Be it growth or blue-chip stocks, a key success factor is to invest in undervalued names. This might sound simple, but the rule is often ignored. There are low P/E stocks in challenging market conditions, and with fear being the dominant sentiment, investors stay away. When the valuation gap closes and the market surges, stocks tend to be bought.
As an overview, the price-to-earnings ratio is the most commonly used valuation indicator. It tells us how much an investor will pay in the markets for every dollar of the company’s earnings. As the markets face multiple headwinds, it’s easy to find low P/E stocks.
Given the macroeconomic scenario, I would also bet on relatively easy monetary policies in the second half of 2023. This can translate into a reversal rally for stocks. Therefore, it’s a good time to accumulate undervalued stocks.
Let’s discuss three low P/E stocks that are worth considering.
Pfizer (PFE)
Pfizer (NYSE:PFE) stock seems significantly undervalued at a forward P/E of 11.8. The 4.1% dividend yield stock has declined by 23% in the last 12 months. Considering the valuation, it seems that the worst of the downside is done.
From a business perspective, there are several positives. Pfizer has a deep pipeline of 110 drug candidates in clinical trials. Of these, 23 are in Phase 3, and 16 are in the registration phase. The launch of new drugs will support revenue growth.
Pfizer has also been active on the acquisition front. The company is targeting $25 billion in risk-adjusted revenue from new business developments as of 2030. Recently, the biopharmaceutical company announced the acquisition of Seagen (NASDAQ:SGEN) for a consideration of $43 billion.
Of course, cash flows from the covid-19 vaccine will decline. However, that factor is discounted in the stock. Given the low P/E and an attractive dividend yield, I expect a reversal rally for PFE stock.
Chevron Corporation (CVX)
Chevron Corporation (NYSE:CVX) stock has been almost sideways in the last 12 months. The stock performance has been resilient, considering the oil price has corrected in the previous few months. At a forward P/E ratio of 10.3, CVX stock looks attractively valued. The stock also offers a healthy dividend yield of 3.87%.
Chevron is the best name among oil and gas stocks for two reasons. First, the company has an investment-grade balance sheet. Furthermore, Chevron has low break-even assets. Last year, the company reported an operating cash flow of $47 billion. Even with a decline in oil prices, it’s likely that OCF will remain robust in 2023.
With high financial flexibility, Chevron targets annual investments in the range of $13 to $15 billion annually. Investments will ensure that cash flows remain healthy. At the same time, the company will Have ample flexibility for dividend growth and value creation through share repurchases.
AT&T (T)
AT&T (NYSE:T) stock has been subdued after the spin-off of the media division. At a forward P/E of 7.5, the stock looks undervalued. T stock also offers an attractive dividend yield of 6.0%.
A major positive related to AT&T is deleveraging. Last year, the company reduced net debt by $24 billion. Deleveraging is likely to continue in 2023, and as credit metrics improve, the stock will trend higher. It’s expected that the company will sell off its cybersecurity division to accelerate the deleveraging process.
Business developments have also been positive for AT&T. For the current year, the company has guided for a free cash flow of $16 billion.
Healthy growth in post-paid phone and fiber subscribers will support strong cash flows. The company has made significant investments to boost its 5G infrastructure. This will yield results in the coming years in the form of subscriber growth and potentially higher average revenue per user.
On the date of publication, Faisal Humayun did not hold (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.
