Investors are entering a new era that could very well be dominated by value investing for quite some time. As a result, investors should look for undervalued value stocks to buy now.
The period following the 2008 Great Recession ushered in a tremendous period of opportunity for growth stocks, as borrowing costs were reduced to nearly zero in an effort to spur economic activity. That attempt worked, especially benefitting growth names which tend to thrive during periods of low interest rates and free money.
Because of persistent inflation, 2022 may be the year that ushers in a golden period for value stocks. Interest rates are much higher as the Fed tries to cool an overheated economy by reducing borrowing, spurring investors to search for stocks with strong fundamentals.
Consequently, the reliability and profitability of value stocks has greatly increased their attractiveness, leaving the following stocks well-positioned to outperform.
United Rentals (URI)
United Rentals (NYSE:URI) rents equipment to everyone from industrial companies to municipalities to homeowners.
The company released its third-quarter earnings in late October. At that time, it increased its full-year guidance for revenue, EBITDA, excluding some items, and gross and net rental capital spending. All of the positive news helped boost URI stock from just over $300 to above $375 as of Friday’s close.
But analysts’ average price target on URI stock is above $415.
On the one hand, United Rentals doesn’t boast particularly impressive valuation metrics, as its price-earnings ratio of 14 is not very much below the stock market’s average. The argument in favor of United Rentals relies more on its strong profitability metrics than on traditional value metrics.
Indeed, its operating margin and net margin are near or above the 90th percentile of its business-to-business rental industry peers. That should make the stock attractive to the many investors who are particularly keen on profitability during this volatile period.
Darling Ingredients (DAR)
Darling Ingredients (NYSE:DAR) provides feed, food, and fuel ingredients to its global partners. During the third quarter, its sales increased 47% year-over-year to $1.747 billion.
That is particularly impressive for a company that is well-established and profitable. Generally speaking, tech companies tend to grow rapidly and generate significant net losses.
However, Darling Ingredients did not post losses in Q3 and has not done so anytime recently. In Q3, its net income came in at $192.3 million in net income, up from $146.8 million of net income during the same period a year earlier. Given its low price-earnings ratio of 11.5, its high profitability, and its rapid growth, DAR appears to be greatly undervalued at its current level.
DAR stock trades around $62 while analysts’ average price target on the name is $96.80.
Pfizer (NYSE:PFE) remains undervalued relative to its peers despite having won the race to develop an effective Covid-19 vaccine. The problem Pfizer faces is that the patents of a number of its most lucrative drugs are poised to expire within the next seven years, threatening to erode its value.
Pfizer is expected to lose $17 billion of annual revenue by the end of this decade. That has investors worried about the longer-term fate of PFE stock despite the company’s revenue windfall from its Covid-19 vaccine.
As a result, Pfizer trades at discounted levels based on its earnings relative to its peers that don’t face similar patent-expiration issues. However, PFE plans to more than make up for its expected revenue losses.
Specifically, the drug maker has stated that it expects to add $20 billion of annual revenue in the medium term by launching new drugs and increase its annual revenue by another $25 billion by selling more of its existing treatments.
The company can certainly redirect some of its windfall profits to acquisitions. That would be one of the quickest ways for it to ensure that its revenues remain strong. Because of the decreased valuations of many drug makers due to the bear market, Pfizer has excellent opportunities to do so.
I think there are valid reasons to believe that Zoetis can move in that direction. But the most compelling argument in favor of ZTS stock is that the company remains highly profitable while growing at a respectable rate relative to its sector.
Zoetis grew modestly through the first nine months of 2022. Its revenues increased by 4% during that time year-over-year while its net income rose by 2%. But during that time, the company’s net margins exceeded those of 92% of its peers in the drug manufacturing sector. It’s highly profitable overall and its 23.9% rate of return on invested capital is quite high.
One research firm expects animal pharmaceuticals to grow at an average annual rate of nearly 7% through 2028. Zoetis’ revenues have grown slightly slower than that in 2022, but it is a safe company in a sector that’s growing moderately, and its stock won’t fall much further.
Citigroup (NYSE:C) stock is an interesting traditional value stock that continues to be overlooked.
By many value metrics, Citigroup is severely underpriced. Its current price-earnings ratio of 6.35 is lower than roughly 80% of its banking industry peers. Big banks should perform well in 2023 with strong interest income certain to continue as rates go higher.
Citigroup is arguably undervalued based on its low P/E ratio. It has a median P/E ratio of 10.2 over the past ten years, so C stock is likely to move higher in 2023 as inflation falls.
Citigroup was keen to note that it has a book value per share of $92.71, more than double Friday’s closing price of $47.31. That is a reasonable indication that C stock is undervalued.
Investors should also note that Citigroup has a rather high dividend yield of 4.4%.
Kraft Heinz (KHC)
Kraft Heinz (NYSE:KHC) stock is a strong example of why investing in consumer staples stocks is a good choice in 2023. Like so many other stocks in that sector, KHC appreciated in 2022, moving from $36 to $40. Meanwhile, the S&P 500 dropped nearly 20% during the same period.
The reason that Kraft Heinz has done so well is part performance and part perception. Kraft Heinz’s top line continues to grow, as its sales climbed 2.9% in Q3. That said, its overall performance was less than stellar as its net income decreased 41% versus the same period a year earlier to $435 million.
The company, like nearly all others, is dealing with rising expenses and also was hurt by a number of non-cash impairments.
But investors’ perception of consumer packaged goods firms is generally strong during economic downturns. Kraft Heinz is no exception, and that reality, along with a high dividend yield of 3.8%, makes KHC an undervalued stock.
Coca-Cola (NYSE:KO) remains undervalued even as its getting close to becoming fully priced. Specifically, KO stock, which closed at $63.40 on Friday, is nearing analysts’ average price target of $67.39.
But KO is still undervalued because the company’s defensive positioning makes its stock compelling. That’s largely because Coca-Cola’s ability to preserve its invested capital shouldn’t be ignored. During a very tough 2022, KO stock has appreciated in price by nearly 8%. In other words, Coca-Cola is a quintessential value stock.
Here’s another interesting point about KO stock: During what was one of the longest bull markets over the past decade, it returned an average of nearly 9% annually. In other words, Coca-Cola is has proven that it performs equally well during both bull and bear markets. That fact shouldn’t be overlooked.
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.