The stock market had a strong first quarter, with many companies posting big gains. This was a welcome turn of events after a difficult 2022 for investors. However, after the rally, you may wonder which are the most undervalued stocks still out there in the market today.
That’s an especially good question as it seems unlikely that the current market volatility has ended. The war in Ukraine drags on, the regional banking system is under fire, inflation is too high and the Federal Reserve continues to hike interest rates.
All this makes it imperative that investors buy the most undervalued stocks to ensure a margin of safety in this unsettled economy.
There are, of course, a lot of different metrics folks can use to identify the most undervalued stocks. For the sake of this article, I’ll be picking seven of the best companies from Morningstar’s 5-star stock category, as these come from the small list of companies that their analysts believe are trading at dramatic discounts to fair value.
|Broadridge Financial Solutions
Citigroup (NYSE:C) has a reputation for running into trouble. The bank played its cards poorly during the 2008 financial crisis, and it has had several other reputational stumbles since that point.
That said, at some price, a firm’s issues are reflected in the valuation, and Citigroup is at that point.
C stock tumbled once again in March following the broader concerns around the health of the American banking sector. The too-big-to-fail banks such as Citigroup should benefit as deposits move from regional banks to national banks. In a crisis, it’s better to be big, and Citigroup is one of the nation’s largest retail banks and is third in overall asset size.
The valuation has also gotten silly. Shares are going for just half of book value. The stock is also selling for just seven times forward earnings. This sets Citigroup up to both repurchase stock and pay a 4.4% dividend yield. Morningstar believes C stock is worth $75, making it among the most undervalued stocks out there.
Avnet (NASDAQ:AVT) is an electronics distribution firm, focusing on reselling semiconductor chips and equipment. Its advantage comes from scale. There are few players that have as broad a reach and depth of connections in its industry. To that point, Avnet generates roughly $25 billion in annual revenues.
But, given the current glut in the semiconductor market, traders have refused to give Avnet the valuation multiple it deserves, which is what puts it among the most undervalued stocks.
In fact, astonishingly enough, AVT stock is selling at just six times forward earnings. Sure, the semiconductor cycle is currently on the downswing. But, distributors take much less risk than the actual manufacturers or chip designers. Avnet has proven to be robust in past semiconductor cycles.
And, in the meantime, the company is returning cash to shareholders both via a 2.5% dividend and its huge buyback program. The company bought back 8% of its outstanding shares in the past 12 months alone. That’s what makes it one of the most undervalued stocks you’re missing out on.
Broadridge Financial Solutions (BR)
Broadridge Financial Solutions (NYSE:BR) is an unheralded financial services company. The firm is integral to much of what makes Wall Street tick.
It got its start as a spin-off from Automatic Data Processing (NASDAQ:ADP). ADP had built up an operation to process shareholder proxy statements that didn’t fit with its core payroll business. And thus, Broadridge was born.
In subsequent years, Broadridge has added management and document processing for wealth managers, investment banks, and other such financial professionals. It also maintains a near monopoly on proxy services.
This is an ideal sort of business. It provides an integral service to brokerages, investment banks and other end clients. And its fees are low enough to not be a meaningful part of its customers’ bottom line. And, with minimal competition, Broadridge has been able to maintain fat profit margins.
Broadridge shares have traded flat since 2020 while earnings growth continues to hum along. As a result, shares are now going for just 21 times forward earnings. Morningstar believes shares are worth $185, versus a current price of $145. Given Broadridge’s tremendous earnings growth track record, investors are likely to bid the company back up to a more generous valuation in due time.
PayPal (NASDAQ:PYPL) seemed like an obvious winner in 2020. With people stuck at home, they’d have to move much of their financial lives to digital means. It wasn’t just e-commerce, PayPal seemed prepared to benefit from trends such as remote work and employers looked for new ways of hiring and paying their employees.
However, the early surge in transaction volumes seen in 2020 and 2021 quickly faded. Along with that, the tech industry went into a tailspin. PYPL stock plunged from a high of $300 to just $76 today.
That seems like an overreaction. Unlike many tech peers, PayPal is profitable. Shares are going for just 16 times forward earnings today. I’d also note that the company is continuing to grow revenues at nearly 10% a year, and analysts expect earnings growth of at least 10% annually going forward.
PayPal’s core business, while slower, is still showing steady growth. The stock price, however, would suggest that things were far worse than they actually are. To that point, Morningstar believes PYPL stock is worth $135 per share which offers tremendous upside from today’s price.
Global Payments (GPN)
Global Payments (NYSE:GPN) has gotten caught up in the same storm as PayPal. However, it’s arguably in an even better position. Unlike PayPal, nothing has gone wrong with Global Payments’ core business.
That business, merchant acquiring, is attractive. Global Payments serves as a middleman between the credit card companies and vendors such as restaurants and retail stores. Global Payments provides payment terminals and related services such as fraud prevention, tax and accounting reporting, and transaction analysis.
The payments industry has plummeted since 2021 thanks to firms like PayPal coming up short of investors’ lofty expectations. GPN stock has lost more than half its value since its peak two years ago.
The thing is, Global Payments hasn’t had its operations impaired. In fact, earnings are continuing to grow at a double-digit clip, even as the stock price has plummeted. GPN stock now trades at just 10 times forward earnings. Morningstar’s Brett Horn believes shares are fully 41% undervalued today.
Sabre Corp (SABR)
Sabre (NASDAQ:SABR) is one of the three primary global distribution systems (GDS) for airlines, hotels, and other travel industry companies. GDS operators serve as a marketplace between airlines, cruise lines, passenger railroads, etc. on one side, and buyers such as travel agents and online booking websites on the other.
Sabre, and its two competitors, get a cut of every transaction that passes through these GDS ticketing platforms. As airline traffic has come roaring back over the past two years, it has given the GDS firms a tailwind.
That said, Sabre has failed to capitalize so far. It invested heavily in upgrades to its tech infrastructure just prior to the pandemic. Business came to a halt before these upgrades could pay off; instead, Sabre ended up undercapitalised and in financial trouble.
The company has struggled to get back on track and reach profitability. However, there’s a high-quality business lying under the surface here. Morningstar believes Sabre can take flight once again; its analyst pegs fair value at $10.50 versus today’s price in the low $4 range.
Verizon Communications (VZ)
Verizon Communications (NYSE:VZ) is one of America’s three prominent mobile telephony providers. Traditionally, investors have gravitated to these companies thanks to their stable cash flows and large dividends.
However, AT&T (NYSE:T) threw a spanner in the works when it slashed its dividend. Investors dumped both AT&T and Verizon shares following that. But AT&T’s problems were self-inflicted, related to that firm taking on excess debt to make unsuccessful acquisitions.
Verizon, by contrast, is still in a strong competitive position. Yes, it has seen a slowdown in earnings growth recently. That has come as Verizon has invested heavily in 5G and other next-generational telecom infrastructure. However, these investments should pay off in due time. Meanwhile, VZ stock has gotten absolutely hammered over the past year, with shares losing nearly a quarter of their value.
It’s rare that telecom companies end up being dramatically mis-priced. But Morningstar believes that is exactly the situation with Verizon today. Analyst Michael Hodel pegs fair value at $57 per share versus a current price of $39. The massive discount available today probably won’t last long, and in the meantime, shares offer a 6.7% dividend yield.
On the date of publication, Ian Bezek held a long position in VZ, GPN, BR stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.