In this article, we will discuss the 8 most undervalued value stocks to buy according to analysts.
The Concept of Value Investing
Value investing is the investment strategy where an investor tends to buy a stock for less than it is worth and holds on to it to realize its actual worth. Thus, the stock is undervalued relative to its fundamentals. CNN reports that the concept of value investing goes back almost 100 years ago to Benjamin Graham who supported using fundamental analysis to buy stocks at a discount to their intrinsic value. Value stocks are typically more mature and less volatile.
Warren Buffett is one of the top value investors who has created a lot of wealth using this strategy. During the financial crisis, Buffett bought Bank of America which is still one of his significant holdings. At Berkshire’s 2023 annual shareholder’s meeting, Buffett emphasized that new things such as tech don’t take away opportunities from value investors in response to the late vice-chairman Charlie Munger’s statement.
According to Munger, value investors should get used to making less money since a lot of them are competing for diminished opportunities. Countering this view, Buffet didn’t see fewer opportunities for value investors in the future by being more optimistic. He explained the bright value investing prospects by stating:
“What gives you opportunities is other people doing dumb things”
Value Investing in 2024
On April 25, Bill Nygren, Oakmark Funds CIO and portfolio manager, appeared on CNBC to talk about the large spread between value stocks and growth stocks. He explained how Oakmark Funds looks at things in the long term with short-term news being just noise and has a portfolio that has kept moving lower and lower in P/E even if the market has risen over the past year. The biggest opportunity is created by the unusually large spreads in P/E multiples. He emphasized how one good thing about companies trading at low P/Es is that one doesn’t have to believe that others are going to see them as good businesses.
On September 23, Nygren again joined CNBC’s ‘Squawk on the Street’ to shed light on the prevailing scenario. He stated how some academics now think that there are not enough value investors to force convergence to fair value anymore. According to him, the issue relates to the number of investors who want positive price momentum in their portfolios nowadays and don’t like to buy companies that have fallen to a cheap price.
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He also talked about how the S&P 500 is not so diversified anymore and that investors would revisit the idea of it as a low-risk way to invest in equities. While the S&P 500 was an index where somebody could put the majority of their capital thinking it was reasonably diversified, the technology sector is becoming more dominant within the index. There is no reason to believe that an individual is best off if their investments match the economic production or the market value of this production. He called an S&P 500 investment a pretty heavy bet on tech the way the market is valuing tech stocks currently.
Will Value Stocks Dominate Growth Stocks in the Future?
Research by Hartford Funds has predicted a rebound for value stocks after growth stocks have dominated them, a trend that was catalyzed by the ascendence of mega-cap US tech stocks. The research revolves around how certain rules of thumb such as value’s ability to outperform being dependent on the economic cycle and value dominated by certain mature and cyclical sectors, are to be reconsidered. The research unveiled that the three factors driving value outperformance are higher inflation, higher real interest rates, and higher economic growth (real GDP), with the impact of these drivers varying from one regime to another.
The research predicts a positive outlook for the value sector over the next 3 to 5 years. Inflation is expected to remain elevated due to several factors including tight labor markets, shrinking working-age populations, rising geopolitical tensions, and supply-chain disruptions among others. Considering an environment of high inflation, real rates will be high due to the monetary policy. In such circumstances, attractive value opportunities could be found in financials such as insurance companies, asset managers, and payment services.
Regarding the assumption that value stocks are concentrated in more mature sectors, the patterns have shifted over time since value has become more diversified and less concentrated than growth. While energy and financials made up 13% and 25% of the value index 10 years ago, the value mix constitutes 20% financials, 16% healthcare, followed by 15% industrials, 13% IT, 9% consumer staples, and only 7% energy. The surprisingly large weight of IT in value is driven by industries such as hardware, semiconductors, IT services, and communications equipment while software companies are more likely in the growth sector.
The risk against this outlook for value stocks supported by structurally higher inflation and real rates as well as increased diversification is generative AI, something that can still enable growth companies to have a multiyear period of outperformance. With that being said, let’s move to the 8 most undervalued value stocks to buy according to analysts.
A money manager reviewing quantitative and fundamental analysis before investing in a public company.
Our Methodology:
In order to compile a list of the 8 most undervalued value stocks to buy according to analysts, we first used a stock screener to identify value stocks with PE ratios under 20. We focused on companies trading in industries that are traditionally saturated by value companies. These industries include consumer staples, financials, energy, and materials. From the resultant dataset, we picked 8 stocks with the highest upsides, as of October 15.
At Insider Monkey we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
8 Most Undervalued Value Stocks To Buy According To Analysts
8. Enterprise Products Partners L.P. (NYSE:EPD)
Average Upside Potential: 16.56%
Forward P/E: 10.26
EPS Growth This Year: 7.10%
Number of Hedge Fund Holders: 23
Enterprise Products Partners L.P. (NYSE:EPD) is a leading North American provider of midstream energy services to producers and consumers of natural gas, natural gas liquids, crude oil, refined products, and petrochemicals. The company’s origins started with Enterprise Products Company, formed in 1968 as a wholesale marketer of natural gas liquids.
Enterprise Products Partners has an integrated footprint with geographic, product, and market diversification. EPD has built a resilient portfolio that is recession-resistant. It stands apart by being the only midstream company to grow Adjusted CFFO per unit and reduce unit count without material asset sales. Investors can consider that the firm has demonstrated 26 consecutive years of distribution growth throughout business cycles. It has returned $54.4 billion to unitholders in distributions & buybacks since its IPO. With $6.7 billion in major capital projects under construction, the potential for further capital returns to shareholders and cash flow growth remains bright.
For the fiscal second quarter, Enterprise Products Partners L.P. (NYSE:EPD) reported net income attributable to common unitholders of $1.4 billion, a 12% increase compared to $1.3 billion for the second quarter of 2023. EPD successfully handled a near-record 12.6 million BPD of equivalent pipeline volumes and 2.2 million BPD of marine terminal volumes despite the second quarter being typically slow. Gross operating margin for the NGL Pipeline & Services segment and Natural Gas Pipelines & Services segment rose 19% and 23%, year-over-year respectively.
The aforementioned robust operating performance drove a 12% increase in earnings per common unit on a fully diluted basis, an 11% increase in adjusted cash flow from operations, and a 5% increase in cash distribution per unit for the second quarter of 2024 as compared to Q2 2023. With distribution stability and growth as a core focus, strong fundamentals, and an average upside potential of 16.56%, Enterprise Products Partners L.P. (NYSE:EPD) ranks on our list.
7. Mitsubishi UFJ Financial Group, Inc. (NYSE:MUFG)
Average Upside Potential: 17.74%
Forward P/E: 12.64
EPS Growth This Year: 5.80%
Number of Hedge Fund Holders: 14
Mitsubishi UFJ Financial Group, Inc. (NYSE:MUFG) is a global financial services group and one of the biggest banking institutions in Japan.
MUFG boasts cross-border expertise and a global network spanning more than 50 countries and regions. The firm benefits from a hard-earned trust backed by a history of more than 360 years and a strong customer base. MUFG’s unique business portfolio maximizes the comprehensive strength of its group. The firm has one of the largest domestic and global customer bases of any Japanese bank which serves as a source of future competitiveness and profitability. Additionally, it has a significant exposure in the APAC region.
For the 1st quarter of the fiscal 2025, Mitsubishi UFJ Financial Group, Inc. (NYSE:MUFG) reported net operating profits of ¥678.1 billion, up by ¥121.5 billion year-over-year. This was a result of a promising performance in customer segments domestically and globally. Results by business group were robust with gross profits for all business groups except Global Markets climbing year-over-year.
Mitsubishi UFJ Financial Group, Inc. (NYSE:MUFG) boasts a worldwide reach, product capabilities, and competitiveness as a strong overall group. As of Q2, the stock is held by 14 hedge funds.
6. McKesson Corporation (NYSE:MCK)
Average Upside Potential: 19.21%
Forward P/E: 15.97
EPS Growth This Year: 16.70%
Number of Hedge Fund Holders: 70
McKesson Corporation (NYSE:MCK) serves as a global diversified leader in healthcare and remains dedicated to improving care in every setting. The company operates through four business segments including U.S. Pharmaceutical, Prescription Technology Solutions, Medical-Surgical Solutions, and International. It was founded in 1883 to import and sell therapeutic drugs and herbal products.
The firm has a prominent history of advancing healthcare, spanning almost two centuries as an industry leader. McKesson Corporation (NYSE:MCK) delivers sustained financial growth across its operating segments by executing against four strategic priorities. These include focusing on people and culture, driving sustainable core growth in its distribution business, expanding oncology and biopharma platforms, and evolving and growing the portfolio.
For the first quarter of fiscal 2025, McKesson Corporation delivered adjusted earnings per diluted share growth of 8%. First quarter company revenues grew 6% year-over-year. The U.S. Pharmaceutical segment witnessed strong momentum, especially within the broad Oncology offerings. Factors impacting the results were a slower than anticipated growth in the primary care channels in the Medical-Surgical business and lower contributions from access programs in the Prescription Technology Solutions segment. Simultaneously, the board approved a 15% increase to the quarterly dividend thereby marking the eighth consecutive year of dividend increases.
Although the start to the year was weaker than expected, McKesson Corporation (NYSE:MCK) is confident in its ability to drive long-term growth and in its market-leading assets. With a strong business foundation and a clear strategy alongside material execution, the firm is in an attractive position.
5. Banco Santander, S.A. (NYSE:SAN)
Average Upside Potential: 23.70%
Forward P/E: 6.36
EPS Growth This Year: 13.00%
Number of Hedge Fund Holders: 9
Banco Santander, S.A. (NYSE:SAN) is a leading Spanish multinational financial services company. Santander was founded in 1857 and it became Spain’s seventh-largest financial institution by its 100th anniversary in 1957. The company is structured under five global businesses including Retail & Commercial Banking, Digital Consumer Bank, Corporate & Investment Banking, Wealth Management & Insurance, and Payments.
The firm’s business model is based upon unique competitive advantages including diversification, a global scale, and customer focus. While SAN focuses on achieving well-balanced diversification between businesses and markets, its in-market and global scale helps enhance local banks’ profitability. As of June 2024, Banco Santander, S.A. (NYSE:SAN) has 168 million of customers and €1,786 total assets. In recent years, the company has expanded its customer base with balanced growth by business and regions.
Banco Santander, S.A. (NYSE:SAN) closed a record first half of 2024. The company reported a profit of €6,059 million in the first half of the year, up 16% year-over-year. The solid year-over-year profit increase was motivated by strong growth in net operating income, supported by efficiency improvements and customer revenue. Net interest income rose 12% to a record €23,457 million, driven by growth in all businesses, particularly in Retail, CIB, and Wealth.
With a strong momentum across the business, Banco Santander, S.A. (NYSE:SAN) is poised to grow. The unique combination of in-market and global scale enables the firm to be one of the most profitable banks in its markets. The strength of Santander’s business model is evident from its results.
4. Merck & Co., Inc. (NYSE:MRK)
Average Upside Potential: 28.79%
Forward P/E: 10.83
EPS Growth This Year: 424.50%
Number of Hedge Fund Holders: 96
Merck & Co., Inc. (NYSE:MRK) is a global healthcare company. The company works to deliver innovative health solutions through its medicines, vaccines, biologic therapies, and animal health products. Merck & Co. was founded in the United States in 1891.
Merck & Co. is driving patient benefits and global growth across a broad portfolio of commercial therapies. The company has made significant progress over the preceding three years by reaching more people globally with its medicines and vaccines and expanding its pipeline to drive future innovations for patients.
The firm’s business momentum has remained strong through 2024. Merck & Co., Inc. (NYSE:MRK) recorded strong Q2 worldwide sales of $16.1 billion, up 7% from the second quarter of 2023. KEYTRUDA sales rose 21% year-over-year. The company also saw a successful initial launch of WINREVAIR in the US. In vaccines, GARDASIL sales increased 4% while VAXNEUVANCE sales grew 16% year-over-year. In July, the firm completed acquisitions of EyeBio and Elanco’s Aqua Business.
Recently, the company got FDA approval for its new pneumococcal vaccine, CAPVAXIVE, for adults. The WINREVAIR vaccine for adults with pulmonary arterial hypertension was also approved and made more than $70 million in sales in Q2 2024. Baron Funds’ Baron Health Care Fund stated the following regarding Merck & Co., Inc. (NYSE:MRK) in its first quarter 2024 investor letter:
“Global pharmaceutical company Merck & Co., Inc. (NYSE:MRK), Inc. contributed on the continued growth of Keytruda, the company’s key asset and the leading immuno-oncology agent used to treat a variety of cancers. The FDA’s late March approval of pulmonary arterial hypertension drug sotatercept, also drove share gains. We retain conviction as Merck has started to transition from prioritizing its Keytruda franchise to building a more diversified business, with a focus on the Gardasil vaccine, pneumococcal vaccine development, and cardiovascular drug development, well in advance of the scheduled expiration of patent protection/exclusivity rights.”
3. PDD Holdings Inc. (NASDAQ:PDD)
Average Upside Potential: 36.12%
Forward P/E: 8.88
EPS Growth This Year: 83.00%
Number of Hedge Fund Holders: 86
PDD Holdings Inc. (NASDAQ:PDD) is a multinational commerce group owning and operating a portfolio of businesses including Pinduoduo and Temu. While Temu is an online marketplace, Pinduoduo is an e-commerce platform offering products related to agricultural produce, apparel, shoes, bags, mother and childcare products, food and beverage, electronic appliances, and others. The company was incorporated in 2015.
PDD has emerged as one of the major e-commerce players in China. As stated by the investment management company, Baron Funds, PDD’s competitive moat lies in its team purchase model that facilitates bulk buying through direct partnerships with manufacturers, thereby eliminating intermediaries and lowering costs. With more demand for affordable products in China complimented with small-scale merchants finding alternatives to Alibaba, PDD has driven growth. In September, PDD shares soared over 40% after China announced an economic plan to stimulate its economy. Investors looking for exposure to the Chinese e-commerce landscape can consider the stock.
For the second quarter, the company recorded total revenues of RMB97,059.5 million, up 86% year-over-year. Meanwhile, net income attributable to ordinary shareholders was RMB32,009.4 million, up 144% as compared to the prior-year quarter.
The management predicts the revenue growth to decline ahead due to external challenges and intense competition. As the firm plans to create a healthy and sustainable ecosystem, it will be investing significantly in the platform’s trust and safety to help high-quality merchants thrive which could cause potential declines in profitability.
2. Elevance Health, Inc. (NYSE:ELV)
Average Upside Potential: 36.27%
Forward P/E: 10.34
EPS Growth This Year: 10.70%
Number of Hedge Fund Holders: 73
Elevance Health, Inc. (NYSE:ELV) is an American healthcare company that supports health at every life stage through its family of companies. The firm offers health plans and behavioral, clinical, pharmacy, and complex-care solutions to promote whole health. Elevance’s purpose revolves around improving humanity’s health.
Elevance Health has nearly 46 million total medical members in affiliated health plans and serves more than 113 million total lives. The firm has a strong brand portfolio encompassing Anthem and Wellpoint as the health plan brands which cater to 34 million and 2.2 million people respectively. Simultaneously, the health services business has over 75 healthcare partners. The balance and resilience of the firm’s complementary businesses have helped it navigate different macroeconomic environments. Elevance has a robust strategy of expanding its core business in commercial, Medicare, and Medicaid and investing to grow in specialized populations. At the same time, it focuses on growing Carelon through scaling best-in-class solutions to deliver whole health.
The power of Elevance’s diversified business was evident in the second quarter results. The firm reported 2Q 2024 diluted EPS of $9.85, up 26% year-over-year. Health Benefits showed resilience in Q2 with a strong growth in ACA health plan membership. In Health Services, Carelon services delivered a robust growth in operating revenue. Operating revenue for Carelon recorded an increase of $1.2 billion or 10% as compared to the prior year period.
In conclusion, Elevance’s strategy of optimizing the core while investing in growth tends to drive a long-term growth algorithm. The firm has a clear growth trajectory over the long term as it targets at least 12% average annual growth in adjusted diluted EPS.
1. Nomad Foods Limited (NYSE:NOMD)
Average Upside Potential: 36.66%
Forward P/E: 11.14
EPS Growth This Year: 9.70%
Number of Hedge Fund Holders: 30
Nomad Foods Limited (NYSE:NOMD) serves as one of the largest frozen food companies in Europe. The company manufactures, sells, and distributes a range of branded frozen food products across 22 European markets. Nomad Foods was formed in 2015 and is headquartered in the United Kingdom. The firm is an owner of leading brands including Birds Eye, Findus and igloo.
Nomad Foods is targeting the historically resilient and steadily growing category of frozen food. As claimed by Nomad Foods, the company has an 18% share within Western Europe’s €22 billion savoury frozen food market. With €3.9 billion in annual sales, the company makes its place among some of the top European frozen food companies. The firm’s attractive position is also backed up by secular winds such as frozen food bringing convenience by cutting down on the prep and meals made from frozen costing €2 to 3 less compared to chilled equivalents.
The growing momentum behind the business of Nomad Foods Limited (NYSE:NOMD) was evident in Q2 results. Reported revenue grew 1.1% to €753 million and adjusted EBITDA increased 5.3% to €139 million. Gross margin increased 270 basis points to 30.9%, driven by a positive product mix performance as the firm invested in its core most profitable must-win battles, supply chain productivity, and leveraged revenue growth management capabilities.
The runway for the firm’s growth is extensive with strong per capita consumption of frozen food across many European countries. The firm is focusing on a dynamic category with promising future growth prospects. With a strong market position complemented by favorable market conditions, Nomad Foods Limited (NYSE:NOMD) is a major pure-play frozen leader in Europe. As of Q2, the stock is held by 30 hedge funds.
While we acknowledge the potential of NOMD as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued AI stock that is more promising than NOMD but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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