Who doesn’t want to buy undervalued stocks? It would be silly to purposely purchase overvalued stocks. Of course, value, in much the same vein as beauty, is in the eye of the beholder. One of Warren Buffett’s oft-quoted sayings is, “Price is what you pay. Value is what you get.”
Over the years, Buffett has become more open to paying a fair value for a stock rather than a deep discount, an ideology he first learned from Ben Graham in the 1950s. Buffett’s right-hand man, Charlie Munger, convinced him that sometimes paying a premium for a quality company made sense.
The Berkshire Hathaway (NYSE:BRK-A, NYSE:BRK-B) you see today has greatly evolved from its partnerships of the 1960s. The quality of the company Berkshire acquires is much higher, whether we’re talking about an entire business or through its equity portfolio.
In the end, everyone’s version of undervalued is slightly different. In an effort to be original, I’ll select one undervalued long-term stock from seven different InvestorPlace articles from the first seven months of 2022.
Undervalued Long-Term Stocks: Pinterest (PINS)
InvestorPlace contributor Chris MacDonald selected Pinterest (NYSE:PINS) as one of seven undervalued stocks in mid-January. MacDonald argued that its user base would help the company grow ad revenues, leading to higher margins and improved earnings.
While my colleague had the right idea, unfortunately, a confluence of issues — Russia’s invasion of Ukraine, persistent inflation and higher interest rates — led to the stock’s demise. It’s down 38% year-to-date. However, Pinterest’s final chapter has yet to be written.
E-commerce and payments specialist Bill Ready, whose last gig was running Google’s shopping and payments efforts, took the helm on June 29. He’s already managed to gain the support of Elliott Management, Pinterest’s largest shareholder.
Ready said in the Q2 2022 conference call that 2022 is a year of investment for Pinterest. In 2023, the margins will accelerate higher. With 433 million monthly active users and a much better shopping experience, investors should expect shopping ad revenues to grow exponentially over the next 18-24 months.
From where I sit, MacDonald’s call will be proven right in the long run. Pinterest is the best of the social media platforms for multiple reasons, not the least of which is that it truly is the most positive in tone.
Netflix (NASDAQ:NFLX) is in the beginning stages of a massive transformation that includes developing an ad-supported version of its streaming platform.
In February, InvestorPlace’s Tezcan Gecgil suggested that the 12-month median price forecast for NFLX stock of $500 — it was trading at $395 at the time — made it undervalued given its position as the top global streaming platform.
At the time, Netflix expected to add 2.5 million net new subscribers in Q1 2022, down from 4 million in Q1 2021. In April, it reported the actual number. It was far worse than projected, with a loss of 200,000 subscribers.
NFLX stock has lost 60% of its value year-to-date. However, in the past month, it’s up nearly 30%. The worst appears to be behind it.
On July 19, Netflix reported better-than-expected Q2 2022 results. Sure, it still lost a million subscribers in the second quarter, but it could have been a lot worse. CEO Reed Hastings acknowledged that fact, suggesting that the company was in a good position heading into 2023.
Let’s not forget that Netflix still managed to grow second-quarter revenues by 8.6% to $7.96 billion while generating $1.58 billion in operating profits. You can hardly describe these results as disastrous. Far from it. It actually generated $8o2 million in free cash flow during the quarter.
Netflix is working with Microsoft (NASDAQ:MSFT) to launch its lower-priced, ad-supported version in early 2023. I expect that the growth engine will resume at that time.
Trading at 3.5x sales, NFLX hasn’t been this cheap since 2012.
Undervalued Long-Term Stocks: British American Tobacco (BTI)
Of all the names I’ve selected as undervalued long-term stocks to buy, British American Tobacco (NYSE:BTI) would be considered the most traditional value play. Tobacco stocks have been cheap for several years as overall tobacco use has waned. For investors interested in sin stocks, the U.K.-based cigarette producer is worthy of your consideration.
Faisal Humayun argued in early March that the company’s forward price-to-earnings (P/E) of 9.7 made it a stock ready to move higher. The company’s move to non-combustible products such as Vuse (vapor products), Glo (tobacco heating products), Velo and Grizzly (oral products), provide a growth runway that its combustible products just can’t match.
In January, I recommended BTI for income-generating portfolios. At the time, it was yielding 7%. Since then, it’s lost approximately $9 billion in market capitalization. Sure, you could have bought it in the high $20s in the March 2020 correction, but that’s in the rearview mirror.
In the final quarter of 2021, it added 1.2 million consumers for its non-combustible products. Approximately 18.3 million consumers use these products worldwide. They now account for 12% of its overall revenue.
Getting paid 7% to wait for this segment of the business to develop further seems like a no-brainer for those not opposed to owning sin stocks.
If there’s a stock to own for the long haul, Starbucks (NASDAQ:SBUX) is one for the ages. The coffee purveyor always seems to bounce back from tough times. We’re in the beginning stages of another resurgence.
In April, InvestorPlace contributor Mark Hake selected SBUX as one of seven stocks he thought were undervalued and in a good position to withstand inflation and/or a recession.
It’s been a choppy ride since my colleague made the buy call on April 19. However, over the past three months, it’s gained more than 22%. As a result, its dividend yield has dropped slightly to 2.19%.
Starbucks reported healthy Q3 2022 earnings on Aug. 2. It included earnings per share (EPS) of 84 cents, 9 cents higher than the analyst estimate, and revenue of $8.15 billion, $40 million better than the consensus.
Despite a 44% decline in China’s same-store sales, Starbucks was able to grow them by 9% in the U.S. due to higher average orders and a 1% increase in traffic. Once China gets back up to speed, you can bet business is going to pick up in a big way.
CEO Howard Schultz — this time it’s an interim gig — had good things to say in the company’s earnings release about the work the company was doing to get itself in position to continue to grow its business over the long haul:
“We have clear line-of-sight on what we need to do to reinvent the company, elevate our partner and customer experiences and drive accelerated, profitable growth all around the world. The Q3 results we announced today demonstrate the early progress we have made in just four short months.”
Never count Starbucks out. More often than not, it will make you look foolish.
Undervalued Long-Term Stocks: Upstart Holdings (UPST)
InvestorPlace contributor Nicolas Chahine suggested in May that Upstart Holdings (NASDAQ:UPST) deserved another chance despite being incredibly volatile. My colleague felt that if the company’s management could keep a lid on the simmering loan defaults the lending platform was facing, UPST stock was sure to move higher.
That was May 18. Since then, UPST has lost 30% of its value. It’s hard to believe Upstart was trading above $400 less than a year ago.
In Q1, the company was very upbeat about the state of its loan portfolio. In the company’s July 8 press release, CFO Sanjay Datta said:
“Despite the tumultuous economy, Upstart-powered loans have performed exceptionally well. For loans facilitated through our platform and held by our more than 60 bank and credit union partners, average returns have consistently met or exceeded expectations since the program’s inception in 2018.”
Down 78% YTD, I would be shocked if Upstart doesn’t decide to buy back its stock soon. It truly is undervalued.
Century Communities (CCS)
The iShares U.S. Home Construction ETF (BATS:ITB) is down almost 26% YTD, while CCS is off more than 37%.
Here’s what I said about CCS last July: “Since 2016, the company’s revenue and earnings have increased by 259% and 464%, respectively. Barring a collapse in housing demand, investors can expect both of these numbers to keep rising.”
In June, my InvestorPlace colleague Stavros Georgiadis called Century Communities an undervalued small-cap stock to buy, arguing that its revenue and income growth provides investors with a bargain valuation.
On July 27, Century reported record Q2 2022 results that included a 12% increase in revenue to $1.2 billion (a Q2 record) and a 35% increase in net income to $158.7 million. It finished June with a backlog of 4,767 homes valued at $2 billion.
Century has made money for 19 consecutive years. It’s on its way to 20. CCS hasn’t been this cheap since 2018. My colleague was right to call it undervalued. If you’re a long-term investor, buying between $40 and $50 ought to pay dividends. It’s a well-run business.
Undervalued Long-Term Stocks: Walt Disney (DIS)
InvestorPlace’s Chris Tyler wrote in late July that he thought Walt Disney (NYSE:DIS) was a steal given it is trading near its Covid-19 lows. Further, it trades at half its March 2021 peak valuation of $203 and is down 20% YTD.
One of the problems Disney faces is a lack of faith in CEO Bob Chapek, who replaced Bob Iger in February 2020. Iger stayed on as executive chairman until the end of 2021. However, any thought of Iger stepping back into the CEO chair was put to rest recently, as Disney’s board extended Chapek’s contract another two years to July 2025.
Bob Iger ran Disney for 15 years. He followed another big name in Michael Eisner. It’s more than possible we’ll say the same thing about Chapek in the future. This is a company with a lot of gold-plated assets.
Disney remains popular with analysts. Of the 29 covering DIS, 22 rate it a buy with an overall overweight rating and an average target price of $139.15.
Disney stock on a price-to-sales basis hasn’t been this low since March 2020. Before that, you’d have to go back to 2012. I like Mickey Mouse’s chances of revisiting $200 in the next 18-24 months.
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.