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10 undervalued stocks despite some of them around record highs
With the S & P 500 on Friday closing above 5,000 for the first time ever, recognizing the winners this year has not been difficult. But what about the ones that are still cheap — or less expensive — on a valuation basis? Those are not as easy to spot. We screened the 32 stocks in our portfolio late Monday and identified 10 that are undervalued based on traditional market metrics following their latest quarterly earnings reports. (The market was under heavy pressure Tuesday after a hotter-than-expected consumer price index.) To determine valuation, we reviewed two metrics — price-to-earnings (P/E) ratios and P/E-to-growth (PEG) ratios — and compared each to their historical five-year averages. P/Es and PEG ratios A stock’s P/E shows how much shareholders are paying in share price for earnings. We use forward P/Es in our analysis. A stock with a lower P/E is considered to be cheaper on a valuation basis. Sometimes, however, a low P/E could be a red flag — signaling earnings estimates are too high and need to come down, which usually leads to a drop in share price, or something is fundamentally wrong with the company, such as slowing growth. The PEG ratio, another valuation tool, starts with the price-to-earnings ratio and divides the P/E by estimated earnings growth. This metric helps investors determine whether they’re paying too much today for a company’s estimated growth in the future. A good PEG ratio is 1 or lower. There is a major consideration when analyzing five-year valuation average comparisons: interest rates. As inflation has cooled, there has been a debate recently over when central bankers should cut rates. If rates come down this year, as expected, then higher multiples could be supported. The 10 undervalued companies from our screen all have strong businesses. Some of these stocks, like the overall market, are trading at or near record-high prices. But price is what you pay and value is what you get. Stocks can have high prices based on historical trading patterns and still be considered cheap based on valuation. As a yardstick, the S & P 500 has a price-to-earnings multiple of 20.5 times the next 12 months’ earnings estimates. That’s above its five-year average of 18.9. The stocks we’re highlighting here are all trading below their five-year average. In other words, the overall market is more expensive compared to historical norms and these stocks are less expensive. All data is from FactSet as of Monday. 1. Alphabet Price-to-earnings ratio (P/E): 21.1 P/E vs. peers: 10% cheaper P/E-to-growth ratio (PEG): 1.3 Alphabet ‘s forward P/E of 21.5 times is 10% cheaper than peers and below its five-year average of 23.4. The PEG of 1.3 is below the historical average of 1.5 — meaning you’re paying less for estimated growth, too. Alphabet shares have the cheapest valuation of all our Significant Six mega-cap tech stocks, which include Amazon, Apple , Microsoft , Meta Platforms and Nvidia. Alphabet’s attractive valuation comes despite multiple avenues for growth within Google Cloud and generative artificial intelligence through Gemini, the successor to Bard. Ongoing cost discipline should also benefit margin expansion. While advertising revenue came in softer than anticipated in Alphabet’s most recent quarter , we believe the tech firm’s use of gen AI in Google search can help improve results. GOOGL 5Y mountain Alphabet 5 years The stock would need to gain about 4% to reach last month’s all-time high. We have our wait-for-a-pullback 2 rating on shares because it’s not our style to chase moves higher even if the valuation is attractive. 2. Amazon Price-to-earnings ratio (P/E): 40.9 P/E vs. peers: flat P/E-to-growth ratio (PEG): 1.3 Amazon ‘s forward P/E of 40.9 times is relatively flat compared to peers and well below its five-year average of 62.7. The PEG of 1.2 is half its historical average. The bargain here is on growth versus what was paid for Amazon’s growth in the past. That’s significant. Amazon shows promise in delivering consistent revenue and earnings growth in the years to come. Profitability in retail is incrementally growing as management focuses on speeding up delivery times supported by the regionalization of its fulfillment network. Cost efficiencies also show the strength of its operating margin growth opportunity across segments. Amazon continues to exhibit strong advertising revenue growth, and the company’s Amazon Web Services cloud unit is back and presents a major multiyear growth opportunity. AMZN 5Y mountain Amazon 5 years Shares of Amazon hit a 52-week high Monday but would still have to increase 9% to hit their July 2021 all-time closing high. For the same reasons as Alphabet, we have a 2 rating on Amazon shares. 3. Constellation Brands Price-to-earnings ratio (P/E): 18.1 P/E vs. peers: flat P/E-to-growth ratio (PEG): 1.8 Constellation Brands ‘ forward P/E of 18.1 times roughly the same as peers and below its five-year average of 20.2. The PEG of 1.8 is well below its historical norm of 2.7. So again, cheaper all around. The maker of Corona, Modelo, and Pacifico delivered a largely positive third quarter last month, with its core Beer business delivering solid results during an off-season period. The company’s struggling Wine & Spirits segment continued to disappoint. Jim Cramer has said over and over that Constellation should concentrate on Beer and offload Wine & Spirits. Management reaffirmed its consolidated comparable earnings guidance while raising its full-year outlook for operating and free cash flow. Shares of Constellation would need to add 10% to match their record closing high of nearly $273 each back in July. We think the stock can get back to those levels. And with an attractive valuation to boost, we have the stock at our buy-equivalent 1 rating. 4. Disney Price-to-earnings ratio (P/E): 22.3 P/E vs. peers: 20% cheaper P/E-to-growth ratio (PEG): 1.2 Disney stock is undervalued even with shares rallying roughly 12% after the company reported an upbeat fiscal 2024 first quarter. The company’s P/E ratio of 21.5 times is about 20% cheaper than peers and below its historical average of 29.6. The PEG of 1.2 compared to its historical 2.6 also flashes bargain, too. Nelson Peltz sees “undervalued” as a problem here. That’s why the activist investor is fighting for Disney board seats. Jim has said he wants Disney’s board to have more “skin in the game,” meaning more share ownership among its members. Peltz would bring that and past success in creating more shareholder value. Disney doesn’t want Peltz on the board, saying outside distractions are not what the company needs. CEO Bob Iger was able to show strength in parks as well as some progress in the entertainment giant’s financials. Management delivered improved profitability, cut streaming losses, and issued guidance of earnings-per-share growing at least 20% for fiscal year 2024 compared to the prior year. However, advertising trends in Disney’s linear networks have been weak as customers migrate to streaming services and a series of the company’s recent films have been duds at the box office. Disney would have to nearly double to get back to its March 2021 all-time closing high of almost $202 per share. We know the turnaround at Disney is going to take a while. But with an inexpensive valuation and an emerging path to growth ahead, we have a 1 rating on the stock. 5. Honeywell Price-to-earnings ratio (P/E): 19.4 P/E vs. peers: 10% cheaper P/E-to-growth ratio (PEG): 2.3 We like how Honeywell ‘s stock is valued post-earnings . The forward P/E of 19.4 times is 10% cheaper than peers and below its five-year average of 21.5. The PEG of 2.3 versus its average of 2.8. Shares pulled back about 3% after the company reported lower-than-expected organic sales. But what Wall Street didn’t credit was the company had better margins, cash flow and solid backlog. We bought shares on weakness on earnings day Feb. 1 because we still believe in the long-term for the industrial giant’s strong execution. While sales were disappointing. Honeywell’s historically strong Aerospace segment continued to deliver. However, the company is still dealing with softness in its Safety and Productivity Solutions as well as Building Technologies segments. HON 5Y mountain Honeywell 5 years Honeywell shares still need to gain nearly 20% to get back to its record close of just over $234 each back in August 2021. We have a 1 rating on the stock, appreciating its valuation and long-term prospects. 6. Nvidia Price-to-earnings ratio (P/E): 33.5 P/E vs. peers: 10% most expensive P/E-to-growth ratio (PEG): 0.8 After Nvidia ‘s stellar triple in 2023, shares still screen cheap even after its 40% year-to-date gain. In terms of valuation, Nvidia is attractive boasting a forward P/E of 33.5 times. That’s about 10% higher than peers but you could argue that it deserves it due to its utter domination of the market for semiconductors that can artificial intelligence. Not to mention, Nvidia’s P/E is still lower than its historical average of 39.6. Add in the PEG, at a reading of 0.8 versus the 2.2 five-year average, and that’s a dirt cheap cost for expected sky-high growth. NVDA 5Y mountain Nvidia 5 years As every day seems to bring a new high lately, we have a 2 rating on the stock in recognition that we don’t want to chase this runaway train higher. But we still believe Nvidia should be part of any long-term portfolio. We explain in a recent commentary how investors with no Nvidia position (or no positions in the rest of our Significant Six), might think about getting in. 7. Salesforce Price-to-earnings ratio (P/E): 30.3 P/E vs. peers: 10% cheaper P/E-to-growth ratio (PEG): 1.4 Salesforce ‘s forward P/E of 30.3 times — 10% cheaper than peers and below its historical average of 46 —and a PEG of 1.4 versus its five-year average of 2.5 show how undervalued the stock is. Back in November , the consumer relationship management software company reported a solid fiscal 2024 third quarter. (The most recent quarter comes at the end of February.) Management at the time boasted solid deal activity even after the tech giant hiked prices on some of its products. The company’s guidance was also upbeat as it expects to grow revenue at a solid pace, accompanied by margin gains. CRM 5Y mountain Salesforce 5 years The stock has been on a tear and would need to add only 7.6% to reach its nearly $310 all-time closing high in November 2021. Shares hit a 52-week high last week. Acknowledging the run, we have a 2 rating on the stock. 8. Starbucks Price-to-earnings ratio (P/E): 22.5 P/E vs. peers: 10% cheaper P/E-to-growth ratio (PEG): 1.3 Starbucks ‘ forward P/E ratio of 22.5 times is 10% cheaper than peers and below its 5-year average of 28.3. The PEG at 1.3 is below its historical average of 2. Both indicators reflect an undervalued stock. But similar to Disney, those low readings might also signal caution. We know from its fiscal 2024 first quarter results, out last month , that the company is facing headwinds such as a slowdown in business due to Middle East protests and sluggish economic activity in China. These are factors that could impact growth. SBUX 5Y mountain Starbucks 5 years However, even when we take this into account, the stock has fallen way too much. Starbucks would have to gain more than 30% to eclipse its July 2021 record close of $126 per share. If we consider growth may be a little slower due to the Israel-Hamas war protests and China rebounding slower than expected, we’re still seeing a good value in Starbucks shares. We have a 1 rating, accordingly. 9. Wells Fargo Price-to-earnings ratio (P/E): 9.9 P/E vs. peers: 10% cheaper P/E-to-growth ratio (PEG): 0.7 Wells Fargo ‘s forward P/E of 9.9 is 10% cheaper than peers and lower than the 11.2 five-year average. The PEG under 1 — in this case 0.7 — is low, especially when you compare it to a historical average of 1.1. Are these low numbers a sign of trouble? We don’t think so. While Wells Fargo stock came under pressure following conservative guidance, the bank’s fourth-quarter earnings report was solid. It beat on both net interest income and noninterest income. We have come to expect CEO Charlie Scharf to set measured expectations, which can be beaten. We like how management is managing and reducing expenses on a year-over-year basis, which balances the softer outlook. Wells Fargo also expects to buy back more shares in 2024 compared to last year, which adds to shareholder value. While hitting a 52-week high at the end of January, Wells Fargo stock would need to gain roughly 35% to get back to its January 2018 record close of nearly $66. But a cheap valuation coupled with an industry getting further and further away from last year’s regional lender crisis after the collapse of Silicon Valley Bank in March 2023 leads us to our 1 rating 10. Wynn Resorts EV-to-EBITDA (enterprice value/earnings before interest, taxes, and amortization): 9.1 We’re mixing it up a bit with Wynn Resorts — focusing on the company’s adjusted EBITDA because this is the financial metric of choice on Wall Street when it comes to the best-in-class hotel and casino operator. With adjusted EBITDA being the key metric, the multiple we’re focused on is enterprise value to forward EBITDA. Before Covid, Wynn generally traded in a range of about 9 times to 13 times — with two very brief periods in late 2015 and late 2018 where the multiple was closer to 8 times EV/EBITDA. However, with shares now trading at roughly 9.1 times EV/EBITDA on a forward basis, we find them highly attractive given what we just heard from management. WYNN 5Y mountain Wynn Resorts 5 years Investors received a positive update on Wynn ‘s financials when it reported beats on its top and bottom lines in its fourth quarter . Macao is coming back, while Las Vegas is strong and Boston Harbor is resilient. It seems even cheaper when considering that China isn’t fully back online yet, but the company is already operating at structurally higher profit margins compared to historical norms. We added to our Wynn position with a small buy last Thursday after its stronger-than-expected quarter because we think the stock has more room to run. (Jim Cramer’s Charitable Trust is long GOOGL, AMZN, STZ, DIS, HON, NVDA, SBUX, CRM, WFC, WYNN. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. 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With the S&P 500 on Friday closing above 5,000 for the first time ever, recognizing the winners this year has not been difficult. But what about the ones that are still cheap — or less expensive — on a valuation basis? Those are not as easy to spot.
We screened the 32 stocks in our portfolio late Monday and identified 10 that are undervalued based on traditional market metrics following their latest quarterly earnings reports. (The market was under heavy pressure Tuesday after a hotter-than-expected consumer price index.)
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