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
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 -0.83%)(BRK.B -0.94%).
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 -2.4%), Bank of America (BAC -0.71%), American Express (AXP -1.06%), Chevron (CVX 0.47%), and Coca-Cola (KO 0.76%).
2. Target
Shares of mega-retailer Target (TGT -2.47%) have lagged competitors Costco (COST -0.57%) and Walmart (WMT -1.65%) year to date in 2024.
Contributors to this underperformance included a lackluster first-quarter earnings report hampered by higher expenses, lower consumer confidence, and general weakness in the consumer discretionary sector.
Still, the company retains some excellent fundamentals. With a forward price-to-earnings ratio of 15.70%, investors buying Target right now can expect a 6.4% earnings yield. The company is also a Dividend King, having increased dividends for more than 50 consecutive years.
3. Kraft Heinz
Best known for its macaroni and cheese and ketchup offerings, food giant Kraft Heinz (KHC 1.0%) is now trading under book value at 0.78 as of July 11.
This means the company's stock price is lower than its net asset value, making it potentially undervalued by the market.
This value stock is a perfect pick for the patient investor who prioritizes low volatility. Operating in a defensive sector, Kraft Heinz has a five-year monthly beta of 0.52, indicating it is half as volatile as the market.
As with most packaged food companies, Kraft Heinz boasts robust profitability, with an operating margin of 20.78% and a profit margin of 10.62%.
Additionally, the company offers a solid dividend yield of 5%, which is not paltry. With a payout ratio of 69.87%, this dividend is sustainable and in line with its sector.
4. British American Tobacco
British American Tobacco (BTI 0.34%) took a significant hit in late 2023 due to a $31.5 billion charge.
This was essentially the company writing off many of its combustible tobacco brands as worthless, given the industry's shift towards smokeless products.
Although the impairment affected BTI's earnings, future revenue, profit growth, and stock price, it was a non-cash-adjusting impairment.
Today, BTI remains a free cash flow powerhouse, with trailing-12-month operating cash flow of $10.71 billion. This robust cash flow supports a substantial dividend yield of 9.2%, with a very sustainable payout ratio of 59.13%.
Currently, BTI is trading at a forward P/E ratio of 7.29%, which implies a 13.7% earnings yield. Like all tobacco manufacturers, its operating margins remain robust at 48.44%, thanks to its ability to continually hike prices.
5. Johnson & Johnson
Johnson & Johnson (JNJ -0.25%) has undergone a significant transformation after spinning off its consumer products brands into the newly formed Kenvue (KVUE 1.92%).
The new Johnson & Johnson now focuses solely on its higher-growth pharmaceuticals and medical devices segments.
However, 2024 has not been a great year for the healthcare sector in general, and Johnson & Johnson had lost 6.25% by mid-July.
Much of the uncertainty came amid speculation about the settlement the company would be liable for in their ovarian cancer-causing talc products. The uncertainty was lifted in late spring when 99.75% of all pending talc lawsuits were resolved, with Johnson & Johnson agreeing to pay a $6.475 billion settlement over 25 years.
Fundamentally, the company remains strong, retaining its rare and rock-solid "AAA" credit rating. It also continues to be a Dividend King with 62 years of consecutive growth, maintains double-digit operating and profit margins, and is currently trading with a forward P/E ratio of 14.06, which is significantly lower than the sector's forward P/E ratio of 20.28.
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Finding undervalued stocks
Finding undervalued stocks
Undervalued companies aren't necessarily the biggest ones out there. They could 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 price-to-earnings 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 some checks you may want to begin with include:
- 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. A ROA above 5% is generally considered good, but this can vary by industry.
- Earnings yield: This is the inverse of the P/E ratio and represents the percentage of each dollar invested that was earned by the company. Ensure the earnings yield is at least above the current yield of the 10-year Treasury note, which provides a benchmark for risk-free return.
- 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. Ensure you compare the EV/EBITDA ratio to peers within the same sector to gauge relative value.
FAQ
FAQ
How do I start value investing?
Value investing requires a lot of research. Start by understanding all the different metrics and ratios 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.