Despite a bull market in 2023 and 2024, value investors hunting for a good bargain can still find some undervalued companies on sale.
An undervalued company is one that is consistently profitable and has attractive long-term growth prospects. Its share price is also cheap compared to many of its peers and cheap compared to the amount of future profit expected to be generated. Such stocks can be great options for patient buy-and-hold investors willing to wait for hidden bargains.
Although investors are always on alert for a good deal, it's important to remember that some stocks are cheap for a reason. It may be that a company's growth prospects have diminished, it's losing money, or it's losing business to new competitors.
Whatever the reason, stocks like these (sometimes called "value traps") are not considered undervalued even if they trade at very low prices.
Intrinsic Value
Our list
Our list of undervalued stocks in 2025
Here are five high-quality, undervalued large-cap stocks to consider, screened for profitability, and positive earnings:
1. Berkshire Hathaway
No list of value stocks would be complete without famed investor Warren Buffett's Berkshire Hathaway (BRK.A -0.97%)(BRK.B -1.4%).
Because it is a holding company, buying shares of Berkshire Hathaway gives you exposure to a private portfolio of insurance businesses (GEICO, among others), one of the largest railroads in the U.S. (BNSF Railway), an energy and utility conglomerate (including a huge renewable energy division), and various other enterprises that span industries from candy to apparel.
When it comes to public companies, Berkshire also holds significant stakes in Apple (AAPL 3.09%), Bank of America (BAC -1.24%), American Express (AXP -0.26%), Chevron (CVX 0.2%), and Coca-Cola (KO 1.29%).
2. Target
Shares of mega-retailer Target (TGT 0.25%) have lagged competitors like Costco (COST 0.9%) and Walmart (WMT -0.27%) in recent years.
Contributors to this underperformance included sluggish growth hampered by higher expenses, lower consumer confidence, and general weakness in the consumer discretionary sector. The company has also faced challenges with theft.
Still, Target retains some excellent fundamentals. It's still solidly profitable and has a differentiated position in the massive retail industry. With a forward price-to-earnings (P/E) ratio of 12.3, investors buying Target right now can get a 3.8% dividend yield. The company is also a Dividend King, having increased dividends for more than 50 consecutive years.
3. Micron Technology
Micron (MU 2.7%) is a maker of memory chips, and an integrated device manufacturer (IDM), meaning that it both designs and manufactures its chips.
Memory chips are notoriously cyclical as demand and prices can fluctuate wildly due to inventory gluts or changes in end-user demand. Nonetheless, Micron has historically been a winner on the stock market even as the stock has gone through multiple cycles.
These days, Micron's sales are booming thanks to AI. Its biggest customer is Nvidia (NVDA 0.6%), and analysts expect sales to jump 39% in fiscal 2025 and 28% the following year. Due to the leverage inherent in its business, that means profits are set to soar. Even with those expectations, the stock trades at a forward P/E ratio of just 12.4. If the company can meet or exceed those expectations, the stock looks significantly undervalued at that valuation.
4. British American Tobacco
British American Tobacco (BTI 0.49%) took a significant hit in late 2023 due to a $31.5 billion charge.
This was essentially the company writing off the value many of its cigarette brands as worth much less than it had earlier estimated, given the industry's shift toward smokeless products.
Although the impairment affected BTI's earnings, future revenue, profit growth, and stock price, it was a non-cash-adjusting impairment.
Today, the company remains a free cash flow powerhouse, with trailing-12-month free cash flow of $10.2 billion. This robust cash flow supports a substantial dividend yield of 7.6%, with a very sustainable payout ratio of 66%.
Currently, the stock is trading at a forward P/E ratio of 8.8, which looks like a good price to pay for a strongly profitable company like British American Tobacco, even if it's growth is roughly flat. Like most tobacco manufacturers, its operating margins are strong at 46%, thanks to its pricing power.
5. Lennar
Homebuilder stocks like Lennar (LEN 0.13%), which is one of the biggest homebuilders in the country, have historically been undervalued. Following the housing collapse during the Great Recession of 2007-09, the industry was largely viewed as too risky by a number of investors.
Homebuilders have also been reluctant to ramp up activity, but ones like Lennar have cleaned up their balance sheets and are generating steady profits. Meanwhile, a housing shortage in the U.S. has become exacerbated, and according to some estimates, there's a deficit of around 4 million homes. Lennar should also benefit from the eventual easing of interest rates and the recovery of the housing market.
Currently, the stock looks well-priced at a P/E ratio of just 8.3, which is a good value for a sector leader that's poised to benefit from industry-level and macro tailwinds.
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Finding undervalued stocks
Finding undervalued stocks
Undervalued companies aren't necessarily the biggest ones out there. They can also be mid-cap or small-cap companies or even growth-oriented companies that trade for less than their peers.
In addition, don't just evaluate the "cheapness" of its P/E ratio or focus on its share price being low relative to its 52-week performance -- it can always go lower.
There's no universal formula for finding value stocks, but you may want to begin with checking:
- Profitability: Look at key metrics like operating margin and profit margin. Consistently high margins relative to peers indicate strong profitability.
- Return on equity (ROE): ROE measures how effectively a company uses shareholders' equity to generate profits. A higher ROE, typically above 10%, is a good sign of management efficiency and profitability.
- Return on assets (ROA): ROA indicates how efficiently a company uses its assets to generate profit. ROAs above 5% are generally considered good, but can vary by industry.
- Price-to-earnings ratio: The P/E ratio measures how much investors are paying for a company's earnings. Comparing the P/E ratio to that of the S&P 500 is a one way to get a sense of the relative value of a stock. You can also compare a company's P/E ratio to its peers.
- Price-to-book ratio (P/B): A P/B ratio under 1 suggests the stock may be undervalued, but be cautious, as a very low P/B could indicate underlying problems. Compare it with the industry average for context.
- Earnings growth: Sometimes a stock is undervalued for a reason, such as poor growth prospects. Check the company's historical and projected earnings growth rates. Consistent growth is a positive indicator while declining earnings could be a red flag.
- EV/EBITDA: This ratio compares a company's enterprise value (EV) to its earnings before interest, taxes, depreciation, and amortization (EBITDA). It provides a more comprehensive view than the P/E ratio because it factors in a company's debt. Ensure you compare the EV/EBITDA ratio to peers within the same sector to gauge relative value.
FAQs
Undervalued Stocks FAQs
How do I start value investing?
Value investing requires a lot of research. Start by understanding all the different metrics and ratios that value investors use. You'll have to do your homework by going through many out-of-favor stocks to measure and model a company's intrinsic value and compare that to its current stock price. Often, you'll have to look at dozens of companies before you find a single one that's a true value stock for the long term.
What are value vs. growth stocks?
Value investing and growth investing are two different investing styles. Usually, value stocks present an opportunity to buy shares for less than their actual value, and growth stocks exhibit above-average revenue and earnings growth potential.
What are value stock ETFs?
An exchange-traded fund (ETF) that invests in value stocks uses specific criteria to find companies whose intrinsic values substantially exceed the market values implied by their stock prices. By investing in a wide range of undervalued companies, value stock ETFs confer instant portfolio diversification. Buying shares in a value stock ETF can be a safe and easy way to invest in companies in cyclical industries.
