What are Undervalued Stocks?
Undervalued stocks are publicly listed companies that trade at a discount on their fair intrinsic value. Many investors use the price-to-earnings (P/E) ratio to find undervalued stocks. Investors must understand why a stock traded below its value, but many undervalued stocks have well-established track records.
Why are Stocks Undervalued?
Several factors can make a stock undervalued. Sometimes, overall market sentiment drags companies lower, or a sector-related issue can create an undervalued stock. Companies may report a disappointing earnings release and weak outlook, which can cause a sell-off.
Why Consider Investing in Undervalued Stocks?
Investing in undervalued stocks is like buying something on sale. For example, if an item that retails at $50 is available at $30, it would make sense to buy more and take advantage of the discount. Therefore, investing in undervalued stocks can deliver outsized returns, but investors should understand the reason behind the discount.
Here are a few things to consider when evaluating undervalued stocks:
- Look for undervalued stocks that have an established track record of profitability.
- Avoid undervalued companies with high debt levels.
- Invest in undervalued stocks that pay sustainable dividends.
- Understand the reason behind the discounted share price.
- Be careful with undervalued stocks that undergo structural changes.
What are the Downsides of Undervalued Stocks?
Undervalued stocks can become more undervalued, especially if negative market sentiment persists. While most investors use P/E ratios, a discounted cash flow analysis, or a dividend discount model, the conclusion is not objective but subjective. Since it depends on individual analysis, it could be flawed and result in an incorrect valuation. Another area of concern is that it may take years for an undervalued stock to close the gap to its fair intrinsic value.
Here is a shortlist of attractive undervalued stocks:
- Toyota (TM)
- Comcast (CMCSA)
- Eastman Chemical Company (EMN)
- APA Corporation (APA)
- Centene Corporation (CNC)
- Devon Energy (DVN)
- Verizon Communications (VZ)
- Qualcomm (QCOM)
- Delta Air Lines (DAL)
- Nexstar Media Group (NXST)
Comcast Fundamental Analysis
Comcast (CMCSA) is a mass media, telecommunications, and entertainment conglomerate. Its best-known divisions and subsidiaries include Xfinity, Comcast Spectacor, NBCUniversal, Sky Group, and Comcast Business. CMCSA is also a component of the NASDAQ 100, the S&P 100, and the S&P 500.
So, why am I bullish on CMCSA after its double-digit rally?
Comcast rewards investors with excellent returns on assets, equity, and invested capital. CMCSA has super profit margins, a good dividend yield, and delivered a reasonable earnings release. I like the business portfolio mix and its exposure to professional sports. The high debt load is concerning, but a September rate cut could provide sufficient bullish energy to keep the current rally alive. The low valuations make CMCSA a prime candidate to buy the dip.
Comcast Fundamental Analysis Snapshot
The price-to-earnings (P/E) ratio of 5.59 makes CMCSA an inexpensive stock. By comparison, the P/E ratio for the S&P 500 is 29.72.
The average analyst price target for CMCSA is 39.81. It suggests good upside potential with manageable downside risks.
Comcast Technical Analysis
Comcast Price Chart
- The CMCSA D1 chart shows price action breaking out above its ascending 61.8% Fibonacci Retracement Fan.
- It also shows Comcast inside of a bullish price channel.
- The Bull Bear Power Indicator is bullish with an ascending trendline.
My Call on Comcast
I am taking a long position in CMCSA between 33.06 and 34.40. This undervalued stock ranks among the cheapest ones. Its dividend yield compensates investors for holding this stock, and Comcast has a quality business mix. Future interest rate cuts will free up additional cash at this conglomerate. CMCSA ranks among my top portfolio picks.
Eastman Chemical Company Fundamental Analysis
Eastman Chemical Company (EMN) is a chemical company. It operates 36 manufacturing sites, with over 14,000 employees. Its business units are Additives & Functional Products, Advanced Materials, Chemical Intermediates, and Fibers. It also engages in commercial-scale chemical recycling for a broad set of waste plastics. Eastman Chemical Company is a member of the S&P 500 Index.
So, why am I bullish on Eastman Chemical Company despite its earnings plunge?
The earnings disaster sparked a nearly 20% one-day plunge to a fresh all-time low. It created a deep-value play, and the dividend yield warrants investors to add EMN. The current share price reflects the bad news, and value investors flocked to Eastman Chemical Company since its plunge to push shares higher by over 20%, almost closing the price gap. The current valuation, dividend yield, plus its expansion in China, should provide more upside momentum.
Eastman Chemical Company Fundamental Analysis Snapshot
The price-to-earnings (P/E) ratio of 9.60 makes EMN an inexpensive stock. By comparison, the P/E ratio for the S&P 500 is 29.84.
The average analyst price target for Eastman Chemical Company is 76.65. It suggests good upside potential from current levels.
Eastman Chemical Company Technical Analysis
Eastman Chemical Company Price Chart
- The EMN D1 chart shows price action between its descending 50.0% and 61.8% Fibonacci Retracement Fan following a double breakout.
- It also shows Eastman Chemical Company inside a narrow bullish price channel.
- The Bull Bear Power Indicator turned bullish and has been improving for over three weeks.
My Call on Comcast
I am taking a long position in Eastman Chemical Company between 66.36 and 69.82. The low valuation and dividend yield above 5% should place this chemical company into portfolios. Despite its earnings miss and downbeat outlook, it ranks at the top of the industry in many core metrics. I see more upside ahead for this undervalued stock with manageable downside risks.
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