Despite the turmoil on Main Street, the U.S. stock market remained resilient throughout the pandemic and beyond. There are several reasons for this phenomenon. First, the Fed slashed interest rates to stave off recessionary pressure. And second, the U.S. government provided much-needed stimuli packages to keep businesses afloat. In fact, multiples are so high that there is a constant fear a stock market crash is right around the corner. Against this backdrop, finding undervalued stocks becomes a difficult task.
However, we have carefully curated a list of the best stocks in the market trading at steep discounts relative to the S&P 500. It is also important to note that all of these stocks are stable performers, with strong positions in their respective markets. So it’s not like you will buy these just because they are cheap.
So, without further ado, here are seven names at an attractive price point:
- Dollar General (NYSE:DG)
- Honda Motor (NYSE:HMC)
- Intel (NASDAQ:INTC)
- WWE (NYSE:WWE)
- Alibaba (NYSE:BABA)
- KeyCorp (NYSE:KEY)
- Toyota (NYSE:TM)
Undervalued Stocks to Buy: Dollar General (DG)
Forward P/E Discount Relative to the S&P 500: 56% Discount
Dollar General is one of the best-undervalued stocks out there. DG stock is down 3.2% year-to-date, which may come off as surprising, considering the solid track record of this leading American discount retailer, particularly during the pandemic.
In fiscal year 2020, net sales jumped 21.6% to $33.7 billion compared to $27.8 billion in the year-ago period, and diluted EPS increased 59.9% to $10.62 from $6.64 in fiscal 2019. One of the main reasons the company always does well is that most revenue is derived from selling essential items with strong all-weather demand.
However, the retailer is conscious that it needs to keep diversifying. As a result, Dollar General is launching Popshelf to target women shoppers in “diverse suburban communities” with an income bracket between $50,000 and $125,000 through non-consumable items, 95% of which will be under $5. Dollar General’s strategy is to expand outside its traditional core consumer base while keeping its core customers happy.
Honda Motor (HMC)
Forward P/E Discount Relative to the S&P 500: 81% Discount
It seems difficult to advocate for Honda Motor in a world where Tesla (NASDAQ:TSLA) is the biggest car company in the world by market capitalization. There is so much going on in the electric vehicle (EV) sector these days. And that is fueling immense demand for quality EV stocks. But it is important to remember that EVs still sell a quarter of the motor vehicles of traditional automakers.
In fiscal year 2020, Honda, one of the largest conglomerates globally, generated approximately 14.9 trillion Japanese yen in revenue, selling 4.8 million automobiles. In comparison, Tesla delivered nearly 500,000 vehicles in 2020. That is respectable, considering we are at the cusp of the EV revolution. But it highlights the gulf between traditional automakers and Elon Musk’s billion-dollar baby.
Besides, if you look at Honda Motor’s fundamentals, there is no reason why shares should not be skyrocketing. Plus, it’s not like Honda does not have its own set of EV offerings. Yet, as of this writing, the stock is up just 6% in the last three months, a travesty, in my opinion.
Undervalued Stocks to Buy: Intel (INTC)
Forward P/E Discount Relative to the S&P 500: 72% Discount
Intel is part of a select group of companies dominating the semiconductor industry. That group includes Nvidia (NASDAQ:NVDA) and AMD (NASDAQ:AMD), both generating more buzz than Intel, the more established name out there.
Truth be told, there is more than one thing that makes a good stock. First, of course, valuation matters a lot, especially when you consider the multiples at which Nvidia and AMD are trading. However, when you look in totality, Intel is the world’s largest chipmaker and one of the most solid performers. According to CNBC data, the American multinational corporation and technology company has beat expectations 11 times in the last twelve quarters. If that does not scream consistency, then I don’t know what does.
It’s also crucial to note how awesome the company is in terms of payout. For the last six years, the company has consistently hiked its dividend. A payout of 29.95% might seem conservative, but we are talking about a very cash-rich company that is consistently looking to plow back resources into its operations to make sure it keeps pace with its peers.
Trailing P/E Discount Relative to the S&P 500: 31% Discount
Market sentiment is down on WWE stock lately, with shares shedding 4.5% of value last month. For the unfamiliar, WWE is a professional wrestling company that produces television programming and live wrestling events. Professional wrestling had two boom periods. First in 1985, then again in 1998. Each period helped the business set records for a few years, then evaporated.
Now, you would be forgiven for thinking that the heyday for this sport is over. But the thing to remember here is that the WWE has an impressive inbuilt audience. That is why NBC Universal and Fox paid millions to acquire exclusive rights for their programming in multimillion-dollar deals.
WWE also has a ten-year deal for two events per year, running from 2018 to 2027 in Saudi Arabia, which will provide the company with approximately $100 million in revenue per year. It should help you understand that the brainchild of Vince McMahon has several diversified forms of revenue.
EPS has jumped by 43.9% and revenue at 5.8% in the last three years, very respectable numbers. In the last 12 quarters, WWE has reported nine “positive” earnings surprises per Refinitiv data. Looking ahead, analysts tracked by the company expect the top line to increase 11.6% and 27.5% in fiscal 2021 and 2022, respectively.
Despite all this positive momentum, the stock is down 3% in the last month, all the more reason to pick up this consistent performer.
Undervalued Stocks to Buy: Alibaba (BABA)
Trailing P/E Discount Relative to the S&P 500: 44% Discount
Alibaba stock has a rare bad run, falling almost 18% in the last three months. For me, the price trajectory is perplexing.
Amazon (NASDAQ:AMZN) and Alibaba are both e-commerce giants. Amazon dominates the American shopping space, while Alibaba does the same in China. However, Amazon rarely suffers from the kind of price correction that BABA suffers from time to time. You have to chalk that down to the company’s symbiotic relationship with the Chinese administration.
For example, the Xi Jinping administration recently levied a $2.8 billion fine against the Chinese tech giant for antitrust violations. The weirdest part? We saw a bump in the markets immediately following the news. The logic is simple. Although the fine is substantial, the Chinese multinational technology company holds massive cash reserves, and a $2.8 billion outflow will not cause management any sleepless nights.
In fact, shareholders were happy that BABA escaped with a mere rap on the knuckles. However, the message is loud and clear. The Chinese government is not afraid to take strict regulatory action on a domestic company as big as BABA.
The price correction aside, there is little to suggest BABA is anything but a good investment. The company’s revenues increased nearly 30% in 2020, and according to Refinitiv data, consensus estimates are estimating growth rates of 30.6% in 2022 and 57.8% in 2023. That kind of success is hard to come by. That is why it’s strange that BABA is trading at 21.3 times forward price-to-earnings. But that should provide you with plenty of incentive to buy this stock.
Trailing P/E Discount Relative to the S&P 500: 63% Discount
eBay and Amazon are two of the earliest American e-commerce success stories. However, the path for both these companies has diverged significantly in the last few years.
While Amazon has gone from strength to strength, eBay has struggled to gain traction and remain relevant. But the American multinational e-commerce corporation has grown respectably in the shadow of its larger peers. In particular, the pandemic has acted as a boon for the company offering consumer-to-consumer and business-to-consumer sales through its website.
In the last four quarters, the company beat Wall Street expectations from analysts, a sound turnaround. The top line increased by 42%, to $3 billion, in the first quarter, and annual active buyers grew 7%, 187 million customers, and annual active sellers grew 8%, to 20 million. eBay forecasts revenue figures in Q2 to remain in line with Q1.
Despite all this positive momentum, EBAY stock is still trading at 15.5 times forward P/E while Amazon is at 54.6 times forward P/E. When you consider all these factors, it is not surprising that this name is on this list of undervalued stocks.
Undervalued Stocks to Buy: Toyota (TM)
Trailing P/E Discount Relative to the S&P 500: 75% Discount
Much like Honda, Toyota seems to be out of fashion due to the bigger EV heavy hitters out there. But there are still plenty of reasons to remain bullish on Toyota.
The Japanese multinational automotive manufacturer has outstanding fundamentals and a stable position in the market, making it a conservative yet attractive play. In fiscal 2020, it managed to sell 10.5 million units, a very respectable return considering we were smack dab in the middle of a global pandemic.
Toyota holds a market share in Japan of approximately 49%, while the U.S. share is nearly 14.5%. When analyzing TM, it’s also important to understand that this is a highly diversified company with a very successful financing arm and investments in Denso, a parts supplier, Subaru (OTCMKTS:FUJHY), Uber Technologies (NYSE:UBER), Mazda Motor (OTCMKTS:MZDAY), and Suzuki.
Considering its solid foundations, it is amazing that Toyota trades at P/E and price-to-book ratios substantially lower than the automotive sector and the S&P 500. So snap it up before this changes.
On the date of publication, Faizan Farooque 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.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio. Faizan does not directly own the securities mentioned above.
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