While the small-capitalization sector provides ample opportunities to find diamonds in the rough, astute investors can occasionally find undervalued large-cap stocks. It sounds completely counterintuitive. Why would a giant publicly traded corporation be undervalued? All I can say is, strange things can happen.
Consider the movie Moneyball, where the protagonists of the film helped drive a flailing Oakland Athletics team into national relevance. Essentially, the heroes of the story found underappreciated players who still had something left in the tank. When talking about undervalued large-cap stocks, we’re dealing with the equities market version of Moneyball.
As always, do your research, but do it quickly. These undervalued large-cap stocks might not stay that way for long.
Undervalued Large-Cap Stocks: Phillips 66 (PSX)
At first glance, downstream hydrocarbon energy specialist Phillips 66 (NYSE:PSX) doesn’t seem a natural candidate for undervalued large-cap stocks. Sure, it seems a viable opportunity, especially now given the rise in energy prices. But let’s face reality – Phillips 66 (and its competitors) enjoy a captive audience. However, it’s such a well-known entity on Wall Street that being underappreciated seems far-fetched.
Also, there’s the point that while the benchmark equity indices posted a loss last week, PSX gained over 5%. Still, it makes a solid case for undervalued large-cap stocks to buy because of its financials. Specifically, PSX trades at a trailing-year earnings multiple of 5.3x and a revenue multiple of 0.37x. Both stats are below their respective sector median values.
Nevertheless, Phillips 66 is consistently profitable, with a better-than-average net margin. Also, its revenue growth over the past three years of 14.9% ranks better than 59.4% of its peers. Finally, analysts peg PSX as a consensus moderate buy. Their average price target lands at $131.09, implying over 7% upside potential.
Kroger (KR)
Another entity that doesn’t seem to qualify for undervalued large-cap stocks, Kroger (NYSE:KR) blatantly offers a bullish narrative. Right now, U.S. retailers have sounded the alarm about rising stressors on the consumer base. That’s actually a warning that companies issued earlier this year. So, you’d think that grocery giant Kroger would benefit cynically. Logically, consumers will direct money toward the essentials.
Well, for whatever reason, KR just happens to be one of the undervalued large-cap stocks. Financially, KR trades at a forward multiple of only 10.36X. In contrast, the sector median comes in at 14.58X.
One factor that could be plaguing Kroger is heavy trading among possibly institutional investors with pessimistic transactions. Due to implied volatility spiking in the direction of both deep in-the-money and out-the-money (OTM) options, the pros are incentivized to sell both puts and calls to collect the heightened premium.
Once the options expire, though, it’s possible the fundamentals can send KR higher. Analysts believe that’s the case, pegging KR as a moderate buy with a $51.82 price target, implying over 10% upside.
Allstate (ALL)
One of the glaring opportunities among undervalued large-cap stocks to buy is insurance giant Allstate (NYSE:ALL). To be sure, the insurance industry isn’t exactly making friends right now. From pulling back in coverage for certain locales to hiking their premiums, households and I’m sure businesses have cried foul. However, what are they going to do? Everybody else is doing the same, from the behemoths to the smaller outfits.
Put another way, Allstate benefits from a captive audience. And to a limited degree, it features shades of a natural monopoly. While competition can always arise, it’s difficult to break into this arena. Therefore, investors may want to take advantage of its sales multiple of only 0.51X. In contrast, the sector median clocks in at 0.97x.
Even with the undervalued profile, Allstate features a three-year revenue growth rate of 14.2%, beating out 82% of its peers. Yes, institutional investors appear to have bought many puts. But once they expire on Oct. 20, it’s possible that ALL could swing higher. Analysts seem encouraged, pegging ALL a moderate buy with a $126.42 price target, implying 19% upside.
On the date of publication, Josh Enomoto 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.
