Best Undervalued Stocks

Invest in the best undervalued stocks with Robinhood or Interactive Brokers.

A company's stock is considered undervalued when its shares continuously trade at a lower price than its peers despite being consistently profitable and having long-term growth prospects. Undervalued stocks are typically priced incorrectly for various reasons, most commonly price overreaction to market sentiments. 

Rising interest rates, persistently high inflation, recessionary concerns and overall broad market weakness can trigger a price overreaction, causing a significant drop in the share price of most high-quality value stocks.

They can be a potential goldmine for patient buy-and-hold investors, particularly those who do not value marginal risk positions. However, some stocks may be cheap for reasons other than being undervalued. So as an investor looking to snag a good deal by leveraging the low price of such asset classes, you need to remember that not all special stones are hidden gems. 

To help investors make the best choice, Benzinga reviews some of the best-undervalued stock options, providing insights into their fundamentals and value.

The Best Undervalued Stocks

Undervalued stocks could be the way to go if you want to capitalize on value and increase your profit margins. A look at some of the best undervalued stocks worthy of consideration.

1. Amazon.com Inc. (NASDAQ: AMZN)

With a little under 40% share of the U.S. e-commerce market, Amazon remains the dominant retail e-commerce platform. The company is projected to pocket $400 billion through online sales this year, according to eMarketer research firm. It is also the biggest global online marketplace, with over 5.69 billion visitors monthly and an hourly average sales amounting to $17 million. However, the company's service is not limited to e-commerce alone. Amazon also offers cloud computing via its Amazon Web Services and provides entertainment via Prime Video and Kindle.

Amazon's e-commerce arm was significantly boosted during the global online shopping boom that characterized the COVID-19 pandemic in 2020 and 2021. By the end of 2020, the company's stock price has grown by almost 75%. However, following the pandemic boom, revenue growth from e-commerce has slowed to a crawl. 

But the company's cloud computing segment, AWS, is still churning out profits that are being reinvested in data centers and other digital services to fuel even more growth. Amazon is beginning to appear undervalued, given its enduring growth trajectory and long-term potential.

Amazon's stock ratio of 49.92X is well above the industry average of 18.2X. Although this indicates that the company's stock is trading at a higher price than its peers, inflation, rising rates, supply chain quagmires and changing consumer behavior post-pandemic have caused significant price declines. In Q2 2022 earnings, the company missed the consensus revenue forecast — for the first time in three years. This led to a mixed reaction among investors that further caused a drop in share prices. 

The company has ramped up spending to continue expansion and maintain its dominance. At the very least, the recent drop could present an opportunity for investors to "buy he dip" while awaiting a future upswing to reap profit. 

2. Pfizer Inc. (NYSE: PFE)

Pfizer is a giant American multinational pharmaceutical company headquartered in New York City. It is possibly the largest global pharmaceutical company that manufactures medicines, vaccines and consumer health care products.

In fiscal 2021, Pfizer reported an impressive revenue of $81.3 billion, an increase of 95% or $39.6 billion compared to 2020. The revenue reflects an operational growth of 92%, thanks to Comirnaty, its COVID-19 vaccine that generated over $37 billion. For Q2 2022 earning report, the company reported a revenue of $27.7 billion, which reflects 53% operational growth and a 47% increase compared to the same quarter last year. 

In the past couple of years, much of the company's resources were focused on solutions to stem the global spread of COVID-19 and save lives. For instance, in 2020, Pfizer's partnership with BioNTech led to the successful development of the first COVID-19 vaccine that saved millions of lives worldwide. The company also scored another win in its fight against the pandemic when in December 2021, the FDA approved Paxlovid as the first oral pill for coronavirus. Subsequently, Pfizer's status as a global pharmaceutical behemoth has been strengthened and reinforced.

COVID-19 vaccine revenue is set to continue boosting the company's cash flows in the coming quarters. Nevertheless, Pfizer is stepping up its acquisition to increase visibility and expand its product line in preparation for the COVID-19 vaccine demand decline. 

Understandably, relative growth is likely to moderate at some point. However, despite its excellent prospects, the stock appears to be undervalued. The company's shares are currently trading at a relatively low price of $45.58 per share and roughly 9X forward earnings. This is below the pharmaceutical industry's average forward price-to-earnings ratio of 29.9X. Analysts forecast a price target of $56.08 — an approximate 22% upside potential. The implication is that Pfizer is a steal at the current level.

With nearly $4 trillion in global assets, Manhattan-based JPMorgan Chase & Co. is the largest financial institution in the U.S. It is also the #1 global retail financial services and investment bank in terms of market capitalization. Its services are divided into four segments — consumer and community banking, corporate and investment banking, commercial banking and asset and wealth management.

JPMorgan has long been a leader in traditional banking and finance. It is aggressively expanding into local communities for more inclusive growth. That said, JPMorgan Chase stock dropped sharply in 2022 due to recessionary concerns. The corporation's share prices are down over 25% year-to-date as it continues to trade like other traditional banks despite its expansion into the technology sector. 

JPM has a "buy" rating consensus and a $135 average price target representing an upside of 14% from its closing price of $118.16 on Sept 19. Its low price could make it ideal for buy-and-hold investors who know their onion.

4. Alphabet Inc. (NASDAQ: GOOGL) (NASDAQ: GOOG)

Google's parent company Alphabet is a global internet conglomerate. It is the world's fourth most valuable company by market capitalization ($1.348 trillion). Besides Google, Alphabet's other holdings include YouTube, DoubleClick, Nest, Mandiant, and many others. 

Most of Alphabet's revenue (over 80%) is tied to advertising via Google. And as firms cut down on ads due to macroeconomic challenges, Alphabet shares sold off hard amid fear of a lean year among investors. Year-to-date, Alphabet is down by over 28%. And in Q2 2022, Alphabet missed analysts' revenue expectations of $69.9 billion due to slowed growth, reporting $69.69 billion instead. Also, EPS was $1.21 below the forecasted $1.28. 

As a mega-corporation, the company remains solid, offering massive potential for growth. Alphabet is poised to witness a secular growth trend considering that global digital advertising is still growing and may hit $1 trillion annually by 2025. In addition, as cloud migration continues globally, analysts forecast a $1 trillion dollar market by 2028. 

Furthermore, Alphabet owes a meager $14.7 billion in long-term debt and has more than $120 billion in net cash and investments. That is more than enough capital to survive and even flourish in the currently overcast economic climate, which is unusual for a tech company.  

At the current price, the company's stocks are becoming too inexpensive for any reasonable investor to ignore. At 18.93, the PE is at a historic low, and so is the share price. The implication is that investors can buy in at this lower price and reap profit later. The overwhelming consensus among analysts is "buy," and the median 12-month price forecast is $140.00 per CNN. 

5. QUALCOMM Inc. (NASDAQ: QCOM)

QUALCOMM is a household name in the semiconductor industry. Its chip design forms an integral component of an everyday smartphone. As the primary hardware support for Android devices, the semiconductor manufacturer firmly holds sway over every mobile device. QUALCOMM has established itself as a premier 5G product and service provider. In doing so, the company's shares have increased significantly since bottoming out from the pandemic.

QUALCOMM is exploring many new growth opportunities for its hardware, such as industrial equipment requiring a mobile connection. QUALCOMM has grown over time from virtually zero sales to annual revenue of more than $1 billion from its automotive segment. And as tech makes further inroads into modern vehicle production, the company's auto segment holds a lot of promises. 

Despite its excellent growth potential, Qualcomm is undervalued compared to its peers. At 0.52X, Qualcomm's PEG ratio is lower than the median semiconductor industrial average of 0.82X. As such, the company's stock sells at a lower price per share than most semiconductor sector stocks. The overwhelming consensus among analysts is "buy," and the median 12-month price forecast is $180.00 — a potential 44% upswing from the current price of $124.79.

What is Value Investing?

Value investing is an investment strategy in which investors buy stocks that appear to be trading at a discount or less than their intrinsic or book value. Value investing is fundamentally geared toward returning an optimal profit over time. 

The stock market can overreact to positive and negative news. Such overreaction triggers stock price fluctuation inconsistent with most companies' long-term fundamental prices. It presents an opportunity for investors to make money by purchasing stocks at a discount — on sale. 

Multi-billionaire and investment guru, Warren Buffett, is probably the most famous value investor today. His series of calculated, low-risk, long-term value investments pushed him to the ranks of one of the planet's wealthiest individuals. 

How Do You Know a Stock is Undervalued?

Identifying undervalued stocks can be tricky, especially for new investors without comprehensive knowledge of stock analysis. Some approaches you can take to determine if a company’s stock is undervalued are:

Determine Valuation Ratio

A valuation ratio demonstrates the relationship between a company's equity or market value and some key financial metrics. It gives you an idea of the price you're paying for a particular stream of profits, revenue or cash flow. 

Comparing a stock's valuation ratios to the rest of its industry or the overall market is one of the quickest ways to determine whether it is undervalued. Stocks of companies with a valuation ratio lower than the industry average or a broad market index such as the S&P 500 are a steal.

Here are some of the most common valuation ratios to consider:

• P/E ratio: The price-to-earnings or P/E ratio compares the price of a company's stock to its earnings per share issued. It is the easiest and fastest valuation metric. It's better to pay low to earn more. Hence it would help if you looked out for stocks with a low P/E ratio when shopping.
• EV/EBIT: The P/E and EV/EBIT are pretty similar. However, the EV/EBIT is calculated using additional factors besides price and earnings-per-share. The enterprise value or EV represents potential financing debt, while the EBIT stands for earnings before interest and taxes. By leveraging this metric, you can compare a company's actual operating earnings to those of other companies with different tax rates or debt levels.
• P/S ratio: The price-to-sales metric is the ratio of a company's market capitalization to its revenue over 12 months. This ratio can help you evaluate companies with low or negative earnings because of one-time events. The P/S ratio can be beneficial for analyzing company stocks in the software industry. 

Inquire Whether Insiders at the Company Are Buying

Checking to see if company insiders are purchasing the shares is an efficient non-analytical way to assess whether a stock is undervalued. When an executive spends money to buy stock, you can bet it's because they believe it's a good investment. Insider transactions are usually disclosed in U.S. Securities and Exchange Commission (SEC) filings, which are accessible via the SEC's website. 

Verify Whether the Stock Price Has Declined Meaningfully

Meaningfully is the keyword here. The reason is that a declining share price doesn't immediately translate to undervaluation. An excellent way to start is to look out for those stocks with a solid financial strength index that has fallen by at least 20% from a recent high. By limiting your search to stocks that are meaningfully below their highs, you increase your chances of finding a steal.

Confirm That Successful Investors Are Investing

If successful investors buy up the shares, that is another sign that the stock may be undervalued. Professional investors who manage a certain amount of money must file quarterly reports with the SEC disclosing their holdings. However, before investing in a stock held by well-known investors, conduct your own research. 

Start Stock Investing With the Best Stock Brokers

Benzinga analyzes, reviews and provides valuable insights on the undervalued stock of companies, including technology, insurance, finance, cannabis and virtual payment platforms.

Invest in the Best Undervalued Stocks Today

When it comes to finding the best undervalued stocks, there is no one-size-fits-all answer. It all depends on your individual risk tolerance and investment goals. While some investors may prefer high growth potential with a greater risk, others may be more comfortable with lower risk and more conservative investments.

It is important to do your own research when it comes to investing in stocks and to understand the risks associated with each potential investment. Whether you are investing in undervalued stocks, growth stocks, value stocks, or any part of the stock market, doing your own research is vital.

Frequently Asked Questions