With 2022 in the rearview mirror, it’s time to hunt for solid, undervalued long-term stocks to buy. First, it’s essential to define what is meant by long-term. Secondly, we need to classify what makes a stock undervalued. For me, long-term is three years, at a minimum. As for undervalued, I like stocks with a high return on invested capital with high earnings yields. For those who follow Joel Greenblatt, I’m borrowing from his Magic Formula to keep it simple.
Each of the stocks on my list will have a market capitalization of at least $500 million. Further, I’ll make sure that I’m selecting seven stocks from seven sectors. And, as we get into 2023, these may be the only seven stocks you’ll need to produce market-beating returns for your portfolio.
Undervalued Long-Term Stocks: Open Lending (LPRO)
At the top of my list of undervalued long-term stocks, Open Lending (NASDAQ:LPRO) provides risk analytics solutions to credit unions, regional banks, and non-bank auto finance companies. The company’s flagship product, the Lenders Protection Program, provides these lenders with loan analytics and other financial modeling products to ensure their auto loan portfolios remain in good standing. It could best be described as a more established automotive version of Upstart Holdings (NASDAQ:UPST), which uses artificial intelligence to help banks and financial institutions make better lending decisions.
As you can imagine in an environment of rising interest rates, Open Lending didn’t facilitate as many loans in the third quarter (42.186) as it did a year earlier (49,332). As a result, its revenues were 14% lower in Q3 2022 than a year earlier. For all of 2022, it expects to facilitate 165,000 automotive loans at the midpoint of its guidance, which translates into $185 million in revenue with an adjusted EBIDTA of $117 million.
As of Sept. 30, it had $202 million in cash on its balance sheet, which translates to $48.5 million in net cash. The company’s ROIC was 30.53%, with an earnings yield of 9.89%. If you multiply its ROIC by its earnings yield, you get 301.9. A product of 100 or more is what you want here.
Undervalued Long-Term Stocks: Dynavax Technologies (DVAX)
In the healthcare sector, one of the top most undervalued long-term stocks to consider is Dynavax Technologies (NASDAQ: DVAX). Unfortunately, the DVAX stock hasn’t done much for shareholders over the past five years. It’s down nearly 30% with more than half the losses coming in 2022.
Dynavax develops and commercializes vaccines to protect people against infectious diseases. It currently has two in commercial production — Heplisav-B and the CpG 1018 adjuvant — with several others, including a vaccine for Tdap (Tetanus, Diphtheria, and Pertussis) and shingles in Phase 1 clinical trials.
Heplisav-B is a vaccine to treat Hepatitis-B. It is the first that requires just two doses in a single month to complete the treatment. It generated $126 million in revenue in 2022, up 104% from a year earlier. CpG 1018 is an adjuvant used with Heplisav-B to help create a stronger immune response from people taking the vaccine. Its sales in 2022 were $588 million, 57% higher than a year earlier and $13 million above its guidance for the year.
The risk to investors is that CpG 1018 is being used in conjunction with various Covid-19 vaccines. As a result, there is the possibility that sales could slow in the future. To ensure it continues to generate revenue from CpG 1018, it is working on combining the adjuvant with several existing drugs from other companies. It’s got three in Phase 1 or Phase 2 clinical trials.
Dynavax’s return on invested capital is 59.68%, while it’s got a 20.80% earnings yield, good for a product of 1,241, 4x higher than Open Lending.
Lam Research (LRCX)
I included Lam Research (NASDAQ:LRCX) in a Sept. article highlighting seven tech stocks to buy with superior fundamentals. Since the article, its shares are up 8%. My timing was a little early. You could have bought its shares for just under $300 in mid-Oct. If you were lucky enough to buy near its 52-week low, you’re up 56% or 168% annually.
You don’t need to worry. Lam traded in the $700s in early 2022. When the semiconductor market rebounds, it will return there in no time. In addition, the editors at Barron’s selected 16 stocks in early Dec. that should be somewhat resistant to a triple whammy in 2023 of inflation, recession, and rising interest rates. Of the 16, Lam was one of the cheapest, trading at 14.5x its forward earnings.
Also, according to Morningstar.com, the LRCX price-to-forward earnings ratio is 13.2x, making it even cheaper than in early Dec. That makes sense. LRCX stock lost more than 12% in the final month of 2022. Lam’s ROIC and earnings yields are 42.98% and 7.51%, respectively. Both are considerably higher than their five-year avenges.
Atkore (NYSE:ATKR) is another one of the top undervalued long-term stocks to consider. Its products are used primarily for constructing electrical power systems and infrastructure projects. Atkore makes conduit, cable, metal framing, mechanical pipe, and many other things required in the construction process.
There is no question its stock should be on your watchlist. In 2022, it delivered record sales and earnings of $3.91 billion (33.4% higher year-over-year) and $913.4 million (55.4% higher). In the fiscal year just past (Sept. year-end), Atkore invested nearly $1 billion in its operations and six acquisitions, as well as $500 million in share repurchases. However, it doesn’t pay a dividend.
As for its valuation, Atkore’s trailing 12-month free cash flow is $651.1 million [key ratios]. Based on a market cap of $4.96 billion, it has a free cash flow yield of 13.1%. So even with a 25-50% reduction in its FCF yield in fiscal 2023, it’s still a bargain.
Alpha Metallurgical (AMR)
Alpha Metallurgical Resources (NYSE:AMR) mines metallurgical coal. This coal’s been in high demand recently despite the historical trend lower. Many countries have reversed course, opting to lean on reliable energy sources at a time when the war between Ukraine and Russia has put energy security front and center.
Alpha has 23 mines worldwide with more than 351 million tons of coal reserves. Approximately 25% of its exported coal is sold to customers in India, which is expected to see a 5% compound annual growth in steel production through 2050. In late Nov., Alpha released its 2023 guidance and noted it expects to ship between 16.7 million and 18.4 million tons of coal, most of it metallurgical. The average price for committed metallurgical coal shipments is $181.56 per ton, with a cost per ton of $109 at the midpoint of its guidance.
That’s a non-GAAP coal margin per ton of 40% and nearly $1.3 billion in gross profits before very low selling, and general and administrative expenses. Given prices are expected to be lower in 2023, its revenue and profits will likely be very similar to 2022. It’s easy to see why its share price is up more than 1,200% since the beginning of 2021.
Vector Group (VGR)
Vector Group (NYSE:VGR) is a Miami-based holding company that generates a big chunk of its revenues and profits from its tobacco interests, which are held through Liggett Vector Brands. Its other revenue stream is New Valley LLC. It owns minority interests in numerous real estate properties and developments in the U.S.
Vector operates as the fourth-largest U.S. cigarette manufacturer. Its brands include Montego, Eagle 20’s, Pyramid, and others. These three brands have retail prices between 15-50% of the leading premium brands. It’s very focused on the value end of the market.
Through the end of September, Liggett held a 5.1% market share. That’s one-ninth the share held by Altria’s (NYSE:MO) Philip Morris USA subsidiary. The industry sells most of its cigarettes through convenience stores (65.7%). Liggett sells 46.3% of cigarettes through convenience stores but generates more than 36% of sales from mass merchandisers.
Like all cigarette producers, it has a busy legal department. According to its latest 10-Q, it currently has 60 individual actions pending against the company, with 40 in Florida and Illinois. Its current liabilities related to present and past actions are $225 million.
In the latest 12 months ended Sept. 30, Liggett’s revenue was $1.39 billion, with adjusted EBITDA of $344 million, a 24.7% margin. And like most cigarette companies, it generates significant free cash flow. In the trailing 12 months that ended Sept. 30, its free cash flow was $261.7 million [key ratios]. That’s good for a 13.6% free cash flow yield. If you can handle owning a sin stock, the 6.4% dividend yield doesn’t hurt either.
EOG Resources (EOG)
EOG Resources (NYSE:EOG), like most oil and gas producers, has been on a roll since March 2020, when oil prices bottomed and started moving higher. As a result, EOG stock gained 326% from March 2020 through June 2022 before running out of steam. The oil and gas producer’s daily production in 2021 was 829,000 barrels of oil equivalent. At the midpoint of guidance, it’s on track to produce 915,100 barrels of oil equivalent per day in 2022.
If you’re like me, you believe free cash flow is an important metric to follow. EOG produced $5.92 billion in free cash flow in the first nine months of 2022. Moreover, it’s on track to generate more than $10 billion for the entire year in 2022. That gives it a free cash flow yield of 13.1% [$10 billion divided by $76.6 billion market cap]. I consider anything over 8% to be in value territory.
EOG has an ROIC of 27.01%, an earnings yield of 10.04%, and a price-to-sales ratio of 2.57. All three suggest that EOG stock is still cheap despite a 31% gain over the past six months. In addition, EOG CEO Ezra Jacob recently said that his company expects global oil supplies to tighten in 2023. As a result, the company’s activity in the Permian Basin should be similar to 2022. In the meantime, enjoy its healthy dividend. It currently yields 2.5%.
On the date of publication, Will Ashworth 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.