings expectations in each of the last four quarters for which it has posted results. And for the second quarter, it posted earnings per share of $1.93, versus analysts’ average estimate of $1.70.
The company’s performance has been greatly enhanced by multiple drugs that generate at least $1 billion of revenue annually, including Eliquis, Opdivo, and Revlimid. In Q2, the three therapeutics collectively contributed $7.8 billion of Bristol Myers Squibb’s $11.9 billion of sales. Pharmaceutical companies generally rely on one or more lucrative treatments to fund their research and development. That R&D, in turn, fuels their future success.
Bristol Myers Squibb clearly has very profitable drugs. Therefore, it is well- positioned for continued success.
Delta Air Lines (NYSE:DAL) is emerging from a pandemic that dealt the Atlanta-based firm heavy losses. It is also among the largest airlines in the world as measured by fleet size and travelers served.
Its size caused it to report massive losses during the pandemic as its fleet sat idle. Consequently, it racked up a great deal of debt. At the end of Q2, the airlines had $19.6 billion of debt.
But Delta continues to pay down its debt and plans to reduce the figure to only $15 billion by 2024.
Now the pandemic is essentially over, travel has rebounded, and Delta is through the worst of it. Investors need not worry that the company will be irreparably broken as it was during the pandemic.
But the market continues to undervalue DAL stock, which currently trades around $30. Analysts’ average price target for DAL stock is $48. That’s roughly 60% above the stock’s current level. Analysts’ price targets are based on their estimates of where price targets will be in 12 months to 18 months.
Valero (NYSE:VLO) stock is sitting in a fortuitous position currently. With OPEC recently announcing that it intends to slash oil production by more than 2 million barrels per day, prices at the pump are set to rise. While that results in higher costs at the pump for you and me, it benefits Valero, the world’s largest independent refiner.
Refiners tend to benefit less than exploration firms when prices rise. That’s because exploration firms sell oil directly from their fields or offshore deposits, while refiners have to buy oil first and then covert it into gasoline or other products. However, Valero’s strong financial performance in the first half of 2022, when oil prices were high, shows that it benefits from elevated petroleum prices.
So it’s evident that Valero has positive catalysts as OPEC reduces oil supplies. But Valero isn’t undervalued based on the notion that gas prices should rise soon. Rather, a combination of other factors, including Valero’s relatively low P/E ratio of 6.87, convinces me that VLO stock is being underestimated. More than 60% of the firms in the oil and gas industry carries a higher P/E ratio than VLO, making Valero attractive.
Valero has had a very strong 2022, like so much of the oil and gas industry. With prices at the pump dropping sharply beginning in mid-June, it looked like the party may have been over. That doesn’t look to be the case as OPEC’s latest move roils the space’s supply-demand dynamics.
The stock market is full of contradictions. Pfizer (NYSE:PFE) stock’s performance this year fairly exemplifies its fickle nature. PFE shares have shed 29% of their value in 2022. That’s not very exceptional, and it is in line with the stock market’s performance.
But at the same time, it’s odd that so many investors have sold Pfizer’s shares.
Pfizer’s financial results have been very strong in 2022.In fact, its revenues have increased by 60% YOY and 47% YOY in the first half of the year and Q2, respectively. It’s almost as if the market believes that Pfizer has lost its shine because the pandemic is winding down.
But here’s the thing: Pfizer is expected to generate $54.5 billion of revenue from its Covid-19 drugs in 2022, up from $36.7 billion in 2021.
The irony is that, based on P/E ratios, PFE stock is cheaper than 85% of all pharmaceutical stocks. All in all, Pfizer is one of the most undervalued value stocks in the pharmaceutical industry.
Procter & Gamble (PG)
Procter & Gamble (NYSE:PG) stock has fallen to a new 2022 low. The Cincinnati-based consumer goods giant has garnered a lot of press in 2022 as rising recession fears have given defensive stocks, including PG, a boost.
Even Procter & Gamble’s shares have fallen, though, as the Fed continues to take a hawkish position on inflation. Many on the Street believe this approach could cause something within the economy “to break,” inadvertently triggering a recession.
Whether that happens or not, lean times are clearly here. And that means PG stock is a strong choice.
Procter & Gamble sells so-called consumer staples that consumers can’t go without. These are the items like tissues, toilet paper, toothpaste, razors, and deodorant for which there is relatively even demand no matter what the economy is doing.
Consider the company’s history of creating value as measured by a return on invested capital of 13.48% that far outpaces its weighted average cost of capital, at 4.74%. Combine that with its dividend that hasn’t been reduced since 1957, and PG shares look deeply undervalued right now.
Boeing (NYSE:BA) stock is in deep value territory. That value is evidenced by its price-sales ratio which is close to a two-year low and lower than three-fifths of the companies in the aerospace and defense industry. It isn’t hard to understand why when you consider everything that has happened to the firm over the last few years.
The company produces aircraft that it sells in similar quantities.to the commercial sector and militaries. Most recently, Boeing reported just over $6 billion of sales for Q2.
But the company is still reeling from the pandemic which caused its sales to grind to a halt as airlines’ fleets were grounded worldwide. And two of Boeing’s 737 Max planes crashed, leading to safety probes, fraud charges, and a $200 million settlement.
Boeing has resumed deliveries of its 787 Dreamliner after a long delay. That development should boost the firm moving forward.
The bullish case for Boeing is relatively straightforward: It is one of only two major airplane manufacturers in the world. For the most part, investors simply have to buy its shares now and wait for the current macroeconomic issues to ease over time.
Exxon Mobil (XOM)
Exxon Mobil (NYSE:XOM) stock is seriously undervalued for similar reasons that Valero’s shares are undervalued. That is, OPEC’s recent decision to cut its production by 2 million barrels per day should directly benefit Exxon Mobil’s chances moving forward.
Q2 was exceptionally positive for Exxon Mobil as it posted profits of $17.9 billion, drastically higher than the $4.69 billion of earnings that it reported during the same period a year prior.
But market conditions changed at the tail end of Q2 as oil prices began to steadily decline. Now that OPEC is curbing its production, oil prices appear likely to rise again.
On the one hand, XOM stock isn’t very far from being fully priced currently, as it trades slightly below analysts’ average price target of $107.
I believe the shares could exceed $130 as investors search for real returns i.e. profits over and above inflation, in the increasingly tough market. XOM’s dividend yields 3.5% so the stock’s returns aren’t dependent on the upward movement of its stock price alone.
XOM stock is also undervalued based on its strong return on equity (ROE) which is better than 75% of the competitors in its sector. ROE measures how effectively a firm turns equity capital into profits.
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.