Big Bank Earnings Breakdown: Here's What You Need to Know
We've now heard from the largest U.S. banks; here's what investors need to know.
An undervalued company stock is one that is consistently profitable and has attractive long-term growth prospects but whose share price is cheap compared to many of its peers. Stocks like these can be great options for patient buy-and-hold investors willing to wait for the market to pick up on hidden bargains.
While 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.
Here are six excellent undervalued stocks to consider.
When considering the best underappreciated value stocks, famed investor Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) deserves to be atop this list. Buffett has become one of the wealthiest people on the planet by successfully buying and holding quality companies for decades. Although Berkshire Hathaway underperformed the S&P 500 (SNPINDEX: ^GSPC) in the 2010s (as well as in 2020 when the market was favoring high-growth tech companies), there’s still plenty to like about the Oracle of Omaha’s sprawling business.
Berkshire Hathaway is a holding company that owns insurance businesses (GEICO, among others), the largest railroad in the U.S., an energy and utility conglomerate, and various other enterprises that span industries from food to apparel. Additionally, Berkshire holds significant stakes in Apple (NASDAQ:AAPL), Bank of America (NYSE:BAC), and Coca-Cola (NYSE:KO).
Buffett and his team provide updates on changes to its stock portfolio every quarter. In 2020, Berkshire Hathaway's largest stock purchase by far was its own stock -- the company's stock repurchases amounted to $24.7 billion, the largest stock repurchase in its history. In his annual letter to shareholders, Buffett indicated that repurchases of Berkshire Hathaway stock will continue, and that has indeed been the case so far in 2021.
Although Buffett's value-focused investing style has fallen out of favor in recent years, the company's ongoing stock repurchases are a clear signal to the market that he considers Berkshire Hathaway stock to be underpriced. If you’re in the market for an undervalued stock that you can buy and forget for many years, Berkshire Hathaway is a great choice.
Target (NYSE:TGT) is a Dividend Aristocrat, having increased its dividend payout to shareholders every year for nearly 50 years. After a banner year in 2020, the company is poised to keep increasing its revenue. Best known as a big-box store, Target has transformed itself into a one-stop shop that sells everything from groceries to basic household goods. Target also has its own in-house labels in traditional department store categories such as apparel and home decor.
But the company's real differentiator is that nearly all Americans live within 10 miles of a Target store. That has helped the retailer turn its locations into distribution centers. In fact, some 95% of all orders -- even many placed online and shipped to customers’ homes -- are fulfilled by local stores rather than distribution centers. In addition to providing a pure e-commerce experience, Target also offers curbside pickup and is expanding its Shipt delivery service.
In the coming years, Target expects to increase its annual capital expenditures to about $4 billion on opening new stores, remodeling existing stores, and improving supply chains -- a sharp increase from the approximately $2.7 billion it allocated annually from 2016 to 2020. The company is committed to expanding its e-commerce operation while continuing to pay a reliable dividend.
The company's stock still trades like it is only a brick-and-mortar retailer as Target is implementing a multi-pronged strategy that effectively leverages its physical footprint. E-commerce pure plays are all the rage, which also contributes to Target stock being undervalued.
E-commerce pioneer Amazon (NASDAQ:AMZN) settled the debate years ago about whether its sprawling operation could ever turn a profit. It’s been quickly and steadily churning out higher rates of net income every year. However, Amazon may not be the first name to come to mind as an undervalued business. This is, after all, still very much a growth stock.
Amazon is now lapping the early pandemic boom it enjoyed during the spring and summer of 2020 when everyone was stuck at home and shopping almost exclusively online. And, as it does so, it’s still growing at a double-digit percentage clip and shelling out record profits. Much of that profit is getting reinvested into the business to foster even more growth.
However, regulatory concerns have cropped up. Some worry the company’s e-commerce, cloud computing, advertising, and various other unified businesses could come into regulators’ crosshairs, as some of its fellow tech giants have.
Whether that happens remains to be seen. Either way, Amazon is starting to look undervalued given its enduring growth trajectory and long-term potential. The stock’s price barely budged from the summer of 2020 to the summer of 2021 even as Amazon’s top and bottom lines continued to expand.
Retail financial services and investment banking giant JPMorgan Chase (NYSE:JPM) manages assets in excess of $3 trillion globally. It's a banking behemoth that maintains a tiny presence in many U.S. cities. The bank has an international footprint and is rapidly expanding its presence, especially in emerging markets where banking services are not easily accessible to many people. JPMorgan is particularly active in China.
JPMorgan is aware that digital banking is the current trend among young consumers. It offers various apps to help clients manage their cash and debt, and it prioritizes the mobile experience. The company is facing plenty of competition from technology companies seeking to make inroads into the massive financial services industry, but it is proving that it’s able to evolve with the times.
JPMorgan also has plenty of other levers that it can pull to drive growth. Its bank branches can help it to receive more deposits and issue credit cards, offer sophisticated services such as wealth management, and overall deepen the bank's relationship with clients.
JPMorgan shares trade more like those of other traditional banks even though the company is adeptly competing in the technology space. Pure-play fintech companies trade for much higher premiums, but this massive bank will continue to perform strongly as consumers increasingly use mobile devices to manage their finances.
IBM (NYSE:IBM) is a storied tech name. It got its start more than a century ago and has transformed several times over to adapt to the changing competitive landscape. The company has struggled in the past decade as cloud computing has become the norm, but IBM will soon begin a new chapter in its history in an effort to squarely focus on this megatrend.
By the end of 2021, IBM will separate a large portion of its existing business (specifically its managed infrastructure division) into a standalone entity called Kyndryl. What remains will be a leaner IBM more focused on the hybrid cloud market and offering services ranging from data center construction to software development.
The new IBM will support a rapidly growing industry that includes both publicly and privately owned data centers and cloud computing service providers. IBM estimates the rise of cloud technology is creating a global market opportunity worth about $1 trillion annually for companies like it.
Despite this plan, IBM stock still trades as if the company will be perpetually stuck in a slow decline. But cloud computing is a growth industry. The new IBM will be one of the largest players in the market, earning revenue from cloud-related offerings that trails behind only the cloud revenues of tech giants Amazon AWS, Microsoft (NASDAQ:MSFT) Azure, and Alphabet’s (NASDAQ:GOOGL) (NASDAQ:GOOG) Google Cloud. If an underappreciated technology company gearing up for a new era of growth -- and which doles out a healthy dividend -- appeals to you, then IBM ranks as a top pick in 2021.
Speaking of cloud computing, The Walt Disney Company (NYSE:DIS) is an excellent example of a non-tech company making excellent use of technology. Its 2019 launch of Disney+ marked the company's entrance into the streaming TV market. The subscription service already had close to 120 million subscribers halfway through 2021. Within the next few years, the subscriber base for Disney+ (marketed as Disney+ Hotstar in many markets outside the U.S.) is expected to increase to hundreds of millions, putting Disney+ in direct competition with Netflix (NASDAQ:NFLX) as the world’s largest streaming service.
Disney+ is certainly not undervalued since investors are already on to its long-term potential, but the rest of Disney certainly could be. The company’s marquee theme park business essentially stopped generating revenue in 2020 and was a huge drain on profitability. The same goes for its film business since new movie releases were delayed for most of that year.
The global economy is still finding its footing amid ongoing pandemic-related challenges, including the delta variant. But travel is gradually making a comeback in 2021. And, although the dynamics of the global box office may have permanently changed, as Disney has been hinting, the company is experimenting with new ways to monetize its movies such as via premium access subscriptions to view Black Widow on Disney+.
With some of the most beloved entertainment franchises in Disney's stable -- and multiple ways to monetize them through its vertically integrated operations -- the company’s non-streaming businesses have plenty of upside potential. Disney stock looks undervalued for 2021 and beyond.
When considering whether a company is undervalued, determine if it is consistently profitable and examine the company’s long-term growth prospects. Don't just evaluate the “cheapness” of its price-to-earnings ratio. Focusing on companies with strong business fundamentals is the best way to ensure the long-term generation of wealth, and it affords the greatest peace of mind. High-quality businesses tend to perform well over the long term, no matter what business or economic challenges they may face.
Value investing is an investment strategy that focuses on stocks that are underappreciated by investors and the market at large. Value investing requires a lot of research. You'll have to do your homework by going through many out-of-favor stocks to measure a company's intrinsic value and comparing 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.
Value investing and growth investing are two different investing styles. Usually, value stocks present an opportunity to buy shares below their actual value, and growth stocks exhibit above-average revenue and earnings growth potential.
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.
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