Who doesn’t want to buy undervalued long-term stocks? It would be silly to purchase overvalued stocks purposely. But, 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.” Buffett has said that it’s better to a premium for a company with high-quality fundamentals than a low price for a company with poor fundamentals. Yet, he’s also noted that it’s possible to pay too much for a high-quality company.
So, where does this leave us?
For today’s article, I’ve selected seven undervalued long-term stocks with solid underlying businesses whose shares have underperformed the S&P 500 over the past six months.
Undervalued Long-Term Stocks: British American Tobacco (BTI)
Of all the names I’ve selected as undervalued long-term stocks to buy today, British American Tobacco (NYSE:BTI) would be considered the most traditional value play. Shares are up nearly 9% in 2022 but have underperformed the S&P 500 over the past six months, down 2.8% compared with a 4.8% gain for the index.
If you don’t have a problem investing in sin stocks, the UK-based cigarette producer is worthy of your consideration. 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 can’t match. In the U.S., Vuse has grabbed nearly 40% market share and is leading in 35 states. In Japan, Glo has attracted 7.3% of the total nicotine market, and Velo has 69.1% of the European market share for the oral category.
British American Tobacco wants to have 50 million adults using its non-combustible products by 2030. As of September, it was had 21.5 million.
Earlier this year, I recommended BTI for income-generating portfolios. Since then, the stock is roughly flat. But with shares yielding north of 7%, investors have been paid well.
Upstart Holdings (UPST)
There was a time investors couldn’t get enough of the artificial intelligence lending platform operator Upstart Holdings (NASDAQ:UPST), pushing shares up to an all-time of $401.49 in October 2021. Since then, the stock has lost 96% of its value and 56% in the past six months alone. Ouch.
Upstart announced Q3 results in early November. Revenue of $157 million was down 31% from a year ago. On the bottom line, the company lost $19.3 million on an adjusted basis, down considerably from a $57.4 million adjusted profit a year earlier.
The report has two positives, though. First, in the nine months that ended Sept. 30, Upstart generated adjusted net income of $40.3 million. So, it didn’t lose money on a non-GAAP basis. Second, contribution margin — defined as net revenue from fees less borrower acquisition costs and borrower verification and servicing costs divided by net revenue from fees — was 54%, 800 basis points higher than a year ago.
Additionally, management has been aggressively repurchasing shares. The company implemented a $400 million share repurchase program in February 2022 with no expiration. In the first nine months of the year, Upstart repurchased 4.4 million shares for $150.1 million at an average cost of $33.84 per share.
While UPST was certainly overvalued at $400 a share, the stock has sharply overcorrected. Aggressive investors ought to be looking at it closely.
Undervalued Long-Term Stocks: Alpha Metallurgical (AMR)
In October, I put Alpha Metallurgical Resources (NYSE:AMR) on a list of seven under-the-radar stocks with 100% upside potential. While it’s lost nearly 5% of its value in the two months since, I still believe shares provide excellent value for long-term investors.
Owning AMR makes sense because it’s unlikely we’ll see a decline in demand for metallurgical coal, which is used to make steel, anytime soon. Alpha Metallurgical Resources produces nearly a quarter of the United States’ metallurgical coal. In 2021, it produced 16.2 million tons of coal from 23 coal mines and eight prep plants, generating $2.25 billion in coal revenue. It currently has met coal reserves of 336 million. That’s nearly 21 years of reserves ahead of it based on 2021 production levels.
In late November, Alpha reported its operational guidance for the upcoming year. In 2023, it expects to ship at least 16.7 million tons of coal, with 33% priced at an average of $181.56 a ton, well below its $109 average cost to get it out of the ground.
The company also noted some highlights from 2022. These included paying off its term-loan debt and returning more than $500 million to shareholders in the form of dividends and share repurchases. In early January, the company will pay a $5 special dividend to shareholders of record on Dec. 15. While that date has passed, the company also increased its regular quarterly cash dividend to 41.8 cents per share for a forward annual yield of 1.1%.
AMR stock is up 138% YTD. However, shares are roughly flat over the past six months, perhaps providing the consolidation needed for the next leg up. Investors should also take note of the stock’s return on invested capital of 142.53% and earnings yield of 54.23%.
Walt Disney (DIS)
Walt Disney (NYSE:DIS) has struggled this year, with shares losing 42% of their value. The stock has been weighed down by uncertainty related to inflation and the potential impact of a global recession, as well as mounting losses for its Disney+ streaming service. Yet, the stock has also been a long-term underperformer, down 19% over the past five years compared with a 45%-plus gain in the S&P 500. That said, a recent development could breathe new life into shares.
That development is the return of former CEO Bog Iger, who led the company from 2005 through 2020. Iger’s successor, Bob Chapek, held the top job for just two years — arguably two of the toughest years any entertainment executive could face given Covid-19. But Chapek’s reign was also marred with other controversies.
Iger has his work cut out for him. But both the business and share price grew substantially during his 15 years in charge — from $50 billion to over $250 billion and from less than $24 a share to around $139, respectively, according to Forbes.
One near-term catalyst for the stock is likely to be the box office performance of Avatar: The Way of Water, director James Cameron’s sequel to Avatar, his 2009 film that generated $2.9 billion at the box office. Avatar: The Way of Water, which hit movie theaters this weekend, grossed $435 million globally, slightly below projections but a strong start nonetheless.
The question is whether it will make money for Disney. Cameron has said the movie will have to do $2 billion globally to break even. But according to BofA Securities analyst Jessica Reif Ehrlich, it may not matter. She was cited in Barron’s as saying that “if the movie does well, it could drive revenue streams for Disney, and if it doesn’t do well ‘there could potentially be a write down.'”
Analysts are bullish on DIS stock. Of the 28 who cover it, 23 rate it “overweight” or a “buy,” with five “holds” and no “sell” ratings. I don’t think there’s any question Disney stock is worth more than where it trades today. How much more is for investors to decide in 2023.
Undervalued Long-Term Stocks: Williams-Sonoma (WSM)
Shares of specialty retailer of home furniture and other household products Williams-Sonoma (NYSE:WSM) have lost 34% this year. This is not surprising given the sharp drops in consumer spending and sentiment this year. Despite Morgan Stanley downgrading WSM to “underweight” at the end of November on margin concerns caused by weakening demand for its home furnishings and household goods, the company is my favorite stock on this list of undervalued long-term stocks to buy.
In June 2016, I called WSM the best stock in retail. Since then, shares are up 110% compared with 43% for the First Trust Consumer Discretionary AlphaDEX Fund (NYSEARCA:FXD), an equal-weighted consumer discretionary ETF.
CEO Laura Alber was recently named to Forbes’ 50 over 50 list in the Lifestyles category. Forbes noted that Alber is “the longest-standing female CEO for a company of its size with $8.25 billion in sales.”
Retailers are facing myriad headwinds. For evidence, just look at Target’s (NYSE:TGT) latest earnings debacle. But Williams-Sonoma caters to a different, more affluent crowd, with the average shopper having a six-figure household income. Therefore, investors may find the retailer to be more resilient amid an economic downturn.
Williams-Sonoma’s ROIC of 41.3 and earnings yield of 14.7% are both excellent. Investors should take any opportunity to add WSM stock to their long-term portfolio under $110.
Shares of the personal computer maker HP (NYSE:HPQ) have fallen 29% year to date and 20% in the past six months alone, largely on demand concerns following a post-pandemic surge and amid a slowing economy. Yet, in the first two quarters of 2022, Berkshire Hathaway (NYSE:BRKB-A, BRKB-B) bought almost 121 million shares of HPQ. As a result, Warren Buffett’s holding company now owns 12.3% of the HP.
So, what does Buffett see in the legacy maker of laptops, desktops and printers that others don’t?
If I had to guess, he sees a company that operates a decent-sized business whose products will continue to be in demand for years, albeit not to the extent that they were a decade ago. But I’ll bet the $1.05 in annual dividends the company pays is enough to compensate for slowing growth.
The company has the cash flow to ride out a challenging consumer market, which has slowed more than expected on inflation concerns and other economic headwinds. Its fiscal 2022 results, announced in late November, showed revenue fell by less than 1% to $63.0 billion. Although free cash flow was 8% lower than a year earlier, it came in at $3.9 billion. The company ended the quarter with $3.2 billion in cash.
To right-size its business, the company announced a three-year plan to cut costs by $1.4 billion or more by 2025. To do this, it plans to eliminate roughly 5,000 jobs over the next three years at the midpoint of its guidance. About 40% of the job cuts will come in 2023. HP also plans to reduce its real estate holdings.
Based on its 2022 free cash flow of $3.9 billion and a $26.2 billion market cap, HPQ has a free cash flow yield of 14.9%. Anything above 8% is value territory. HPQ stock will be back in the $30s soon enough.
Undervalued Long-Term Stocks: Mesabi Trust (MSB)
Mesabi Trust (NYSE:MSB) is the tiniest of the seven stocks on my list of undervalued long-term stocks to buy, with a market cap of $237.5 million. Mesabi is a royalty trust that generates income from the Peter Mitchell mine at the eastern end of the Mesabi Iron Range in Minnesota. Shares are down 31.5% YTD and 28% over the past six months.
The mine is operated by the Northshore Mining Company, a subsidiary of Cleveland-Cliffs (NYSE:CLF). According to Mesabi Trust, “Northshore mines the ore, which is in the form of taconite, a hard rock containing approximately 21% recoverable iron, crushes it, separates the iron particles from the non-metallic, and forms the resulting concentrate into pellets which are shipped for use in steel-producing blast furnaces of customers of CCI, an international mining company, the largest producer of iron ore pellets in North America.”
Mesabi receives royalties from Northshore based on the price of the pellets produced at the mine. Mesabi’s revenues are passed through to its unitholders.
Investors should know that MSB is no slam dunk. The trust is currently in arbitration with Cleveland-Cliffs and its Northshore Mining Company subsidiary for alleged underpayment of royalties between 2020 and 2022. As a result of the impasse — partly due to Cleveland-Cliffs idling its Northshore facility — zero pellets were produced in the three months ended Oct. 31, compared to 1.12 million a year earlier.
Through the first three quarters of 2022, Mesabi has declared $1.88 per unit in distributions. However, it chose not to declare a distribution in the third quarter. Until the situation is resolved, there likely won’t be any distributions, so there’s no incentive to buy shares until then. Once this is resolved, though, the price will jump immediately. So, it’s a timing thing.
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.