With markets remaining choppy and sentiment still cautious, many quality stocks are trading at tempting valuations. Recent indiscriminate selling has knocked down the valuations of profitable, growing companies to levels that don’t accurately reflect their long-term potential. Savvy investors can exploit this disconnect by identifying and buying shares in temporarily-mispriced businesses.
Though broader macroeconomic challenges persist, these companies operate successful business models that should drive significant shareholder value creation over the long term. Some industry leaders have simply been oversold due to this risk-off environment. Others face short-term headwinds, but have levers to pull to reaccelerate their growth. And some are great businesses unfairly tarnished by association with struggling sectors.
Of course, further market declines may pressure stocks lower still in the near term. But buying companies with strong fundamentals at these levels enables outsized returns once the tide eventually turns. Here are the seven most undervalued stocks to look into:
Carl Zeiss Meditec (CZMWF)
Carl Zeiss Meditec (OTCMKTS:CZMWF) is down almost 40% from its 52-week highs despite reporting robust Q3 results. The microsurgery company’s revenue grew 12.9% year-over-year on a currency-adjusted basis to €1.51 billion. This broad-based growth was driven by its Ophthalmic Devices and Microsurgery segments.
Carl Zeiss continues to benefit from powerful demographic trends, including an aging global populations and the rising prevalence of eye diseases. The company estimates the cataract surgery market will sustain mid-single digit growth, while premium intraocular lenses represent a massive opportunity growing at 10%+ annually. With its advanced technology in lasers, intraocular lenses and visualization systems, Carl Zeiss is well positioned to capitalize on these strong tailwinds.
Even with the healthy revenue growth, and temporary factors like China lockdowns, supply chain issues fading away and rebounding margins this quarter, the stock is yet to rebound. At current valuations around 24-times forward earnings, the stock seems to price in an excessively negative scenario, in my opinion. As macro conditions eventually stabilize, Carl Zeiss’ long-term growth story should regain momentum. Analysts expect the top-line growth here to hover near double digits for the foreseeable future. Accordingly, the average analyst expects 40% upside in one year.
JinkoSolar (JKS)
As one of the largest solar module suppliers globally, JinkoSolar (NYSE:JKS) operates an integrated production network spanning silicon wafers to solar modules. However, negative market sentiment due to Chinese regulatory risks has driven JKS stock down over 60% from 2022 highs, now trading at just 3-times forward earnings. This seems like a huge overreaction, creating a compelling bargain buy for long-term investors.
First things first, the company’s revenue growth is above 50%, as of the latest quarter. JinkoSolar beat analyst estimates for revenue by a massive $210 million, and beat on its earnings per share number ($5.78 compared to estimates of $3.52)! JKS has demonstrated outstanding execution, even amidst challenging conditions. The company also reported 65.6% sequential growth in net income, driven by a 36% jump in solar module shipments. Its next-gen N-type modules already comprise 58% of shipments, underscoring its technology leadership. JKS expects N-type to reach 60-65% of shipments in the coming quarters.
With fully integrated operations spanning silicon ingots to solar modules, JKS enjoys significant cost advantages relative to non-integrated peers. Its global manufacturing footprint extends throughout China, Southeast Asia, and the U.S. This footprint allows JinkoSolar the flexibility to navigate regulatory risks and tariffs. Currently, the company sees no impact from the recent U.S. ban on Chinese solar imports.
Looking ahead, JinkoSolar issued upbeat guidance expecting full-year module shipments of 70-75 GW, implying over 25% growth. Its mass production capabilities for next-gen high-efficiency N-type modules should support continued market share gains. Trading at just 0.09-times sales and 3-times forward earnings, JKS stock is undoubtedly among the most undervalued solar stocks now. This creates a very compelling risk-reward proposition for investors who can look past short-term volatility.
Advance Auto Parts (AAP)
Advance Auto Parts (NYSE:AAP) operates a network of over 4,790 auto parts stores, catering to both retail do-it-yourself customers and professional installers. The company has faced margin headwinds this year from elevated inflation and investments to improve parts availability. This led to a 66%+ decline in AAP stock price from 52-week highs. However, I believe the market has overreacted, and AAP stock looks like among the most undervalued options among its peers right now.
In Q2 results, Advanced Auto Parts delivered positive net sales growth despite comparable store sales dipping 0.6%. Importantly, sales trends improved sequentially, with comparable store sales slightly increasing over the last four weeks. The company is seeing traction from initiatives to boost parts availability and maintain competitive pricing. Supply chain investments are also helping improve inventory close rates.
Looking ahead, powerful secular tailwinds should drive accelerating demand for auto parts. The average age of vehicles on U.S. roads is at a record high today. Plus, high inflation means fewer consumers can afford new car purchases, necessitating higher spending on maintenance and repairs.
Meanwhile, Advanced Auto Parts is continuing its pivot towards higher-margin-owned brands, which should support gross margin improvement over time. The company does face near-term headwinds from elevated costs and its pricing strategy. However, Advanced Auto Parts has targeted significant improvements through supply chain optimization, cost savings, and asset productivity. While growth in 2023 will likely be muted, the long-term growth story remains intact. The current undervaluation with AAP stock provides an attractive entry point for investors.
Farmers and Merchants Bank of Long Beach (FMBL)
Farmers and Merchants Bank of Long Beach (OTCMKTS:FMBL) is a community bank operating in California since 1907. The outlook for regional banks has weakened considerably amidst economic uncertainty, sending FMBL stock down close to 36% from 52-week highs. However, this excessive pessimism has created a buying opportunity in this high-quality regional bank.
Despite the tough operating environment, I expect a strong recovery over the long-run. For now, the rising rate environment will impact near-term profitability. And unfortunately, there is little to analyze with this stock, due to its size.
However, as per Gurufocus’ model, they believe FMBL’s fair price will be at $8,000 by the end of this year and believe the stock is significantly undervalued.
Regardless, FMBL maintains a rock-solid balance sheet. As per its latest Q2 release, “…Farmers & Merchants Bank’s total risk-based capital ratio was 16.93%; its tier 1 risk-based capital ratio was 15.68%, with a common equity tier 1 capital ratio of 15.68%, and a tier 1 leverage ratio of 10.86%. The minimum ratios for capital adequacy for a well-capitalized bank are 10.00%, 8.00%, 6.50% and 5.00%, respectively.” Thus, while many regional banks are struggling, FMBL seems well-positioned to weather near-term headwinds.
Trading at just 0.48-times on a price-to-tangible-book value basis, and 7-times forward earnings, FMBL stock is undoubtedly cheap for a profitable bank of its caliber. The stock also offers an attractive dividend yield of 2.2%. While risks exist in this uncertain environment, the risk-reward now seems skewed positively for long-term investors, adding exposure at current levels.
Insulet Corporation (PODD)
Shares of Insulet Corporation (NASDAQ:PODD) have plunged by nearly 47% since May despite the medical device company beating estimates and delivering stellar top and bottom line growth in its most recent quarter. Insulet is the maker of the Omnipod system for diabetes management. The stock’s steep decline reflects worries that new diabetes drugs like Eli Lilly’s (NYSE:LLY) Mounjaro could have a major negative impact on Insulet’s insulin pump business.
However, I believe these competitive concerns are overexaggerated. Insulet just reported record revenue in Q2, up 32.4% year-over-year. Its flagship Omnipod 5 product saw U.S. sales surge 41%. The company is also expanding Omnipod 5’s rollout internationally. Though new medication options may modestly dampen pump demand, Insulet still has an incredible opportunity to grow over the long-term, as its diabetes tech platform continues taking market share.
Even if we assume the company takes a significant hit from new competition, Insulet’s current valuation reflects an overly dire scenario. Shares trade at just 55-times forward earnings with a price-to-sales ratio of 8-times. That suggests the market expects minimal growth, an unlikely outcome given Omnipod 5’s early success and the still highly underpenetrated insulin pump market. Insulet also has a pristine balance sheet to lean on during any temporary slowdown.
Innovative Industrial Properties (IIPR)
Innovative Industrial Properties (NYSE:IIPR) has faced its own struggles over the past two years. Shares are down almost 70% from its peak. The cannabis industry-focused REIT has dealt with tenant struggles, including some missed rental payments. Investors worried about the shaky financial health of IIPR’s cannabis tenants have clearly been dumping this stock.
However, the worst seems behind for Innovative Industrial Properties. Collections have improved, after the company negotiated lease amendments with distressed tenants. IIPR is also being more conservative with capital deployment in the current environment. Additionally, its existing properties support an attractive dividend, which was recently increased by 11% year-over-year.
With tailwinds from broader cannabis legalization still ahead, IIPR’s experienced management team is positioned to drive growth for years to come. The REIT collects very high yields on its properties, given cannabis companies’ limited access to traditional financing. Once capital markets normalize, demand for IIPR’s specialized facilities should reignite.
After substantial multiple compression, Innovative Industrial Properties trades at just 11-times forward FFO, a massive discount to historical valuations. The stock appears positioned for a gradual turnaround as financial conditions improve industry-wide.
FMC Corporation (FMC)
FMC Corporation (NYSE:FMC), a diversified chemical company, has also endured steep valuation multiple contraction in 2023. Shares are down 40% year-to-date and trade near 5-year lows. The stock swoon reflects FMC’s expectation for a 9% revenue decline this year, driven by reduced pesticide demand. However, this headwind is temporary.
Wall Street analysts forecast FMC will deliver 7.7% revenue growth in 2024 as agricultural markets stabilize. Over the long term, FMC should achieve around 5% annual growth thanks to its robust product pipeline and strategic pivot toward higher-value offerings. Margin expansion will also likely accompany revenue growth.
Despite the difficult operating environment, FMC continues generating solid cash flows. Its dividend yield sits at an attractive 3% after 5 straight years of payout hikes. At only 12-times forward earnings, FMC stock reflects undue pessimism about its future prospects. The company has successfully navigated prior industry downturns. Once macro conditions improve, FMC’s discounted valuation sets up a substantial upside. The consensus price target is at $110, implying over 47% upside in one year’s time.
On the date of publication, Omor Ibne Ehsan 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.
