In the past year, analysts and investors have been talking a lot about valuation. However, as the stock market flirts with record highs, most of the questions have centered around overvalued stocks. Which begs the question of whether there are any undervalued stocks?
The history books will forever link 2020 with the novel coronavirus pandemic. However investors may well remember 2020 as the year when Robinhood investors told the broader market to “hold my beer” while bidding up stocks regardless of fundamentals.
I hope you’ll give me the benefit of some mirth this holiday season. But stocks continue to look a bit frothy. And in a market like this, it can be difficult to believe that there are any undervalued stocks.
But according to one Morningstar analyst, about a third of the stocks that firm follows are considered to be undervalued. That makes sense when you consider that we are rapidly having a “K-shaped” bubble. That is there are some mega-cap stocks that remain significantly overvalued.
So if you’re an investor that’s willing to zig while others are sagging, now might be a time to look at adding some undervalued stocks that could be ready for whatever new normal the New Year brings. Because every investor is different, I’ve chosen one undervalued stock from seven different sectors.
- Molson Coors (NYSE:TAP)
- Enterprise Products Partners (NYSE:EPD)
- American International Group (NYSE:AIG)
- Duke Energy (NYSE:DUK)
- VMware (NYSE:VMW)
- Simon Property Group (NYSE:SPG)
- BioMarin Pharmaceutical (NASDAQ:BMRN)
Undervalued Stocks: Molson Coors (TAP)
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Defensive stocks in general may be fairly value, but the alcoholic beverage industry looks to be a bit undervalued. And that’s good news if your holiday plans include a cup or two of cheer. But all kidding aside, there are many analysts that seem to be underestimating the demand that will exist for individuals to get out of the house when the pandemic quiets down, which won’t be good for Molson Coors.
One measure of valuation is to look at a stock’s price-to-earnings ratio compared to its sector’s average. In the case of TAP stock, its P/E multiple is just over 17x (17.09x) which is significantly below its peers which average 27.94x. And after a dismal 2020, the company expects to see profits grow up to 58% in the next two years. Stronger revenue and better cash flow should also contribute to the growth story.
TAP stock is currently trading at about a 30% discount to its 52-week high. That gives investors a nice runway for growth when travel and dining markets re-open in earnest.
Enterprise Products Partners (EPD)
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The good news and the bad news of Enterprise Product Partners is the same news. It’s a master limited partnership (MLP). By itself there’s nothing wrong with that. In fact, it’s the reason the company offers shareholders an eye-popping dividend that currently has a yield of over 8%. And as Bob Ciura wrote for Sure Dividend:
EPD has increased its distribution for 21 years in a row, an impressive track record given that so many MLPs have had to cut distributions.
One reason they can offer such a generous dividend is because an MLP does not pay federal taxes at the entity level. Those are passed through to the individual shareholders (partners). No double taxation is a nice feature.
But an MLP is also prone to outsize losses. And with Enterprise being part of the oil and gas sector, that could be a concern. But fossil fuels aren’t going away overnight. And while the economy may not be firing on all cylinders until later into 2021, the sector and EPD stock should benefit from a return to normal.
American International Group (AIG)
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Sadly, 2020 has put many Americans in touch with their mortality. But that’s good news for insurance stocks like American International Group. Despite a recent surge, AIG stock is still down 25% for the year and faces cost pressures due to low interest rates.
In the best of times, the annuities market is challenging, but it’s been particularly brutal in 2020. But that could be changing. This, in turn, is putting pressure on the company’s revenue and ultimately its earnings. But analysts are becoming more bullish on the prospects for AIG stock. And the biggest reason for the optimism is the fact that the economy is getting better. Rising jobs numbers are an indication that policyholders who may have been foregoing premium payments to make ends meet will be able to get back on track.
And the recent upturn in the market is helping the company generate more income from its investment of insurance premiums.
Duke Energy (DUK)
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Duke Energy may be one of the least undervalued stocks on this list. However, while DUK stock is positive for the year, it’s still below its pre-pandemic highs, which means the stock looks like it has room to recover.
Utility stocks were considered overvalued over the last 10 years. But it seems that the novel coronavirus took care of any disparity that existed. And with the sector being slower to rebound than other sectors, there is value to be had. Some investors may find other stocks they like better, but I’ll give the nod to Duke Energy.
DUK stock has climbed over 5% in the last two months, which is nearly twice the sector average. The company boasts a trailing 12-month return on equity (ROE) of 8.28% which is slightly lower than the industry’s ROE of 8.97% for the same period.
If investors are looking for a negative, they can point to Duke’s 54.24% debt-to-capital ratio which is higher than the utility power sector average of 49.53%.
However, Duke pays a solid, safe dividend that will reward value investors.
VMware (VMW)
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Shares of VMware have been trending in a range since early summer. VMW stock often gets compared to Salesforce.com (NYSE:CRM). Salesforce helps businesses connect with their customers and clients through the cloud. But VMware is fundamental to the entire cloud environment, helping businesses make the best use of the cloud on any device.
For investors who are looking for multiple catalysts, VMware also has some exposure to the 5G revolution. But the problem for VMware is that despite the fact that the digital and cloud computing sectors are accelerating, investors seem to only have eyes for CRM stock.
However this means that VMW stock remains undervalued. CRM stock trades for 57x earnings, whereas VMware trades at around 38x. The company recently reported growth in its software-as-a-service (SaaS) business. Investors love SaaS because it means recurring revenue.
The company has made some strategic acquisitions in the past year. And with about $14 per share in cash, VMware should have the cash to continue to do so.
Simon Property Group (SPG)
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My InvestorPlace colleague Dana Blankenhorn made the comment that Simon Property Group’s strategy to buy bankrupt retailers will either be seen as genius or idiotic; there’s usually a thin line.
It’s too early to tell. But one thing seems clear. The real estate sector and particularly real estate investment trusts (REITs) like SPG stock are significantly undervalued.
And as long as Simon continues to pay its dividend, it should continue to be undervalued. Blankenhorn remarked that it remains to be seen if SPG stock will be able to maintain its dividend when it has to buy and turn over inventory for its acquisitions.
Simon has above-average risk. But it has some solid financials for investors willing to give the stock a shot. For example it has generated positive free cash flow (FCF) in eight of the past 10 years. And prior to the pandemic, the company’s profitability was trending higher.
To be fair, Simon Property needs to see the economy return to some form of normal sooner rather than later. Then we’ll see if the company’s solid financials will be enough to reward its shareholders.
BioMarin Pharmaceutical (BMRN)
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BioMarin Pharmaceutical is a leader in rare disease therapy. Like many biotechs, BMRN stock is not without risks. However, the company has many competitive advantages, including scale, expertise, patents and relationships.
BioMarin recently received some bad news when its lead gene therapy candidate for treatment of hemophilia A was delayed. Frequently biotech stocks sell on the news, but in this case it looks like the sell-off may be overdone. Yes, the launch of the drug may be delayed a year later than planned (2022 rather than 2021), the most important thing is that it should get launched.
In addition, BioMarin has a strong pipeline which is another key factor to consider when choosing biotech stocks. And among those candidates is a drug for achondroplasia. This is significant because the condition currently has no approved treatments. However, the FDA has an August 2021 deadline for approving the company’s New Drug Application (NDA).
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