Undervalued stocks offer the chance to pick up shares of companies that are trading at too low a price based on some measure of intrinsic value. The appeal in identifying such equities is obvious: Find good companies at low prices before others do and watch your investment increase in value as demand rises.
The premise is simple and there are many indicators that can be used to substantiate the idea that a given stock is currently being overlooked. But like all market activity, it’s partly objective and partly subjective. It’s a confluence of metrics and macroeconomic expectations that can produce strong strong returns. Let’s take a look then at several stocks that are currently underappreciated by the market.
|DAL||Delta Air Lines||$35.93|
Undervalued Stocks: Citigroup (C)
Citigroup (NYSE:C) has been seeing positive attention, even as concerns about the banking sector linger. It’s clear that the banking failures of March weren’t an isolated problem and presented a contagion threat to the overall economy. The aftermath has also made it clear that investors realize that bigger is better in banking.
Too-big-to-fail is again en vogue for depositors who have retreated to the safety offered by the biggest U.S. banks. JPMorgan Chase (NYSE:JPM) arguably received the lion’s share of the attention as the meltdown unfolded in mid-March. CEO Jamie Dimon was instrumental in orchestrating bailouts for regional banks only bringing it further into the spotlight. But Citigroup is part of the conversation as well as the 3rd largest U.S. bank.
In fact, Citigroup offers roughly $8 of upside beyond its current $49.50 share price and a 3.9% dividend that looks safe based on payout ratio. It’s the least heralded of the big banks and should be able to strengthen its overall position as a result of current turmoil.
Undervalued Stocks: Block (SQ)
Block (NYSE:SQ) has nearly $30 of upside beyond its current $64 price based on analysts’ consensus ratings. In addition, with the Federal Reserve signaling a potential cessation of rate hikes, growth stocks should move higher, including Block.
That suggests the narrative surrounding Block will be less about its sustained losses moving forward. Those were substantial at $114 million in Q4 and $541 million in 2022. But the focus now should shift toward growth that included gross profits that increased by 36% in ‘22 and 40% in Q4.
Block’s direction is a product of its Square and Cash App businesses which account for the overwhelming bulk of profits. But it also has buy-now-pay-later offerings and a blockchain development platform that offer additional future growth prospects. Growth stock cyclicality will eventually favor Block again and with Fed rate hikes perhaps over that cycle could be returning. It is certainly risky as a potential recession will pull everything down starting with riskier growth first. But that’s the nature of risk.
Undervalued Stocks: Amdocs (DOX)
Amdocs (NASDAQ:DOX) is an overlooked software provider to the media and communications industry. The fact that the company recorded record revenues in Q1 in what are difficult macroeconomic conditions is worthy of reflection. And the fact that the company anticipates rising free cash flows about already strong levels only boosts its prospects.
That’s the narrative investors should understand regarding Amdocs. Revenues increased by 7.3% in Q1, to a record $1.186 billion. That was near the upper end of guidance but not wildly unexpected which is positive because it suggests steady business.
The company anticipates $700 million in free cash flows in 2023, up from $600 million in 2022. Free cash flow is essentially cash on hand or readily disposable money. Amdocs is very profitable, maintains an average price-to-earnings ratio, and is flush with cash. Its business model is low-cost and produces gains not net losses making it attractive overall.
HudBay Materials (HBM)
HudBay Materials (NYSE:HBM) is an overlooking mining stock that copper enthusiasts should consider. At the moment, its forward P/E ratio of 8.32 suggests that HudBay Materials is indeed undervalued.
HudBay Materials combined with Copper Mountain to create Canada’s 3rd largest producer. Potential investors should also be aware that mining is a volatile industry and HBM shares can swing quickly. That truth is evident in the stock’s 1.99 beta. Beta measures volatility relative to the market overall with 1 being average. A beta lower than 1 moves more slowly, or is less volatile than the market. HBM is roughly 2X as volatile so gains and losses come quickly.
In any case, HudBay Materials is a play on continued growth in the renewable energy sector as copper wiring is used in everything. Demand has increased in 2023 as the push away from fossil fuels continues giving HudBay Materials potential tailwinds for some time to come.
For investors who want to avoid volatility, Pfizer (NYSE:PFE) is a solid bet. Its 0.59 beta nearly ensures investors greater ability to evaluate and avoid sharp losses. That’s one positive aspect of the pharmaceutical giant as an investment to be sure.
But I’d assert that the more attractive aspect of Pfizer is that it remains very undervalued currently. And depending upon where you look, it’s either undervalued by roughly 20% but perhaps by as much as 50%. It also developed one of the most successful vaccines in history and benefited from the associated windfall. 2021 revenues increased by 95% to $81.3 billion and eclipsed $100 billion in 2022.
Lithium Americas (LAC)
A simple, powerful narrative underpins Lithium Americas (NYSE:LAC) stock. The U.S. EV industry needs dependable lithium supply chain partners. And Lithium Americas is emerging as a powerful potential link in that chain.
Electric vehicles are entangled with larger geopolitical forces. Precious metals are strategically important as we’ve seen in the past few years. A similar narrative applies to chip production. Now the lithium used in the manufacture of EV batteries is in the same conversation.
That’s why Lithium Americas is particularly important. It controls the Thacker Pass mine in Nevada, the world’s 2nd largest lithium deposit. Construction of the site mines commenced in early March and the slow ramp up is underway.
Analysts believe LAC stock should be worth $36 within 12-18 months while it currently trades for $20. It is underpriced simply because of the strategic importance of sourced lithium and the sheer size of Thacker Pass. Development has been ongoing for over a decade so it seems likely that LAC shares will provide strong returns because the analysis has had such a long time to be refined.
Delta Air Lines (DAL)
Delta Air Lines (NYSE:DAL) was a big loser due to the pandemic. Those losses haven’t gone away. And the company will be dealing with the after-effects for a long time.
But Delta – now one of the top most undervalued stocks — continues to recover and recent earnings will be helpful in convincing investors about DAL stock. Delta revenue and earnings were in line with guidance. Perhaps more importantly, debt reduction is ahead of schedule due to record March quarter cash flows.
Delta anticipates a record June quarter which could help to further accelerate already strong cash flows. That could likely be directed to a further acceleration of debt pay down. And the company anticipates more than $2 billion in cash flow in 2023 overall. That dwindling debt makes DAL stock much more attractive as an undervalued investment right now.
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.