Have you ever wondered why some stocks remain undervalued despite strong fundamentals? In this updated article for 2024, we delve deep into the world of undervalued stocks, uncover hidden gems, and offer you the latest strategies to identify them.
What are undervalued stocks?
Undervalued stocks are assets that are trading below their intrinsic value. In other words, the market price is lower than what the company is worth. They are often overlooked by the market as investors either do not recognize their true value or they are simply unaware of the company's potential for growth.
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The intrinsic value of a stock is determined by several factors, such as:
- Financial health of the company
- Growth prospects
- Competitive landscape
- Industry trends
When an asset is trading below its intrinsic value, it offers investors the opportunity to buy at a discounted price.
Investing in undervalued assets can be a profitable strategy for traders who are willing to do their research and take a long-term approach. However, it's important to note that just because a stock is undervalued doesn't necessarily mean it's a good investment.
Investors should conduct thorough research and analysis to determine whether the asset is undervalued due to temporary factors such as market volatility or negative news, or whether there are fundamental issues affecting the company's financial health and growth prospects.
10 undervalued stocks for 2024
Here are 10 stocks considered undervalued and defensive for 2024. Defensive stocks are those that remain stable during economic downturns, often outperforming the market during recessionary times. The focus is on stocks from utilities, healthcare, and consumer staples, and real estate sectors.
Key highlights:
- The global economy has been unpredictable post-COVID-19 and the Russia-Ukraine war, with many analysts predicting a recession in 2023.
- However, as of December 2023, the S&P 500 had gained 24.33%.
- Goldman Sachs predicts a 2.1% growth in the US GDP for 2024 and a decrease in inflation to around 2.4% by December 2024.
Examples of undervalued stocks:
Entergy Corporation (NYSE: ETR):
- Business overview: Based in Louisiana, Entergy Corporation is a significant player in the energy sector, primarily involved in electricity generation, transmission, and distribution.
- Market position: Known for its substantial investments in clean energy and infrastructure, Entergy has a strong presence in the Southern United States.
- Investment appeal: The company's focus on sustainable energy solutions and stable revenue from utility operations make it an attractive defensive stock.
Ambev S.A. (NYSE: ABEV):
- Business overview: Ambev, headquartered in Brazil, is a leading brewing company with a diverse portfolio that includes popular beer brands and soft drinks.
- Market reach: With a strong foothold in the Latin American market, Ambev is known for its extensive distribution network and brand loyalty.
- Investment appeal: The company's dominance in a relatively stable consumer sector positions it as a resilient investment choice.
Bristol-Myers Squibb Company (NYSE: BMY):
- Business overview: As a global pharmaceutical giant, Bristol-Myers Squibb specializes in developing innovative medicines in areas like oncology and cardiovascular diseases.
- Financial stability: The company has a history of consistent dividend increases, reflecting its financial health and commitment to shareholder value.
- Investment appeal: Its strong pipeline of drugs and established market presence make it a defensive stock with growth potential.
VICI Properties Inc. (NYSE: VICI):
- Business overview: This New York-based Real Estate Investment Trust (REIT) focuses on gaming, hospitality, and entertainment properties.
- Portfolio strength: VICI Properties owns some of the most iconic properties in the gaming and entertainment industry, offering a unique investment profile.
- Investment appeal: The company's real estate assets provide stable rental income, making it a solid defensive stock choice.
Sanofi (NASDAQ: SNY):
- Business overview: Sanofi, a French multinational, is a leader in pharmaceuticals, focusing on a wide range of medicines and vaccines.
- Global impact: With a strong presence in both developed and emerging markets, Sanofi is at the forefront of addressing global health challenges.
- Investment appeal: The company's diverse product portfolio and commitment to innovation in healthcare make it a resilient investment.
United Therapeutics Corporation (NASDAQ: UTHR):
- Business overview: Specializing in pharmaceutical development, United Therapeutics focuses on treating cardiovascular disorders and infectious diseases.
- Innovation-driven: The company is known for its cutting-edge research and development in biotechnology and medicine.
- Investment appeal: Its niche focus and innovative pipeline offer potential for growth within the defensive stock category.
CVS Health Corporation (NYSE: CVS):
- Business overview: CVS Health is a comprehensive healthcare provider, offering services from retail pharmacy to healthcare benefits management.
- Market presence: As one of the largest pharmacy chains in the U.S., CVS has a significant impact on the healthcare sector.
- Investment appeal: The company's integrated model and expanding healthcare services position it as a stable investment in the defensive stock category.
Albertsons Companies, Inc. (NYSE: ACI):
- Business overview: Operating a network of supermarkets and drug stores, Albertsons is a key player in the U.S. retail sector.
- Consumer reach: With a wide range of store brands and locations, Albertsons caters to a broad consumer base.
- Investment appeal: The company's strong market presence and consistent performance in the retail sector make it an attractive defensive stock.
Public Service Enterprise Group Incorporated (NYSE: PEG):
- Business overview: This public utility holding company is involved in energy generation and distribution, primarily in the Northeastern U.S.
- Stable operations: With a focus on reliable and sustainable energy solutions, PSEG has a strong track record of operational stability.
- Investment appeal: The company's essential service provision and commitment to clean energy make it a compelling choice for defensive stock investors.
GSK plc (NYSE: GSK):
- Business overview: GSK, based in the UK, is a global healthcare company focusing on pharmaceuticals, vaccines, and consumer healthcare products.
- Innovation and reach: Known for its research-driven approach, GSK has a wide-reaching impact on global health.
- Investment appeal: The company's diverse healthcare portfolio and strong research capabilities offer stability and growth potential, making it a notable defensive stock.
The list was compiled using the Yahoo Finance stock screener, focusing on companies with a P/E ratio below 15 and a 5-year monthly beta under 0.8.The stocks were chosen from sectors known for their defensive nature.
These stocks represent potential opportunities for investors looking for undervalued and stable investments in 2024. However, individual research and consideration of personal investment strategies are advised.
How to find undervalued stocks
Finding undervalued stocks requires a little research and analysis. Investors need to look for stocks that are trading below their intrinsic value, which can be determined by several metrics. Here are some of the main ones to check out:
Price-earnings ratio (P/E ratio)
The price-earnings ratio (P/E ratio) is the most commonly used metric to determine whether a stock is undervalued or overvalued. It is calculated by dividing the stock's current price by its earnings per share (EPS). A low ratio suggests the stock is undervalued, while a high ratio suggests it is overvalued.
Price-to-book value ratio (P/B ratio)
The price-to-book ratio (P/B ratio) compares a company's market value to its book value. It is calculated by dividing the stock's current price by its book value per share. A low index indicates that the stock is undervalued, while a high value indicates that it is overvalued.
Dividend yield
The dividend yield is the amount of dividend a company pays per share in relation to its share price. A high dividend suggests the stock is undervalued, while a low index suggests the stock is overvalued.
Price to Sales Ratio (P/S Ratio)
The price-to-sales ratio (P/S ratio) compares a company's market value with its sales. It is calculated by dividing the current price of the stock by the sales per share. A low ratio suggests the stock exists. undervalued, while a high number suggests it is overvalued.
Free cash flow
Free cash flow is the cash flow a company generates after accounting for capital expenditures. A company with high value is more likely to be undervalued because it has the potential to invest in growth opportunities or return cash to shareholders.
By looking at key indicators, investors can identify undervalued assets. You should also consider qualitative factors such as the company's management team, the competitive landscape, and industry trends to identify stocks that have the potential for significant returns over the long term.
Why might a stock be undervalued?
There are several reasons why a stock could be undervalued. Understanding these reasons can help make informed decisions. Here are some of the most common reasons:
- Market volatility can cause stocks to be undervalued. When the market experiences a downturn, investors may sell their stocks, causing the price to drop. This can provide an opportunity for smart investors to buy undervalued stocks.
- Negative news about a company can cause its shares to be undervalued. This can be due to a variety of factors, such as poor financial performance, regulatory issues or management issues. Investors may panic and sell their stocks , causing the price to drop. However, if the negative news is temporary and the company has strong financials and growth prospects, the stock may be undervalued.
- Poor financial performance can also cause a stock to be undervalued. If a company experiences declining sales, declining profits, or increasing debt, investors may lose confidence in the company's ability to grow and generate profits. This can cause the share price to fall below its intrinsic value.
- Stocks in cyclical industries such as automotive or construction may be undervalued during a downturn in the industry cycle. This is because investors may anticipate reduced demand for the company's products or services, which could cause the stock price to fall below its intrinsic value.
There are several reasons why a stock could be undervalued. By understanding them, investors can identify opportunities that have the potential for significant returns over the long term. However, they also need to conduct thorough research and analysis before making a decision.
The Most Undervalued Stocks in History
Throughout history, there have been several undervalued stocks that have provided investors with significant returns. These assets have often been overlooked by the market due to temporary factors, offering astute investors the opportunity to purchase them at a discounted price. Here are some of the most famous examples:
Amazon (AMZN.US)
In 2001, Amazon (AMZN.US) traded at just $5 per share, well below its current price of over $3,000 per share. The company was initially undervalued because of concerns about its profitability and ability to compete with traditional retailers. However, its innovative business model and strong growth potential proved to be a winning combination, and the stock has since become one of the most valuable in the world.
Apple (AAPL.US)
In 1997, Apple traded at just $0.97 per share, well below its current price of over $130 per share. The company was undervalued due to declining sales and concerns about its ability to compete with Microsoft. However, under Steve Jobs' leadership, the company launched several groundbreaking products, including the iPod, iPhone and iPad, and the stock has since become one of the most valuable in the world.
Microsoft (MSFT)
In 1990, Microsoft traded at just $0.67 per share, well below its current price of over $250 per share. The company has been undervalued due to concerns about its dependence on IBM and the future of the personal computer industry. However, its dominance in the software industry and its ability to innovate and adapt to changing market conditions have made it one of the most valuable companies in the world.
Throughout history, there have been several undervalued stocks that have provided investors with significant returns. These stocks have often been overlooked by the market due to temporary factors such as concerns about profitability, declining sales, or industry trends. However, smart investors who saw the long-term potential of these companies were able to purchase them at a discount and benefit from their growth and success.
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Investing in undervalued stocks can be a profitable strategy for investors, but it is important to remember that it is not a guaranteed path to success . While undervalued stocks can provide an opportunity to purchase assets at a discounted price, they come with risks and not all stocks will perform well in the long term.
Additionally, it is important for investors to avoid the temptation to focus solely on undervalued stocks and maintain a diversified portfolio that includes a mix of undervalued stocks and growth stocks. This approach can help manage risk and maximize potential returns.
Traders should keep in mind that the stock market is inherently volatile and the value of stocks may fluctuate based on various external factors. Therefore, it is important to be patient and take a long-term perspective when it comes to investing in undervalued stocks.
Summary
Identifying undervalued stocks requires patience, research, and a long-term perspective, but the potential rewards for traders willing to do the work can be significant. By maintaining a diversified portfolio, managing risk, and taking a long-term perspective, investors can increase their chances of success when investing in undervalued stocks.
FAQs
1. What does it mean when a stock is considered 'undervalued'?
An undervalued stock is selling for a price lower than what is perceived to be its actual value based on financial metrics. This can happen due to various reasons like market fluctuations or temporary setbacks. An undervalued stock is thought to offer a good value for its price.
2. How can I identify undervalued stocks?
Identifying undervalued stocks typically involves looking at financial indicators like the price-to-earnings ratio, and dividend yield, and comparing the company's stock price to its intrinsic value. It also involves a thorough analysis of the company's fundamentals, including its financial health, industry position, and future growth prospects.
3. Are undervalued stocks always a good investment?
Not necessarily. While an undervalued stock can be a good investment opportunity, it's important to understand why the stock is undervalued. Factors such as declining industry, poor management, or financial instability can lead to undervaluation. Therefore, thorough research and sometimes a long-term investment perspective are essential.
4. What risks are involved in investing in undervalued stocks?
The primary risk is that the market may not recognize the stock's true value, or the factors causing the undervaluation may worsen. There's also the risk that the investor's analysis might be incorrect. Like any investment, undervalued stocks carry the risk of loss, especially in the short term.
5. Should I diversify my portfolio with undervalued stocks?
Diversification is a key strategy in investing. Including undervalued stocks in your portfolio can be a part of this strategy. However, it's important to balance them with investments in other types of stocks and financial instruments to mitigate risk.
6. How long should I hold onto an undervalued stock?
The holding period for an undervalued stock can vary. Some investors hold these stocks until the market corrects the price, while others may have a long-term investment approach, waiting for the company to grow in value. Your decision should align with your overall investment strategy and risk tolerance.
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