Last year proved to be a turning point in the trajectory of the financial markets. Investors had been ignoring the importance of valuations and fundamentals for years amid easy monetary policies and the reign of growth stocks. This growth party came to a sudden halt in 2022 when stubborn inflation and a volatile geopolitical situation finally forced the Federal Reserve to begin raising interest rates. Value investing and paying attention to the actual business models and growth prospects of companies are back in fashion as investors grow more cautious in spending their money.
The Triumph of Value Investing
A March 2023 report on value investing from State Street Global Advisors showed some interesting trends about the market valuations especially seen after the Federal Reserve started increasing interest rates. The report said that the biggest moderations in valuations were seen in the technology sector, which enjoyed easy access to money and strong investments when interest rates were low. State Street Global Advisors said in its report that the growth stocks saw a period of euphoria driven by the hype around NFTs and cryptocurrencies. During this period many companies, even those with “dubious” business models, thrived as investors were not paying attention to the fundamentals. The report said it was a “difficult” time for State Street’s Fundamental Value Equity Team since it was adhering to its value investing philosophy. However, the report adds that the 2022 bought some key changes that ushered in some “sanity” in the markets and brought valuations under control.
The report adds that since August 2020, the MSCI World Value Index has returned 46.13%, outperforming the the MSCI World Index by 17% (in euro terms on a total return basis). The report said it’s “gratifying” to see the approach of investing in businesses with decent valuations “vindicated”.
A detailed academic paper from Tweedy, Browne Company mentions an interesting study which shows the importance of paying attention to valuations of stocks. In the study, stocks which were trading low as compared to their book value and at 66% or less of net current asset value were taken into account. The study involved thousands of companies with market caps at least $1 million each and a stock market price of no more than 140% of book value during April 30, 1970 through April 30, 1981. Results showed $1 million invested on April 30, 1970 in these companies would have increased to $23,298,000 on April 30, 1982. On the other hand, $1 million invested in the S&P 500 on April 30, 1970 would have been worth $2,662,000 on April 30, 1982.
Using Volatility to Your Advantage
While the financial market today seems more risky, it has actually created more opportunities for wise investors. An important report from T. Rowe Price shares some data points which shed light on the significance of using market volatility to your advantage. The report cites research which shows that active U.S. equity managers have had a relatively higher chance of outperforming when market performance is poor. The report also adds that when the correlation of returns within a benchmark is low, active managers as a whole may have more opportunities to add value through stock selection or sector rotation.
Who’s a better teacher when it comes to valuations and stock investing than Oracle of Omaha Warren Buffett, who’s made his wealth by following the time-tested principles of value investing. In his 2022 letter, Buffett wrote some sentences relevant to value investing principles:
One advantage of our publicly-traded segment is that – episodically – it becomes easy to buy pieces of wonderful businesses at wonderful prices. It’s crucial to understand that stocks often trade at truly foolish prices, both high and low. “Efficient” markets exist only in textbooks. In truth, marketable stocks and bonds are baffling, their behavior usually understandable only in retrospect. Controlled businesses are a different breed. They sometimes command ridiculously higher prices than justified but are almost never available at bargain valuations. Unless under duress, the owner of a controlled business gives no thought to selling at a panic-type valuation.
In this article we are going to be at a sweet spot between value and growth, identifying companies that are seeing growth and still trade at decent valuations.
Most Undervalued Growth Stocks To Buy According To Analysts
Our Methodology
For this article we first used a stock screener to find stocks with PE ratio under 20, positive sales growth (>0%) over the past five years, over 10% EPS growth over the past five years, over 10% QoQ sales growth and analyst price targets which are at least 20% above their current price as of May 22. We then picked 15 stocks whose price targets placed by analysts show a huge upside potential from their current levels. This way, both PE ratios and analyst price targets indicate that these stocks are trading below their true value and have the potential to reward investors in the coming months.
Most Undervalued Growth Stocks To Buy According To Analysts
Marine transportation service company Capital Product Partners L.P. (NASDAQ:CPLP) earlier in May posted its first quarter results, which show that the company’s first quarter GAAP EPS came in at $0.49, missing estimates by $0.29. Revenue in the period jumped about 10.4% year over year to $81 million, beating estimates by $2.49 million.
Pumping equipment company DXP Enterprises Inc. (NASDAQ:DXPE) reported upbeat first quarter results earlier this month. Revenue in the period shot up 32.8% year over year to $424.3 million, surpassing analyst estimates by $55.3 million. GAAP EPS in the quarter came in at $0.95, beating estimates by $0.39.
A total of 10 hedge funds tracked by Insider Monkey had stakes in DXP Enterprises Inc. (NASDAQ:DXPE) at the end of 2022.
Chemicals and materials company Koppers Holdings Inc. (NYSE:KOP) ranks 13th in our list of the most undervalued growth stocks to buy according to analysts. As of May 22 Koppers Holdings Inc. (NYSE:KOP) was trading at around $31.60 while its 12-month analyst price target is $41.
As of the end of the fourth quarter of 2022, 9 hedge funds tracked by Insider Monkey were bullish on Koppers Holdings Inc. (NYSE:KOP).
Avid Bioservices, Inc. (NASDAQ:CDMO) is operating in the biotech industry. Avid Bioservices, Inc. (NASDAQ:CDMO) is up about 9% year to date through May 22. Earlier this month Avid Bioservices, Inc. (NASDAQ:CDMO) posted solid results for the fiscal third quarter. GAAP EPS in the quarter came in at $0.01, beating estimates by $0.05. Revenue in the period increased by about 21% year over year to reach $38.02 million, beating estimates by $1.7 million. KeyBanc analyst Paul Knight upgraded Avid Bioservices, Inc. (NASDAQ:CDMO) after the results and set a $20 price target.
Building material company CRH PLC (NYSE:CRH) is one of the most undervalued growth stocks to invest in according to Wall Street analysts. In March CRH PLC (NYSE:CRH) posted its FY’2022 results. GAAP EPS in the period came in at $3.50, beating estimates by $0.08. Revenue in the period increased by 12% year over year to $32.7 billion, beating estimates by %520 million.
CRH PLC (NYSE:CRH) is also a dividend payer with a dividend yield of about 2.5%.
Automobile design company The Shyft Group, Inc. (NASDAQ:SPAR) shares have gained about 10% year to date through May 22. In April, The Shyft Group, Inc. (NASDAQ:SPAR) posted its first quarter results, which showed a 17% year-over-year revenue growth. Adjusted EPS in the period totaled $0.12, beating estimates by $0.10.
This growth stock is also a dividend payer. Earlier this month The Shyft Group, Inc. (NASDAQ:SPAR) declared a quarterly dividend of $0.05 per share, payable on June 20 to shareholders of record as of May 17.
Heartland Small Cap Value Strategy made the following comment about The Shyft Group, Inc. (NASDAQ:SHYF) in its Q4 2022 investor letter:
“The Shyft Group, Inc.(NASDAQ:SHYF) is a leader in specialty vehicles, including “last mile” delivery vans used in ecommerce. More than a year ago, the company announced plans to develop an electric parcel-delivery vehicle, investing $75 million at launch. Concern over the elevated operational risks and spending associated with the program weighed on the stock, sending shares down almost 49% this year.
Tanker company Ardmore Shipping Corp. (NYSE:ASC) ranks 9th in our list of the most undervalued growth stocks to buy according to analysts. Earlier this month Ardmore Shipping Corp. (NYSE:ASC) posted its first quarter results. Adjusted EPS in the period came in at $1.04, beating estimates by $0.04. Revenue in the quarter came in at $118.23 million, which was up 85.7% year over year. The figure also beat analyst estimates by $34.64 million.
Aristotle Small Cap Equity Strategy made the following comment about Ardmore Shipping Corporation (NYSE:ASC) in its Q4 2022 investor letter:
“Ardmore Shipping Corporation(NYSE:ASC), a product and chemical transportation company focused on modern mid‐sized “eco‐friendly” vessels, appreciated following record third quarter earnings driven by supportive industry supply‐demand fundamentals, higher spot rates and longer voyages. We maintain a position, as we believe the company continues to operate from a position of strength, driven by recent shareholder friendly capital allocation decisions,strong operating performance and a favorable industry supply‐demand backdrop.”
Online education companies took a beating this year as investors are concerned that the rise of AI services like ChatGPT might make these platforms redundant. However, Stride, Inc. (NYSE:LRN), the Virginia-based online education company, is having a great year, having gained about 25% in stock value in the period through May 22.
In April Stride, Inc. (NYSE:LRN) posted its fiscal third quarter results. GAAP EPS in the quarter came in at $1.30, beating estimates by $0.21. Revenue in the quarter increased by 11.5% year over year to $470.28 million, beating estimates by $14.31 million.
According to Yahoo Finance data, the average analyst price estimate for factory-built houses company Cavco Industries, Inc. (NASDAQ:CVCO) is $372, while the stock was trading at around $275 on May 22. This shows a huge upside potential for Cavco Industries, Inc. (NASDAQ:CVCO) from current levels.
In May, Cavco Industries, Inc. (NASDAQ:CVCO) posted its fiscal Q4 results. GAAP EPS in the period came in at $5.39, beating estimates by $0.29.
In December 2022, Wedbush analysts Jay McCanless, Brian Violino, and Henry Coffey gave bullish comments on several homebuilder stocks on the back of bright prospects for 2023. Cavco Industries, Inc. (NASDAQ:CVCO) was one of these stocks.
Churchill Downs Incorporated (NASDAQ:CHDN) operates several racetracks and casinos. In April Churchill Downs Incorporated (NASDAQ:CHDN) posted solid first quarter results, according to which its revenue in the period jumped about 53.7% year over year to $559.5 million, beating estimates by $22.93 million. Most of the growth was seen in the Live and Historical Racing segment. Net income in the quarter came in at $155.7 million, versus $42.1 million in the same quarter last year.
