Finding deals in undervalued S&P 500 stocks is similar to finding deals in anything. It always raises the same question: Why is this priced lower than it should be? If you can’t find a logical reason for the discount then you should buy. That’s the basic premise here.
These stocks are undervalued and undeservedly so. All have strong upside narratives and solid businesses that present reasonable ongoing opportunities. In short, if you can find the rationale for ongoing business growth then any given stock deserves at least your attention.
If the fundamentals look healthy, then it’s worth the gamble. Let’s look at 7 of the most undervalued S&P 500 stocks to now now.
Undervalued S&P 500 Stocks
Delta Airlines (DAL)
Delta Airlines (NYSE:DAL) already telegraphed a strong second quarter when it released Q1 earnings back in mid-April. Management said it in no unclear terms: “Expect record June quarter revenue.” Share prices have moved up since then but there is plenty of room for growth remaining based on Wall Street analyst projections. Surging summer travel should reward Delta and is a great reason to get on board now.
It’s also worth noting that those same analysts overwhelmingly rate DAL stock as a buy. Part of the hesitation around Delta stock stems from the pandemic hangover. Airlines were losing money hand-over-fist as it dragged on due to grounded operations. The cost of idle planes is massive. Just to refresh your memory, Delta was burning through $27 million in cash per day in June 2020. That led to an incursion of debt that currently plagues all airlines.
But Delta offers positive news there: The company reported record free cash flows in the March quarter that allowed it to complete its full-year planned debt reduction in the first half of the year. That’s a huge accomplishment and bodes well for the fact that so many pundits worry about debt reduction as their primary concern with Delta.
Marathon Petroleum (MPC)
Marathon Petroleum (NYSE:MPC) stock remains inexpensive overall. The metrics surrounding the company point squarely to that notion. But before jumping into that, let’s first understand the oil firm’s business model. Marathon Petroleum is a midstream/downstream oil company. It basically transports crude in its midstream business and refines and markets it downstream.
The company currently makes the bulk of its earnings via the downstream segment so it’s more accurately a downstream firm. However it’s defined, Marathon Petroleum is growing on both fronts. Midstream earnings (29% of the total) increased from $1.4 billion to $1.53 billion in the first quarter. The downstream segment boomed, moving from $1.37 billion to $3.8 billion in earnings.
Investors aren’t particularly enthusiastic about MPC stock, however. Its P/E ratio is just about as low as it has been in the last decade. Investors simply aren’t willing to pay as much for a dollar of its earnings as they were previously. That’s the opportunity, frankly. It’s cheaper than it should be.
CF Industries (CF)
CF Industries (NYSE:CF) is much the same as Marathon Petroleum stock in that regard. It, too, is deeply undervalued based on its P/E ratio which stands at 4.73 currently but has a median of 14.06 over the past decade. The company manufactures hydrogen and nitrogen products that it sells to firms across clean energy, emissions abatement, fertilizer, and other industrial niches.
The best way to summarize CF Industries is as an excellent operator that suffers unduly due to commodity prices largely out of its control. The firm’s operational excellence is on display across broad profitability, value, and growth metrics that all favor investing in the firm.
CF Industries is basically growing faster than the vast majority of its competitors, more profitably, while remaining undervalued relative to that growth. Those signs suggest that it makes sense to get in now. The reason it is undervalued likely relates to lower prices the company reported for the ammonia, urea, and nitrogen products it sells during the first quarter. Those prices are transitory, CF Industries’ ability to operate at a high rate is not transitory.
Altria (MO)
Altria (NYSE:MO) stock has vacillated between $43 to $48 in 2023. It is now priced around $43 and that price is really too good to ignore. Altria manufactures and sells cigarettes, tobacco, and other forms of nicotine. Share prices have come down dramatically over the past several years as cigarette smoking rates decline. But what Altria losses there benefits investors as the company is pivoting into a more diversified, more smokeless portfolio while paying a handsome income to investors.
Companies across the space are racing to release reduced-risk products and have seen rapid revenue growth there per a recent Zacks report. As Altria pivots to do so, it continues to pay a dividend yielding 8.6%. The company last reduced it in 1970 and is unlikely to again anytime soon. It’s one of the primary benefits as the firm pivots. That and the notion that the company creates massive shareholder value as measured by a return on invested income that far outstrips its weighted average cost.
Albemarle (ALB)
Albemarle (NYSE:ALB) has garnered a lot of attention recently as EVs have taken hold and lithium became a hot commodity. That status as a major producer of a hot commodity saw stock prices move steadily upward over the past few years. They’ve come down in 2023 somewhat as lithium supply and demand factors roiled the market.
But prices seem to stabilize in recent months and Albemarle is offering strong upside again. Wall Street analysts believe it could rise from $220 now to as high as $360 over the next year. Gurufocus is even more optimistic about its upside, pegging ALB’s share value at $450.
The gamble here is that commodities markets like that for lithium are notoriously difficult to predict. That said, even when the bottom falls out, as it did in late 2022, Albemarle prices remained strong. Growth projections for lithium are approximately 20% compounded annually through 2033. I’m guessing Albemarle’s recent growth is not a fluke.
American International Group (AIG)
American International Group (NYSE:AIG) stock is relatively cheap as the company shifts its model slightly. The company is divesting its life insurance business line while placing increased focus on its core business insurance segment. That segment is doing well which is part of the reason to consider AIG at present.
The divestiture of its life insurance business is dragging down operational efficiency. That’s keeping prices lower than they might otherwise be. Meanwhile, the company delivered its highest-ever Q1 general insurance underwriting income at $502 million.
Those policies are sold to corporate clients around the world and grew by 13% during the period. The narrative for AIG is that it is transitioning to a more profitable business that is seeing increased demand for its risk products but looks somewhat weak due to that transition. AIG shares also come with a stable, lower-yield dividend that has plenty of room to grow based on payout ratios.
Pfizer (PFE)
A recent Wall Street Journal article about Pfizer (NYSE:PFE) and other vaccine stocks summarized the current opportunity well. That article highlights the fact that the big 3 vaccine makers have fallen dramatically in 2023. Part of the reason is that fewer and fewer people are planning to get boosted as time goes on.
Pfizer is expected to report $20 billion in Paxlovid sales this year, down from $55 billion in 2022. Analysts believe the market will remain resilient as elderly populations are likely to continue to get boosted. So, there’s perhaps an overreaction on the part of investors regarding waning demand for Pfizer’s Covid vaccines.
The other point is this: Pfizer took windfall Covid profits and bought Seagen (NASDAQ:SGEN). It now has cancer assets in its portfolio that it didn’t have. The neverending biotech search for the next blockbuster drug continues. Pfizer hedges against a patent cliff with its Seagen acquisition and it’s entirely reasonable to believe it could make further acquisitions. The point here is Pfizer is much better for having won the vaccine race.
— Alex Sirois
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Source: Investor Place