Some of the best investors of all time have cemented their places in the upper echelons by sticking to a simple observation: Undervalued assets become fairly valued, eventually. Simple as it seems, going against the crowd and putting your hard-earned cash on a depressed stock can lead to a lot of second-guessing. But investors who maintain a long-term mindset and keep their emotions in check can realize above-average gains as a reward for their patience.

At the end of 2019, two industry leaders really stand out as undervalued businesses: paper-based packaging powerhouse WestRock (NYSE:WRK) and lithium producer Albemarle (NYSE:ALB). Here's why they're two of the top value stocks to buy in December.

A potted plant growing in the shape of an ascending arrow.

Image source: Getty Images.

Has the rally started?

I called WestRock my top stock to buy in September. The timing worked out pretty well, as shares have surged 20% since then in their biggest rally since the end of 2017. But as an example of how frustrating the stock has been (and how long it can take for value investing to pay off), I handed the same label to the paper engineering leader in August 2018. Shares are down 29% since that call.

Despite the stock's recent surge and investors' long-standing frustration, the numbers continue to argue that WestRock is a value stock. Shares trade at 0.9 times book value (up from 0.74 at the end of August), which means they would have to rise 11% to be fairly valued against the balance sheet. The stock also sits at 11.6 times future earnings, compared to 12.5 for the industry average and 30.6 for the S&P 500.  

As boring as paper-based packaging and cardboard might seem to investors, the industry is in the midst of some of its best growth opportunities in decades. Growing middle classes in South America and Asia are driving demand for sustainable packaging.

In post-industrial economies, retail and consumer-facing companies are increasingly interested in turning away from plastic-based packaging and toward fiber-based solutions. There are a number of single-use plastic bans on the horizon, with more surely on the way.

WestRock has positioned itself to capture the opportunities. The company has worked intimately with customers to develop shelf-ready and retail-ready packaging, including Walmart for its new razor brand and Colgate-Palmolive for new ships-in-own-container (SIOC) packaging requirements put in place by Amazon. WestRock even sells customers such as U.S. Auto Parts box-folding machines that allow them to make custom-sized cardboard boxes on site for oddly shaped products, which reduces excess shipping fees from carriers. 

The paper-based packaging leader has also achieved an annual run rate of $100 million in incremental revenue specifically related to customers ditching plastic-based packaging. WestRock thinks the current opportunity is $5 billion, which provides plenty of room for growth.

Given the undervalued business, the growth opportunities, and a sustainable annual dividend yield of 4.65%, WestRock is a top value stock to buy right now.

A neon light of a battery.

Image source: Getty Images.

This "struggling" lithium producer is worth a look

Whatever you think the word "struggling" means, it appears Wall Street has a different definition. 

Analysts can't shake their concerns that the global lithium markets are out of favor right now due to an economic slowdown in China, which is the largest market for lithium. Those fears have pushed selling prices of lithium -- one of the more abundant materials on the planet -- to "only" $7 per kilogram in China. That totally unfair selling price meant Albemarle "struggled" to deliver earnings before income taxes (EBIT) of $484 million and an EBIT margin of "only" 18.7% in the first nine months of 2019. Poor Albemarle.

All kidding aside, shares of the lithium producer have tumbled 17% this year and are trading at 13 times future earnings and 1.8 times book value. On metrics alone, the value argument tends to favor Albemarle over peers Sociedad Quimica y Minera de Chile (NYSE:SQM) and Livent Corporation (NYSE:LTHM):   

Metric

Albemarle

SQM

Livent Corporation

Market cap

$6.8 billion

$6.5 billion

$1.2 billion

Price-to-book ratio

1.8

3.1

2.2

Forward P/E

12.9

19.7

12.9

Dividend yield

2.3%

3.8%

N/A

Ex-lithium operations

Bromine chemicals, catalysts, fine chemicals

Agricultural nutrients, iodine, industrial chemicals 

None

Data source: Yahoo! Finance, SEC filings. P/E = price to earnings ratio.

When strategic plans are taken into account, it becomes clear that Albemarle is the best value stock among major lithium producers. The company expects to grow lithium conversion capacity from just 65,000 metric tons of lithium carbonate equivalent (LCE) at the end of 2018 to 175,000 metric tons of LCE by the end of 2021. The majority of that planned capacity is already entered into long-term supply agreements.

While the business (along with many of its peers) decided earlier this year to significantly reduce expansion investments in an attempt to help quell oversupply fears and respond to slowing demand in China, investors with a long-term mindset will find reasons to cheer. As a result of reduced capital-investment requirements, Albemarle now expects to be free cash flow positive in 2021, which will provide enviable financial flexibility for when it needs to pull more lithium out of the ground in the future. Peers won't be able to respond to customer demand in the same way. 

Investors may not have to wait too long for the value proposition to deliver gains. Albemarle told investors discussions are underway with multiple parties to divest the catalyst business and fine-chemistry segment. A deal isn't guaranteed, but based on the profitability of the businesses, the company could net at least $1 billion combined for both. That would reduce the company's earnings potential but provide a cash injection -- used to pay down debt, invest in lithium operations, or just park on the balance sheet -- to cement the stock's value proposition among its peer group.