In this piece, we will take a look at the ten most undervalued value stocks to buy now. If you want to skip our overview of value stocks and undervalued stocks, then you can check out 5 Most Undervalued Stocks To Buy Now.
Among the several categories that stocks can be divided into, two categories are value stocks and growth stocks. They stand on the opposite end of the spectrum and cater to investors with different kinds of risk appetite and goals. These stocks are defined primarily through the price to earnings ratio, which measures the premium that the stock market is paying over the firm's ability to make a profit. The higher the ratio is, the more a stock can be said to be a 'growth' stock and vice versa, with the industry in which the value stock or growth stock belongs also playing a crucial role as different sectors often have wildly varying P/E ratios.
Investors who pile into growth stocks do so to grow their money. A stock with a high P/E ratio shows that the market believes that it will grow its earnings significantly in the future and is therefore willing to bet on this future growth in the present. On the flip side, value stocks are for those investors who just want to place their money in a stable security and just forget about it. As opposed to growth stocks, whose high P/E ratio comes with the risk of significant share price drop in case of an untoward event, value stocks are relatively insulated since investors have not paid a hefty premium over their earnings. One exception to this statement is value traps which are stocks with strong current earnings but negative earnings growth rates. Value traps may look cheap but investors face significant capital destruction risk.
This fundamental difference between value stocks and growth stocks is most often based on their business models. So say, one example of a value stock, JPMorgan Chase & Co. (NYSE:JPM), is unlikely to be perceived by investors to leave a blazing trail in its wake of pursuing high technology innovation. On the flip side, investors of the eCommerce behemoth Amazon.com, Inc. (NASDAQ:AMZN), rightly have high expectations from the firm when it comes to maintaining a foothold (or stronghold) in the high growth eCommerce market and artificial intelligence. This is also reflected in Amazon's forward and trailing P/E ratios which currently sit at 43.67 and 63.82, respectively. For more on growth stocks, you can check out 10 Best Growth Stocks To Invest In Now.
Another set of categories that stocks can be divided into are undervalued and overvalued stocks. In fact, stock valuation sits at the heart of an investing philosophy called Value Investing. This set of beliefs has found some highly successful adherents on Wall Street, with two notable ones being Warren Buffett of Berkshire Hathaway and Seth Klarman of Baupost Group. At its heart, value investing involves determining the fair or true value of a stock and then comparing it with the market price. If the market price is lower, then an investing decision is made depending on the difference between the two called the margin of safety. The greater this difference is, the more comfortable a value investor feels with their decision as it reduces the amount of losses in case of the share price dropping in an untoward event. Stocks that have a fair value that is higher than the market value are called undervalued stocks, and those whose market price is higher are called overvalued stocks - with the market price being the primary determinant of the valuation adjective.
The next question to ask is, what constitutes a fair value of a stock? Well, one commonly used proxy for this is the analyst share price targets. Sell side financial firms such as Morgan Stanley (NYSE:MS) and The Goldman Sachs Group, Inc. (NYSE:GS) employ analysts whose sole job is to see what the value of a firm's stock can be based on different metrics such as future cash flows. Averaging these price targets aims to remove some of the biases present in a single analyst's analysis and it is often used as a proxy for fair value.
Finally, before we head to our list of the most undervalued value stocks, we can check to see if investing in undervalued stocks has its merits or not. Well, we don't have to look too far to find a list of undervalued stocks. One such list is Insider Monkey's coverage of 14 Best Undervalued Stocks To Buy Now. This list used consensus undervalued stock picks of the financial media and was published in mid September 2023. The average six month share price performance of all the stocks on this list is 19.64% and ranges from 44.64% for Amazon to -22.77% for the lithium provider Albemarle Corporation (NYSE:ALB).
Albermarle has suffered amidst a glut in the global lithium industry that has been hurt from oversupply and slow demand, and here's what The London Company had to say about the firm in its Q4 2023 investor letter:
ALB underperformed as weak lithium prices drove downward revisions to earnings expectations, and sentiment became more negative regarding demand for electric vehicles. Commodity prices are inherently uncertain, but we continue to view ALB as a winner in this growing industry and favorably positioned on the cost curve. Our long-term view of ALB is not affected by short-term supply-demand dynamics for the commodity.
With these details in mind, let's take a look at some of the most undervalued value stocks that hedge funds are buying. A couple of notable picks are Charter Communications, Inc. (NASDAQ:CHTR), Alibaba Group Holding Limited (NYSE:BABA), and Cheniere Energy, Inc. (NYSE:LNG).
To make our list of the most undervalued value stocks we first made a list of 40 stocks with P/E ratios under 15 and average analyst percentage share price upside greater than 20%. Then, the 20 stocks with the highest upside were selected, and they were ranked by the number of hedge funds that had bought the shares in Q4 2023. Out of these, the top stocks were selected.
For these undervalued value stocks, we used hedge fund sentiment. Hedge funds’ top 10 consensus stock picks outperformed the S&P 500 Index by more than 140 percentage points over the last 10 years (see the details here). That’s why we pay very close attention to this often-ignored indicator.
Rio Tinto Group (NYSE:RIO) is a British mining behemoth headquartered in London, the United Kingdom. The firm's shares were at the center of a rather interesting note from Barclays in April 2024 which shared that the spread between the equities listed in Australia and in the U.K. could narrow and provide a profit taking opportunity.
During Q4 2023, 34 out of the 933 hedge funds profiled by Insider Monkey had bought a stake in Rio Tinto Group (NYSE:RIO). Ken Fisher's Fisher Asset Management was the biggest shareholder due to its $1.1 billion stake.
Along with Alibaba Group Holding Limited (NYSE:BABA), Charter Communications, Inc. (NASDAQ:CHTR), and Cheniere Energy, Inc. (NYSE:LNG), Rio Tinto Group (NYSE:RIO) is a great undervalued value stock that hedge funds are buying.
Aptiv PLC (NYSE:APTV) is an Ireland based car parts manufacturer headquartered in Dublin, Ireland. The firm has been doing well on the financial front as of late since it has beaten analyst EPS estimates in all four of its latest quarters. The shares are rated Buy on average, and the average analyst share price target is $104.36.
For their fourth quarter of 2023 shareholdings, 39 out of the 933 hedge funds tracked by Insider Monkey were the firm's shareholders. The largest Aptiv PLC (NYSE:APTV) hedge fund investor is Ian Simm's Impax Asset Management as it owns $651 million worth of shares.
Lantheus Holdings, Inc. (NASDAQ:LNTH) is a backend medical products and raw materials firm whose products enable medical professionals diagnose diseases and ailments. The only bit of relevant news for the firm lately has been the appointment of a new chief commercial officer. Lantheus Holdings, Inc. (NASDAQ:LNTH) is also one of the strongest rated stocks on our list since the shares are rated Strong Buy on average.
As of December 2023 end, 42 out of the 933 hedge funds part of Insider Monkey's database had invested in Lantheus Holdings, Inc. (NASDAQ:LNTH). Ken Griffin's Citadel Investment Group owned the biggest stake which was worth $54.4 million.
Lamb Weston Holdings, Inc. (NYSE:LW) is the well known American food products firm that sells fries and other potato products. This makes it a perfect value stock, as the share price is insulated against most negative macroeconomic trends. It's also another highly rated stock, having secured an average share rating of Strong Buy. The average share price target is $127.
After digging through 933 hedge fund portfolios for 2023's fourth quarter, Insider Monkey found that 46 had invested in the firm. Lamb Weston Holdings, Inc. (NYSE:LW)'s largest hedge fund investor is Andreas Halvorsen's Viking Global through its $383 million stake.
Valaris Limited (NYSE:VAL) is a Bermuda based contract oil drilling services provider. Its shares were under a bit of stress in April 2024, after the Saudi oil giant Aramco suspended a drill rig contract as part of a joint venture. Valaris Limited (NYSE:VAL) shared that the contract was slated to end in December 2024 and that it holds the right to terminate the contract in its entirety.
47 out of the 933 hedge funds surveyed by Insider Monkey during Q4 2023 were Valaris Limited (NYSE:VAL)'s investors. It joins Charter Communications, Inc. (NASDAQ:CHTR), Alibaba Group Holding Limited (NYSE:BABA), and Cheniere Energy, Inc. (NYSE:LNG) in our list of some top hedge fund undervalued value stock picks.
