In this article, we will take a look at 12 best undervalued stocks to buy now. If you want to see some more undervalued stocks to buy, go directly to 5 Best Undervalued Stocks To Buy Now.
Undervalued stocks are defined as stocks that arguably trade for below what they are worth in terms of their fair value. Given each stock is different, there is no real metric to define which stocks are undervalued and which aren’t. Forward Price to earnings ratios are not perfect as analyst estimates could be wrong and market valuations can change over time. Analyst price targets are also just a reflection of what analysts think and not what will actually happen.
Nevertheless, the two metrics are still useful as information, and generally undervalued stocks are stocks of high quality companies that trade substantially below their historical valuations. Given that markets can be bearish at times, high quality stocks can be undervalued and their stock prices can go even lower for a long time.
Due to the Federal Reserve having increased interest rates 5 times this year, the markets have fallen substantially in 2022. The S&P 500 is down around 25% and the NASDAQ is down around 35%.
As a result, the stocks of many high quality companies with quality earnings potential and strong competitive advantages have fallen substantially year to date.
If the economy recovers in the long run, the stocks of those high quality companies could recover and rise too.
When that happens, however, is uncertain and it looks like 2023 could be a year with potentially more rate hikes and an economic recession as well.
Given the uncertainty, it could be a good idea for long term investors to hold a well diversified portfolio of stocks across many different sectors. If economic data fails to meet estimates or sentiment worsens, the market could decline further. In the long term, however, the earnings per share of the high quality companies will likely continue to grow and their stock prices could be higher if the market becomes more bullish.
Source: pexels
Methodology
For our list of 12 Best Undervalued Stocks To Buy Now, we selected stocks that we think have the right mix of value, competitive advantages and scale. Using the collective wisdom of hedge funds, we then ranked them based on the number of hedge funds that held shares of the same stock at the end of Q2 2022.
12 Best Undervalued Stocks To Buy Now
12. Kimberly Clark Corporation (NYSE:KMB)
Number of Hedge Fund Holders: 24
Kimberly Clark Corporation (NYSE:KMB) is a leading consumer products company that has a forward P/E ratio of 17.86 and also a dividend yield of 4.1% as of October 16. Although the world faces headwinds and there could be a recession in 2023, Kimberly Clark Corporation (NYSE:KMB)’s earnings per share is likely steadier than many other companies and Kimberly Clark Corporation (NYSE:KMB)’s stock could potentially bounce back from its down 20.79% year to date performance in 2022 once things normalize in the longer term.
Of the 895 hedge funds in our database, 24 owned shares of Kimberly Clark Corporation (NYSE:KMB) at the end of the second quarter.
Alongside Meta Platforms, Inc. (NASDAQ:META), Amazon.com, Inc. (NASDAQ:AMZN), and Microsoft Corporation (NASDAQ:MSFT), Kimberly Clark Corporation (NYSE:KMB) is an undervalued stock that’s held by many hedge funds in our database at the end of Q2 2022.
11. The Clorox Company (NYSE:CLX)
Number of Hedge Fund Holders: 31
The Clorox Company (NYSE:CLX) is a leading household and personal products company with a forward P/E of almost 25. While that’s still premium priced, The Clorox Company (NYSE:CLX) has a dividend yield of 3.6% as of 10/16.
Although some analysts aren’t as bullish on the company given the average analyst target price of $130.07 versus the current stock price of $131.29, The Clorox Company (NYSE:CLX) has high quality earnings and its earnings potential could bounce back to pre-Covid levels in the long term. In the near term, the company could have downside if sentiment weakens or the economy worsens.
With 31 hedge fund holders we track owning shares of The Clorox Company (NYSE:CLX) at the end of Q2 2022, the company ranks #11 on our list of 12 Best Undervalued Stocks To Buy Now.
10. Starbucks Corporation (NASDAQ:SBUX)
Number of Hedge Fund Holders: 55
While Starbucks Corporation (NASDAQ:SBUX) has a P/E ratio of 24.29 and a forward P/E ratio of 25.74, the company has a durable income stream and is arguably undervalued. Analysts have an average target price of $96.71 per share on Starbucks Corporation (NASDAQ:SBUX) and Matrix Asset Advisors commented on Starbucks Corporation (NASDAQ:SBUX) in a Q2 2022 investor letter,
Starbucks Corporation (NASDAQ:SBUX) is a premiere global coffee brand supported by over 32,600 stores across the world. The firm has a long history of beverage innovation and strong employee/barista relations with the firm paying above-market wages and benefits. Starbucks has a strong balance sheet and finances. The company generates steady and consistent cash flow, selling millions of cups of premium coffee every day. The company’s share price declined in part due to its large business in China which was largely shut down due to Covid restrictions and because of rising commodity and labor costs. We think the shares are attractively priced for a company that should grow 10% plus per year with a dividend yield of 2.6% at our average cost.
9. The Procter & Gamble Company (NYSE:PG)
Number of Hedge Fund Holders: 71
The Procter & Gamble Company (NYSE:PG) is down 23.5% year to date given the S&P 500’s decline of around 25% year to date. The Procter & Gamble Company (NYSE:PG)’s dividend yield of 2.92% as of October 16 also isn’t as attractive given the Federal Reserve interest rate hikes. Nevertheless, The Procter & Gamble Company (NYSE:PG) has high quality earnings that are likely pretty durable. In the long term, the stock could bounce back if the economy rebounds. Analysts have an average price target of $149.21 per share.
8. NIKE, Inc. (NYSE:NKE)
Number of Hedge Fund Holders: 72
NIKE, Inc. (NYSE:NKE) shares have fallen substantially year to date with the stock down almost 50% in 2022. According to NIKE, Inc. (NYSE:NKE)’s first quarter earnings report, inventories are building and the company’s gross margins are weaker. If there is a recession in 2023, the company could find it harder to maintain its growth. In the long term, however, demand for NIKE, Inc. (NYSE:NKE)’s products will likely return to normal and the company’s stock price could potentially be higher. Analysts have an average price target of $113.04 per share.
7. Johnson & Johnson (NYSE:JNJ)
Number of Hedge Fund Holders: 83
Johnson & Johnson (NYSE:JNJ) is a high quality conglomerate that is selling for just 15.6 times forward earnings estimates. Although the Federal Reserve rate hikes have made the Johnson & Johnson (NYSE:JNJ)’s dividend yield of around 2.75% as of October 16 less attractive, Johnson & Johnson (NYSE:JNJ) still has long term upside. Demand for healthcare products will only grow as the world develops.
83 hedge funds in our database owned shares of Johnson & Johnson (NYSE:JNJ) at the end of the second quarter, ranking it #7 on our list of 12 Best Undervalued Stocks To Buy Now.
6. JPMorgan Chase & Co. (NYSE:JPM)
Number of Hedge Fund Holders: 104
JPMorgan Chase & Co. (NYSE:JPM) is a bank that has benefited from higher net interest income due to the rising interest rates. Nevertheless, JPMorgan Chase & Co. (NYSE:JPM) also faces potential headwinds if the economy slows due to the rapid rise in those rates and its stock could fall further in the near term.
In the long term, however, the bank has a lot of qualities that might make it undervalued. Vltava Fund said the following about JPMorgan Chase & Co. (NYSE:JPM) in a Q3 2022 investor letter,
We regard JPM to be the strongest and best- managed bank in the world. It is a leader in investment banking, commercial banking, credit cards, and asset management. Its size (the largest bank in the USA, with nearly USD 4,000 billion in assets) and diversification give it a strong competitive advantage that is compounded by its cost advantages and the high costs to clients associated with switching banks. JPM’s management prides itself on running the only large bank to avoid major instability over the long term. JP Morgan’s quality and strength first became fully evident in 2008 under the leadership of its CEO Jamie Dimon. Not only did JP Morgan help to stabilize the market by taking over the failing Bear Stearns in the spring of that year, but throughout the Great Financial Crisis it was the only big US bank that did not require government assistance and it was highly profitable even in the difficult year of 2008. A well-functioning and efficient bank can be a very good long-term investment, because the interest compounding effect works well here. JPM’s return on equity (ROE) is well into the double digits and this puts it in a good position to continue producing better long-term returns than does the market. JPM has been very profitable even during years when interest rates were close to zero. The current – and perhaps not temporary – return to somewhat more normal, higher interest rates should have a significantly positive impact on the bank’s interest income and overall profitability.
In addition to JPMorgan Chase & Co. (NYSE:JPM), Meta Platforms, Inc. (NASDAQ:META), Amazon.com, Inc. (NASDAQ:AMZN), and Microsoft Corporation (NASDAQ:MSFT) are undervalued stocks held by many hedge funds at the end of Q2 2022.
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Disclosure: None. 12 Best Undervalued Stocks To Buy Now is originally published on Insider Monkey.
