There are bargains to be found in the current bear market for investors who have nerves of steal and can stomach near-term volatility. The broad-based decline in equities through the first half of the year means that some of the best run and most dominant companies in the U.S. have undervalued stocks, trading at a huge discount relative to their current and future earnings.
Many highly profitable, market leading companies have seen their share prices pushed down by 50% or more over the last six months, in many cases erasing the gains achieved during the pandemic of the last two years.
This presents a huge buying opportunity for investors looking to put capital to work in a down market. And while we may not have achieved a bottom yet, there are plenty of undervalued stocks available to investors at fire sale prices. These stocks should pay off handsomely once the market does bottom and share prices reverse higher.
Here are seven of the most undervalued stocks to buy now.
|GOOG, GOOGL||Alphabet||$111.88, $110.98|
|AMD||Advanced Micro Devices||$89.13|
Alphabet (GOOG, GOOGL)
Shares of technology behemoth Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) are undervalued, and they’ve recently become a lot more affordable. Earlier in July, Alphabet stock split on a 20-for-1 basis and the share price fell from around $2,300 down to just over $110.
The stock split alone will put shares of Alphabet within reach of most retail investors. However, Alphabet’s stock is also down 23% year-to-date and trades 26% below its 52-week high. The company’s price-to-earnings (P/E) ratio has declined along with the share price to an attractive level of 19, which is below the average of 25 among large cap technology stocks.
Put it all together, and GOOGL stock trading at its most affordable level since shortly after the company went public in 2004, and the share price is at its most undervalued since the 2008-09 financial crisis. Investors can take a position in one of the world’s most dominant technology companies for close to what they would have paid when the search engine giant held its initial public offering (IPO). Since then, Alphabet’s share price has gained more than 4,000%.
And this year’s pullback of 23% is one of the steepest in the company’s history as a publicly traded entity. Investors should take advantage of the opportunity.
Home Depot (HD)
Down nearly 26% this year, retailer The Home Depot (NYSE:HD) is now trading at $308 a share and was recently at its lowest level since before the Covid-19 pandemic struck in March 2020.
The decline in the share price hardly seems justified considering that the Atlanta-based company just reported the strongest first quarter sales in its 44-year history and raised its full year guidance. Home Depot reported Q1 earnings per share (EPS) of $4.09, which beat Wall Street forecasts of $3.68 per share. Revenue in the quarter totaled $38.91 billion, beating expectations of $36.72 billion.
The company said it now expects sales to increase 3% and earnings per share growth in the mid single digits for all of 2022.
So far, Home Depot has been impervious to inflationary pressures. The company has been focused on serving professional home builders and contractors rather than just do-it-yourself renovators and weekend warriors. The company noted in its Q1 results that sales to professionals outpaced do-it-yourself projects, with building material supply sales growing by double-digits.
The earnings and positive guidance show that Home Depot has been unfairly dragged lower by the market rout. Add in a P/E ratio on the stock of nearly 20 and a quarterly dividend that yields 2.5% — a payout of $1.90 a share — and it’s easy to make the case that investors should buy the dip in HD stock.
Winter is coming. And with it will likely come record prices for oil and natural gas as demand spikes and supplies are constrained in Europe, China and many other parts of the world. That’s good news for San Ramon, California-based Chevron (NYSE:CVX), which is positioned to capitalize on demand for energy products as the weather turns colder.
Of course, it might seem odd to claim a stock is undervalued that is up 23% on the year when the broader indices are in a bear market (down 20% or more from recent highs), but consider that CVX stock has fallen 20% from the 52-week high it reached on June 8 and is now trading at $145 a share, the same level it was at this past February when Russia invaded Ukraine.
The decline in CVX stock comes as oil prices have slipped back below $100 a barrel on growing fears that a global recession will hurt demand for energy products. However, demand and prices remain elevated in Europe where Russia has been threatening to curtail supplies to Germany, France and other countries on the continent, a situation that is expected to worsen as winter arrives and temperatures drop.
Any rise in oil prices back above $110 a barrel will almost certainly lift Chevron stock, which looks cheap right now with a P/E ratio of just 14. The company also pays a stellar dividend that yields a strong 3.9%, equal to $1.42 per share each quarter.
Advanced Micro Devices (AMD)
Really, you could put any semiconductor stock on this list. They’ve all been knocked lower this year as investors flee high growth technology securities in favor of stocks that are more immune to rising interest rates that are used to dampen inflation.
But among the semis, Advanced Micro Devices (NASDAQ:AMD) has been especially battered, down 39% on the year and nearly 46% below its 52-week high of $164.46. As recently as the middle of July, investors could purchase shares of AMD for around $75, the same level the stock was at two years ago. The Santa Clara, California-based company’s P/E ratio is now at 31, lower than archrival Nvidia’s (NASDAQ:NVDA) P/E ratio of 46 and below the industry average.
While AMD doesn’t pay a dividend, the company’s earnings have continued to be stellar this year, and its outlook is strong despite ongoing challenges with supply chains and inflation pressures. In May, the company reported results for this year’s first quarter that showed its sales in the January through March period rose 71% to $5.89 billion, well ahead of the $5.52 billion expected on Wall Street.
Each of AMD’s individual lines of business grew by double digits in Q1. Looking ahead, the company guided for sales of $6.5 billion in the just completed second quarter, ahead of analyst forecasts for $6.38 billion. By almost every measure, AMD is a best-in-class stock that investors should buy while it is on sale.
Another major retailer with stock looking cheap is Minneapolis-based Target (NYSE:TGT). Year-to-date, TGT stock has come down 32% to trade at just under $160 a share.
Shares of the big box department store chain, which has nearly 2,000 locations, more than 400,000 employees and annual revenues in excess of $100 billion, had been holding up fairly well until April this year when the company reported earnings that showed inflation has affected its bottom line and that it has an excessive amount of inventory in its warehouses.
Inventory, in particular, has been a problem, with the retailer warning in June that its operating margin in the second quarter would likely fall to 2% from 5.3% in Q1 as it marks down unwanted items, cancels orders and takes steps to get rid of extra items. The retailer blamed an across the board first quarter earnings miss on pricey freight costs, higher markdowns and lower sales of everything from television sets to bikes.
The earnings and inventory aside, Target still pays a decent dividend that yields 2.7%, or $1.08 a share per quarter. And its P/E ratio of 13 shows the stock is currently undervalued relative to its peers.
General Motors (GM)
Supply chain disruptions and back-ups have been hard on most companies, but they have been brutal for automakers such as Detroit-based General Motors (NYSE:GM).
So far this year, GM stock has declined 41% to $31.91 a share. The legendary car company’s price-to-earnings ratio now sits at 5.4, indicating that the stock is extremely undervalued relative to the company’s financials.
The company’s stock has been pulled lower by ongoing manufacturing problems, a slowdown in sales within China due to renewed Covid-19 lockdowns and higher prices for the components used to make its vehicles.
Yet despite the woes, General Motors has maintained its outlook for this year, saying its still expects to achieve net income of between $9.6 billion and $11.2 billion, earnings of $13 billion to $15 billion — $6.50 to $7.50 per share — and free cash flow of $7 billion to $9 billion.
The company also continues its aggressive push into electric vehicles, with the automaker spending $35 billion on the transition through 2025. That money will go to developing two electric vehicle battery plants and helping the company rollout 30 electric vehicle models in the next three years. While GM doesn’t pay a dividend, it is worth picking up this stock while the share price is depressed.
The Howard Schultz era has begun at Starbucks (NASDAQ:SBUX). Again. Schultz, who previously served as chief executive of the coffee retailer from 1986 to 2000 and again from 2008 to 2017, is back for a third kick at the can. Schultz took over as head of the Seattle-based company in March of this year, and his tenure back at the helm has been described by the company as indefinite.
At Starbucks, Schultz faces a number of problems ranging from finances that were weakened during the pandemic and union drives at the company’s outlets to oversaturation in some markets and declining sales overseas. However, Schultz remains confident in Starbucks’ prospects and has bought $10 million of SBUX shares since returning to lead the coffee company.
Schultz has also confronted the challenges head-on, announcing on his first day back in the CEO office that he is suspending the company’s $20 billion share buyback program. That news didn’t sit well with shareholders and investors, but Schultz said the money would be better spent reinvested into Starbucks’ operations.
More recently, Starbucks announced that it is permanently closing 16 stores in high crime areas over concerns for employee safety and is experimenting with cashier-less outlets in major cities such as New York. Year-to-date, SBUX stock has dropped 29%. The company’s P/E ratio sits at favorable 22, and Schultz is maintaining the company’s dividend that yields 2.4%, or 49 cents per share each quarter.
On the date of publication, Joel Baglole held long positions in GOOGL, GM and NVDA. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.