In this article, we discuss the 10 undervalued stocks to buy today. If you want to skip our detailed analysis of these stocks, go directly to the 5 Undervalued Stocks to Buy Today.
In an era where making quick profits from short-term volatility seems to have become a normal, even pulling in some of the biggest investors on Wall Street, it is important to remind ourselves that the stock market has over the years proven that abiding by a patient and value-based strategy can pay massive profits in the long-term. Some of the most prolific investors of the past few decades have been value investors, with names like Warren Buffett and Mario Gabelli jumping to mind. However, identifying undervalued stocks is not as easy as it seems.
It is important for investors flocking to value plays to shield their portfolios from inflation, to understand the business a company is involved in and the way it makes money. Metrics like earnings, revenue, and other indicators of the overall performance should also be considered, but not before the development of a basic understanding of the business itself. For example, during times of inflation, firms that have strong pricing power and solid fundamentals, usually found in the utilities, consumer goods, and transport sectors, are good additions to the portfolio.
Potential value investors should also keep in mind that even though value stocks underperformed growth stocks by 17% between 2006 and early 2020, the onset of the pandemic had widened this gap to 34% by August 2020. However, from thereon till June 2021, as the economy normalized, value stocks actually outperformed growth equities by 8%. Heading into 2022 and beyond, value stocks are expected to continue to outperform growth stocks in terms of real returns by around 23%.
Some of the top undervalued stocks to buy today include Lennar Corporation (NYSE:LEN), D.R. Horton, Inc. (NYSE:DHI), and LyondellBasell Industries N.V. (NYSE:LYB), among others discussed in detail below.
Our Methodology
These were picked using the Price-to-Earning (PE) ratios. Stocks that have a PE ratio of less than 10 and strong growth catalysts were preferred for the list. Business fundamentals and analyst ratings for each company are also discussed.
The hedge fund sentiment around each stock was calculated using the data of 873 hedge funds tracked by Insider Monkey.
Why pay attention to hedge fund holdings? Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 86 percentage points since March 2017. Between March 2017 and July 2021 our monthly newsletter’s stock picks returned 186.1%, vs. 100.1% for the SPY. Our stock picks outperformed the market by more than 86 percentage points (see the details here). That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
Undervalued Stocks to Buy Today
10. Encore Wire Corporation (NASDAQ:WIRE)
Number of Hedge Fund Holders: 20
PE Ratio: 7.07
Encore Wire Corporation (NASDAQ:WIRE) markets electrical components and equipment. The inflationary environment has helped the company beat market expectations on earnings per share and revenue in the third quarter by $5.59 and $128 million respectively. DA Davidson analyst Brent Thielman believes the stock is trading at a discount considering the 6-times expected 2021 earnings. The analyst recently raised the price target on the stock to $150 from $115 and maintained a Buy rating.
Encore Wire Corporation (NASDAQ:WIRE) is also in the process of vertical integration that will help the company in several ways moving forward, most likely with cost reduction, operational flexibility, and high efficiency.
At the end of the second quarter of 2021, 20 hedge funds in the database of Insider Monkey held stakes worth $77 million in Encore Wire Corporation (NASDAQ:WIRE), up from 19 the preceding quarter worth $81 million.
Just like Lennar Corporation (NYSE:LEN), D.R. Horton, Inc. (NYSE:DHI), and LyondellBasell Industries N.V. (NYSE:LYB), Encore Wire Corporation (NASDAQ:WIRE) is one of the stocks on the radar of elite investors.
9. Oasis Petroleum Inc. (NASDAQ:OAS)
Number of Hedge Fund Holders: 23
PE Ratio: 9.20
Oasis Petroleum Inc. (NASDAQ:OAS) is an independent oil and gas firm. The firm has two advantages moving into the final months of the year. One, the prices of oil and gas are expected to stay at higher-than-normal levels for the coming months, increasing total revenue for Oasis. Secondly, the lower cash expenses of the oil firm, compared to peers, will likely help it generate a better corporate return. The firm came back from the brink of bankruptcy in 2020.
The comeback story has been impressive so far. Oasis Petroleum Inc. (NASDAQ:OAS) posted earnings for the third quarter on November 3, reporting earnings per share of $3.16, beating estimates by $1.31. The revenue over the period was $402 million, up 48% year-on-year.
At the end of the second quarter of 2021, 23 hedge funds in the database of Insider Monkey held stakes worth $210 million in Oasis Petroleum Inc. (NASDAQ:OAS), up from 17 in the preceding quarter worth $173 million.
8. Magellan Health, Inc. (NASDAQ:MGLN)
Number of Hedge Fund Holders: 26
PE Ratio: 8.47
Magellan Health, Inc. (NASDAQ:MGLN) is a healthcare management firm based in Arizona. The pharmaceutical division of the company was recently accredited by the National Association of Boards of Pharmacy for digital pharmacy practice. The will help the company as it aims to deliver pharma products directly to people at their homes or offices. Gaurang Gandhi, the CEO of the firm, has said the accreditation demonstrates the firm’s commitment to quality.
In September, Magellan Health, Inc. (NASDAQ:MGLN) had announced that it would be expanding the Navigate Whole Health program to include the AIDS Drug Assistance, an initiative aimed at closing care gaps in HIV treatment.
Among the hedge funds being tracked by Insider Monkey, New York-based investment firm Starboard Value LP is a leading shareholder in Magellan Health, Inc. (NASDAQ:MGLN) with 2.3 million shares worth more than $233 million.
7. Nucor Corporation (NYSE:NUE)
Number of Hedge Fund Holders: 32
PE Ratio: 6.76
Nucor Corporation (NYSE:NUE) makes and sells steel products. The company has benefited from the increase in steel prices recently and government policies designed to ease tariffs on the industry. A new infrastructure plan of US President Biden has also been approved that will likely drive up the demand for steel in the coming months as the government spends on rebuilding roads and bridges across the country.
Nucor Corporation (NYSE:NUE) posted earnings for the third quarter on October 21, reporting earnings per share of $7.28 and a revenue of $10.3 billion.
At the end of the second quarter of 2021, 32 hedge funds in the database of Insider Monkey held stakes worth $196 million in Nucor Corporation (NYSE:NUE), up from 25 in the preceding quarter worth $191 million.
In its Q1 2021 investor letter, Madison Funds, an asset management firm, highlighted a few stocks and Nucor Corporation (NYSE:NUE) was one of them. Here is what the fund said:
“This quarter we are highlighting Nucor (NUE) as a relative yield example within the Materials sector. NUE is a leading manufacturer of steel and steel products. It is the largest steelmaker in the U.S. based on production volume with a vertically integrated business model. The company has a low fixed-cost position due to its use of electric arc furnaces, which are cleaner, less labor and energy-intensive than blast furnaces, and this results in low total costs per unit of steel produced. Our view is that a low cost position is an important attribute in a commodity business. NUE’s historical financial record supports this view as it has been profitable every year except for one over the past fifty years, unlike many steel producing peers. In addition, the company has a diverse product and mill portfolio that takes market share over time. We believe its scale, low fixed-cost position, consistent record of profitability and diverse mill portfolio result in a sustainable competitive advantage versus peers.
Our thesis on NUE is that it should benefit from higher steel prices as the U.S. economy recovers from the downturn caused by the Covid-19 pandemic. The company may also be a beneficiary of on-shoring, where manufacturing returns to the United States. These two dynamics should drive growth this year, and if the United States Congress passes new infrastructure legislation, that will provide another avenue for growth longer-term.
Importantly, NUE has a strong balance sheet and flexible capital spending model that can quickly adjust to changing economic
conditions. If economic growth slows, NUE can quickly reduce its cost structure, something it has done successfully in prior cyclical downturns. The company has low financial leverage as its net debt/adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was only 0.9x at the end of last year, and it consistently generates positive free cash flow. These favorable characteristics differentiate NUE from other steel producers and help the company gain market share through disciplined capital allocation.
The fund purchased NUE at $56 in January, 2021, after it reached a low valuation with an attractive dividend yield and relative dividend yield versus the S&P 500. At the time or purchase, the stock yielded 3.3% and had a relative dividend yield of more than 2x the S&P 500, which was the high end of its historical range as shown in the bottom pane in the graph. The company is also a Dividend Aristocrat that has raised its dividend annually for 48 years. We expect continued dividend increases going forward.
Risks to the thesis include a prolonged economic downturn, lower steel prices and increasing steel import volumes that could hurt NUE financial performance. We believe these risks are manageable as economic growth is expected to be well above average this year. Specifically, Goldman Sachs is forecasting U.S. gross domestic product (GDP) growth of +8% in 2021, which would be the fastest pace of growth since 1950. Strong growth is likely to result in higher manufacturing activity, which we believe would be supportive of higher steel prices and limit risks to the thesis.”
6. Signet Jewelers Limited (NYSE:SIG)
Number of Hedge Fund Holders: 33
PE Ratio: 9.80
Signet Jewelers Limited (NYSE:SIG) is a specialty store that retails diamonds, watches and other luxury products. As inflation increases interest in gold as a safe haven, the company has raised revenue guidance for the coming months. It has also been using the improved sales trends to invest. In October, the firm had announced that it would be acquiring Diamonds Direct, one of the largest jewelry stores in the US, in a deal worth $490 million.
UBS analyst Mauricio Serna recently initiated coverage of Signet Jewelers Limited (NYSE:SIG) stock with a Buy rating and a price target of $140, appreciating the “transformative changes” the company had made in the past few years for better pricing power and operational efficiency.
Among the hedge funds being tracked by Insider Monkey, New York-based investment firm Select Equity Group is a leading shareholder in Signet Jewelers Limited (NYSE:SIG) with 6.6 million shares worth more than $533 million.
In addition to Lennar Corporation (NYSE:LEN), D.R. Horton, Inc. (NYSE:DHI), and LyondellBasell Industries N.V. (NYSE:LYB), Signet Jewelers Limited (NYSE:SIG) is one of the stocks that hedge funds are buying.
In its Q3 2020 investor letter, Miller Value Partners, an asset management firm, highlighted a few stocks and Signet Jewelers Limited (NYSE:SIG) was one of them. Here is what the fund said:
“We also saw Signet Jewelers (SIG) start to deliver improved performance during the quarter and believe their initiatives on closing unprofitable stores, expanding new Omni-channel capabilities, and launching new product offerings should begin to drive an improvement in their operations over the coming quarters. Historically, Signet’s stock price has performed very well coming out of an economic downturn. With the company valuation multiples near 2009 lows, it wouldn’t take much to see Signet’s share price double during the ongoing economic recovery. While we are highlighting the consumer space, we also wanted to mention a new investment, Chicos FAS, Inc. (CHS). The investment opportunity reminds us a lot of Bed Bath and GameStop earlier this year: a new CEO who is executing well on a new transformation plan, closing unprofitable stores, significantly streamlining and realigning their operations, and enhancing new product for their Chicos, White House Black Market, and Soma brands. Chicos has an asset-rich balance sheet, nearly $1.4B in total assets. The company’s real estate assets (land and buildings) combined with the cash on the balance sheet are significantly higher than the company’s current equity market capitalization! Over the next couple of years, the company has the potential to return to a $2B+ revenue base, which would support $100M in free cash flow. We believe a successful turnaround over the next couple of years has the potential to drive the share price 5-10x higher than current levels.”
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Disclosure. None. 10 Undervalued Stocks to Buy Today is originally published on Insider Monkey.
