5 Seriously Undervalued Stocks

It's all really pretty simple. When we buy stocks, we want to buy them when they're priced below what the underlying company is worth. When looking at the broader market, we similarly want an idea that the stocks in that market are collectively undervalued.

When it comes to the closely-watched S&P 500 index, there's a debate that's been raging over whether investors are better off watching the one-year price-to-earnings ratio or the ratio based on 10-year average earnings -- the cyclically adjusted price-to-earnings ratio, or CAPE -- that Yale economist Robert Shiller favors. And even those that like Shiller's measure can't seem to agree whether today's value should be benchmarked against the long-term average (going back to 1871) or a more recent period, such as the past 20 years.

But I'm going to set aside that debate for a moment and show you five stocks that are almost undeniably cheap. How cheap exactly? Each of the stocks below trades at a multiple of its 10-year average earnings that is below the market's long-term CAPE of 16.4 and is expected to grow at a rate above the market's long-term average of 4%.

Company

Price to Average 10-Year Earnings

Expected Long-Term Growth Rate

Total (NYSE: TOT  ) 7.5 7.5%
Goldman Sachs (NYSE: GS  ) 8.4 10.2%
ArcelorMittal (NYSE: MT  ) 7.3 19.2%
Torchmark (NYSE: TMK  ) 7.9 8.6%
DST Systems (NYSE: DST  ) 6.2 4.2%

Source: Capital IQ, a Standard & Poor's company. Historical average earnings based on calendar years. 2011 estimated based on annualized first half.

For the most part, the names on the list above aren't exactly household names, so we should probably take a closer look at exactly what we're dealing with here.

Energy value: Total
When talk turns to big-cap energy, it generally involves industry giants like ExxonMobil and Chevron. But don't overlook French oil major Total.

The company's financial track record speaks for itself, with a history of solid profits, cash flow, and equity returns. It has a very reasonably-capitalized balance sheet and a very impressive 7% dividend yield. And as far as the business is concerned, there is certainly downside potential if a weak economy causes oil to fall, but at the same time, the world's unquenchable thirst for oil doesn't seem to be drying up any time soon.

I should also point out, though, that this doesn't mean you should completely ignore the other oil majors. With a 10-year average P/E of 11 and an expected growth rate of 7.7%, Exxon could have easily made the list above as well.

Feels so dirty: Goldman Sachs
It's the brokerage house so many investors love to hate. To a large extent, Goldman's business is a hopelessly opaque black box. Almost all of the publicity it's received since the financial crash has been bad publicity. And it wouldn't surprise me in the least to see the company end up on the wrong side of an ethics case study.

That said, as far as the financial world goes, Goldman may actually look like a conservative pick when stacked against the likes of Bank of America (NYSE: BAC  ) or Citigroup (NYSE: C  ) . It still has the brand power to attract top talent, and we can't deny that it's got a heck of a profit-producing track record.

And the stock is darn cheap.

Steeling yourself: ArcelorMittal
Many of the companies on the list above have a reasonable amount of consistency on the bottom line. Not so with ArcelorMittal. The steel business is a highly cyclical one that swings wildly with the leaps and lurches of the global economy. When things are peachy, plenty of building demands plenty of steel. But when growth slows to a crawl, that demand can dry up rather drastically.

In 2008, for example, ArcelorMittal produced a whopping $9.5 billion in net profit. The next year, a mere $157 million. Profits have bounced back since 2009, but they're nowhere near peak levels. The bottom line, though, is that this is the world's leading steel producer, and I think when we consider the company's earnings power, it's pretty obvious that the stock is a … um … steal.

Snore-inducing winners: Torchmark and DST Systems
While it wouldn't surprise me to hear that the three names above have hit the radars of many readers, I'd be more surprised to hear that a lot of readers had their eyes on Torchmark and DST. The reason is simple: Both are smaller companies with relatively boring businesses.

The lowdown: $3.7 billion Torchmark is a provider of life insurance and supplemental health insurance, while $2 billion DST provides back-end services for financial and healthcare companies. But just because these aren't the names that everyone is excited about on CNBC hasn't stopped them from being successful. Both companies have solid track records of profitability, cash flow, and equity returns. Both have also returned capital to shareholders through generous share buyback programs.

I don't expect that these companies will suddenly become hot-to-trot Wall Street darlings, but I also don't see them staying at these depressed prices.

Dig in
While I think these are all intriguing ideas, all require more research before making that final "buy" decision. Ready to take the next step in the process? Click the "+" next to any of the tickers above to add them to your watchlist. And if none of these catch your fancy? My fellow Fools have put together a free report detailing five stocks that The Motley Fool owns and they think you should own two. Two of the five stocks they highlight would have made the table above. Grab a free copy of that report by clicking here.

The Motley Fool owns shares of Bank of America and Citigroup. Motley Fool newsletter services have recommended buying shares of Total and Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Matt Koppenheffer owns shares of Total, Bank of America, and Chevron, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool’s disclosure policy prefers dividends over a sharp stick in the eye.


Read/Post Comments (13) | Recommend This Article (56)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 19, 2011, at 5:37 PM, SwiperFox wrote:

    I've had MT since 2009. It's been a nice ride and the dividends have been consistent.

    Currently it's below the (cheap) 2009 price. I'm going in for more.

  • Report this Comment On August 19, 2011, at 6:13 PM, stan8331 wrote:

    My problem with Goldman as an investment is that it's structured more to benefit employees than shareholders. There are far too many other, better bargains out there right now.

    From this list, MT is the stock that looks most intriguing to me. If I can scrape up some additional cash, I might just take a bite.

  • Report this Comment On August 19, 2011, at 6:28 PM, nbBurna wrote:

    Why do you think GS is a buy now? I guess they're still the titan in the finance world, but they have been giving negative returns for the past 5 years, and I'm just curious as to what changed from then to now to make it a buy.

    Also Matt, you posted a while ago about TEVA. I love the company too, and was just wondering what the hecks going on with the stock since its below $39 now.

  • Report this Comment On August 19, 2011, at 6:28 PM, PeakOilBill wrote:

    Goldman could either get hurt, or make a fortune (which they always seem to do on other's misfortune) on the upcoming banking crisis in Europe. Watch Sean Egan on Friday morning's CNBC TV Squawk Box for what is about to happen to the banks over there. Hint: UGLY. The USA will get dragged into it.

    Total is a big oil company. And the French might still be able to bribe the right people without having to worry about going to jail.

    Steel companies could get slammed, in a bad recession. AT&T, not as much.

  • Report this Comment On August 19, 2011, at 6:50 PM, PeakOilBill wrote:

    Sorry, CNBC cut off most of what Sean Egan said. He estimates that the ECB, or someone, will have to come up with 3 TRILLION euros to prevent a banking meltdown and euro collapse. Obviously, a depression in Europe would quickly spread worldwide by taking down the banking system. That is why he said that the USA will have to help. They don't have enough money. He kept saying that they must act soon. The longer they delay, the greater the cost will be to fix the problem and the more severe it will become. So you CNBC, Bloomberg and Fox Business viewers will have plenty to watch in the coming months.

  • Report this Comment On August 19, 2011, at 11:04 PM, 11x wrote:

    That's a common comment I have seen for GS. "They run the company for the benefit of the insiders and give shareholders the shaft."

    Since going public, GS stock is up 50% versus down 16% for the S&P 500. It seems GS shareholders are doing just fine to me.

  • Report this Comment On August 21, 2011, at 1:35 PM, mikecart1 wrote:

    TOT has been on my watch list for months. The dividend is awesome!

  • Report this Comment On August 22, 2011, at 11:55 AM, TMFKopp wrote:

    @nbBurna

    Re: GS. Negative returns in what sense? The company has continued to be profitable...

    Re: TEVA. A lot of that loss has simply been the stock falling with the rest of the market. Unless I missed something, nothing has drastically changed with the company.

    I've used the lower price to up my stake: http://www.fool.com/investing/general/2011/08/12/3-stocks-i-...

    Matt

  • Report this Comment On August 22, 2011, at 4:27 PM, TMFKopp wrote:

    FWIW, this doesn't go in the "plus" column for GS:

    http://www.reuters.com/article/2011/08/22/us-goldman-blankfe...

    Matt

  • Report this Comment On August 26, 2011, at 1:48 PM, inkstainedwretch wrote:

    Wait... Tot's trailing yield is around 7 percent... but it's forward yield is just 3 .... per Yahoo. They only payout once a year, per Google.

    Am I missing something? Have they cut their yield or just not announced next year's payout?

  • Report this Comment On August 26, 2011, at 2:39 PM, TMFKopp wrote:

    @Bokononblue22

    "Am I missing something? "

    In short, yes. :)

    The online sources like Yahoo are notoriously bad at working with foreign dividends, so the best thing to do is go straight to the source (the company). Total recently changed its policy so that it will now pay out quarterly.

    Here's a link to the company's investors page -- http://www.total.com/en/home-investors-940702.html

    Matt

  • Report this Comment On August 27, 2011, at 2:06 AM, Sunny7039 wrote:

    According to my information, TOT has cut its dividend in half for the next two quarters. Yet I still see everyone touting it as having a 6-7% dividend/a dividend yield roughly equal to its PE ratio, plus a safe payout. To my knowledge, this is outdated.

    If I am wrong, or if something else is going on that I'm misunderstanding, PLEASE correct me.

    French companies are required to keep a lot of cash on their balance sheets, so they are probably a little better prepared to weather the Euro zone problems than one might otherwise predict. But this, like anything else, could end up being a thin reed to hang on to. I refuse to recommend to anyone to buy any stock.

  • Report this Comment On August 29, 2011, at 10:37 AM, TMFKopp wrote:

    @Sunny7039

    What's your information source?

    Matt

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