Value stocks have seen a resurgence in demand during 2022. Rising interest rates increase borrowing costs, making speculative behavior less appealing. As a result, investors have fled from the speculative growth stocks that were so popular when rates were near zero. While some of that money is sitting on the sidelines, a good deal rotated into value stocks.
Value stocks’ current appeal is in their security and predictability. However, renewed investor focus on value stocks has increased demand, thus driving up prices. That’s great for shareholders, but it also makes it more difficult to find truly undervalued value stocks.
Investors looking for value stocks that are still reasonably priced should consider the names below.
| C | Citigroup | $50.22 |
| PFE | Pfizer | $47.60 |
| MU | Micron Technology | $62.52 |
| DHR | Danaher | $271.06 |
| MO | Altria | $44.37 |
| TREX | Trex | $49.26 |
| SKX | Skechers | $39.57 |
Undervalued Value Stocks: Citigroup (C)
Citigroup (NYSE:C) stock is seriously undervalued due mainly to investor hesitancy regarding the overall macroeconomic picture and the firm’s operational efficiencies. Those efficiencies were on display in the company’s Q3 earnings report, released in mid-October.
While revenue increased 6% year over year to $18.5 billion, net income declined by 25% from a year ago to $3.5 billion. The company attributed the decline in net income primarily to “higher cost of credit resulting from the loan growth in [Personal Banking & Wealth Management] and higher operating expenses.”
Wall Street wasn’t too miffed by the results, though, as C stock is up 17% since they were announced. Meanwhile, Citi is moving to cut costs by laying off workers.
While the year ahead is likely to be challenging, there is value to be found in the stock. Consider that Citigroup has a book value of $92.17 while shares are around $50 for a price-to-book ratio of 0.52. And the stock’s 4.8% dividend yield only adds to its value.
Pfizer (PFE)
Shares of Pfizer (NYSE:PFE) are up 14% over the past month, outperforming the S&P 500’s 9.5% advance. Yet, shares still trade 14% below analysts’ average target price of $54.31.
On Nov. 1, the drugmaker announced better-than-expected third-quarter results. The company also raised its full-year earnings forecast and the lower end of its revenue guidance. The revised outlook is due in part to stronger-than-expected sales of its Covid-19 vaccine.
The company now expects to generate $34 billion in revenue from the vaccine in 2022 and between $99.5 billion and $102 billion in total revenue. At the midpoint of the range, that would translate into revenue growth of 24%. Management also raised its 2022 earnings per share guidance to $6.40 to $6.50, up from $6.30 to $6.45 previously.
All in all, it was a strong showing, and shares are up about 3% since the announcement.
Many investors are concerned about the eventual decline in Covid-19 vaccine revenue negatively impacting the company. But pharma is a forward-looking industry and Pfizer expects up to 19 regulatory approvals over the next 18 months. Its robust pipeline, strong dividend yield of 3.4% and history of profitability make PFE an undervalued stock worth pursuing.
Undervalued Value Stocks: Micron Technology (MU)
Semiconductor stocks have been hammered this year over concerns of a cyclical slowdown, and Micron Technology (NASDAQ:MU) is no exception. Shares are down 33% year to date. However, the stock is up more than 30% since the company reported its fiscal fourth-quarter and full fiscal 2022 results on Sept. 29.
It was a tough quarter, with both revenue and earnings falling on a year-over-year basis. The company managed to beat estimates on the top and bottom lines, but its forecast for the current quarter came in well below expectations. Management blamed an “unprecedented level of inventory adjustments” by its customers and said it planned to scale back its plans to build out capacity.
Eventually, the cyclical downtrend in the chip market will end. And despite current headwinds, analysts remain bullish on MU stock. Of the 39 who cover the stock, 30 rate it a “buy” or “overweight.” Moreover, MU looks undervalued based on traditional metrics. For example, its current P/E ratio of 8.1 is lower than nearly 80% of its peers. Plus, the stock pays a dividend that yields 0.8%.
For investors willing to bet that efforts to reshore memory production to the U.S. will succeed, Micron Technology is a buy.
Danaher (DHR)
Danaher (NYSE:DHR) operates a life sciences, diagnostics and environmental solutions business, controlling more than 20 operating companies and employing 80,000 people globally. Life sciences firms aren’t inherently flashy or exciting, and DHR stock has not drawn a lot of investor interest. However, that’s not necessarily a bad thing for those looking for undervalued value stocks.
So far in 2020, DHR stock has fallen about 17%, in line with the broader market. Over the past five years, however, it has outperformed, with shares nearly tripling in price.
Looking at Danaher’s fundamentals, there’s plenty to like. The company reported Q3 results on Oct. 20. Revenue was up 6% year over year to $7.7 billion, solid but not spectacular. Where Danaher had a chance to shine, though, was with its adjusted net earnings. They jumped 36% from a year ago to $2.10 per share. Notably, Danaher has exceeded analysts’ EPS estimates in each of the past four quarters despite a challenging macroeconomic environment.
For the full year, analysts are forecasting the company will earn $10.55 a share on revenue of $30.75 billion. This represents year-over-year growth of 4.4% and 5%, respectively.
Well-operated, dependable companies that may not be household names and get overlooked are a great place for investors to find value. That’s DHR to a “T.” Shares even throw off a bit of income with a 0.4% yield.
Undervalued Value Stocks: Altria (MO)
You may not be a fan of Altria’s (NYSE:MO) business of selling cigarettes and other tobacco products. And it’s true that sales of cigarettes are declining in the U.S. However, vaping and e-cigarette use are on the rise, which is an area in which Altria is looking to become more competitive.
Its stock has held up much better than the broader market over the past year, down around 1% compared with a 15% loss for the S&P 500.
Shares currently throw off a huge 8.5% yield, making them attractive from an income perspective. I will note that the company’s payout ratio is 142%, meaning its earnings aren’t high enough to cover dividend payments. This is a bit concerning. Yet, the company is one of the elite Dividend Kings, meaning it has not just maintained but increased its dividend payout for 50 years and counting.
In late October, Altria said it had entered a new strategic partnership with Japan Tobacco (OTC:JAPAF) to develop and commercialize smoke-free products, which will provide a new growth avenue for the company.
While most analysts who follow MO stock rate it a “hold,” their average target price of $44.38 is 10% above where shares currently trade. That’s not eye-popping, but the stock’s 8.5% yield is.
Trex (TREX)
Trex (NYSE:TREX) manufactures wood-alternative decking and railing. Given the slowdown in the housing market, this may not feel like the time to be investing in a company like Trex. However, data suggests that a dramatic increase in home equity is spurring home improvement projects.
To be sure, the company’s third-quarter results weren’t great. Revenue was down nearly 44% year over year to $188.5 million and EPS of 14 cents missed the consensus estimate by a penny. However, the company’s Q4 revenue guidance was in line with estimates. Despite its near-term struggles, Trex continued to repurchase its stock, buying back 1.7 million shares in the third quarter.
TREX stock is down 63.5% year to date. Its current P/E ratio of 28 is below its median of 34.4 over the past 10 years. Meanwhile, analysts’ average price target of $52.53 implies upside of 6.6%. I foresee analysts raising their target as consumers begin to spend more on improvements to their existing homes, especially as rising mortgage rates cause some potential homebuyers to reconsider purchasing a new home.
Bottom line: There is value in beaten-down TREX stock even if it is a bit of a contrarian play.
Undervalued Value Stocks: Skechers (SKX)
An increasingly difficult operating environment is the only thing to dislike about Skechers (NYSE:SKX). Investors who give the footwear maker the benefit of the doubt and chalk up losses to macro issues will see an undervalued gem.
Rising costs led to a 280-basis-point drop in gross margins in the third quarter from a year ago to 47.1%, while operating margins decreased 250 basis points to 6.9% during the same period. Net earnings fell 17.2% year over year to $85.9 million. On the bright side, Skechers announced record quarterly revenue of $1.9 billion, up 20.5% from Q3 2021, which I believe says much more than decreasing margins given the overall economy. Furthermore, the company repurchased $25 million of its stock during the quarter, showing its commitment to shareholder value.
For the year, SKX stock is down about half as much as the broader market following a 16% rally over the past month. Analysts’ average target price of $44.27 is 12% above the current share price.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.