Investing’s Biggest Bargains May Lie in Overlooked Corners of the Market
As the stock market continues its volatile churn, savvy investors are on the hunt for bargains. While premium companies commanding steep valuations grab the headlines, some of the market’s most compelling opportunities may lie in unheralded corners, where overlooked but fundamentally-sound businesses trade at valuations that don’t reflect their true potential.
Here are seven undervalued stocks that could be poised for a surge in March as the market’s focus inevitably shifts:
Alphabet:
The Tech Titan Hiding in Plain Sight For all the hype surrounding artificial intelligence and the battle among tech’s heavyweights to dominate the space, one company has remained a relatively unsung hero: Alphabet (GOOGL).
Sure, the Google parent has stumbled at times with its AI endeavors, like when its Bard chatbot provided inaccurate information during a demo. But the $1.2 trillion company remains an absolute juggernaut when it comes to data –– the lifeblood of AI. Alphabet owns the world’s most popular search engine and one of the biggest cloud businesses on the planet. Those twin advantages provided a stockpile of data that rivals can only dream of.
Wall Street seems to be missing the forest for the trees. While obsessing over Alphabet’s isolated missteps, it’s overlooking the company’s fundamental strengths propelling its financial performance. Fourth quarter 2023 revenues grew 13% year-over-year to $76 billion, while net income surged 52% from a year earlier to $18.6 billion. Contributing to that bottom-line bounce were cost-cutting efforts like Alphabet’s recent 12,000-employee layoff.
The recent numbers signal loud and clear that Alphabet is firing on all cylinders, AI spats aside. Its cloud business turned profitable during the quarter for the first time ever –– an inflection point validating the division’s long-term investments. And that’s without even mentioning Alphabet’s lucrative YouTube and self-driving vehicle subsidiaries.
Even at current prices, Alphabet shares trade at around 26 times earnings. That’s a bargain valuation for a trillion-dollar titan with its fingers in nearly every pie of the modern tech world. Analysts see over 20% upside from current levels as the market’s Alphabet angst settles.
Deckers Outdoors:
The Fast-Growing Sneaker Stock You’ve Missed From Nike to Adidas, athletic apparel companies command premium valuations as investors gobble up shares. But there’s an overlooked $8 billion sneaker maker growing faster than both of those behemoths –– and trading at a relative discount.
Meet Deckers Outdoor (DECK), the company behind the popular Ugg and Hoka brands. For the past several years, global demand for its ultralight but cushioned Hoka sneakers has sent sales skyrocketing. Total revenues grew 16% year-over-year in the third fiscal quarter to $1.35 billion, while earnings per share jumped 40% to $10.48.
What’s most impressive is that Deckers did all this in a weakening consumer spending environment that crippled results at companies like Nike and Lululemon. Its products, concentrated in the under-$200 range, have struck a sweet spot in terms of providing comfort, quality, and affordability for the masses.
Deckers’ recent addition to the S&P 500 index provided a jolt of institutional buying interest. But the stock has more room to run. It trades at just 32 times earnings –– the same valuation multiple as Nike, which has posted flagging top- and bottom-line results for the past two quarters. Analysts have an average price target of $1,150, suggesting 27% upside from current levels.
Don’t be surprised if Deckers soon emerges as a household sneaker name alongside the Nikes and Adidases of the world.
Qualcomm:
Low Valuation Belies AI Turnaround Think Qualcomm (QCOM) missed the AI train? Think again. Though it lagged some semiconductor competitors in rolling out AI-focused chips and solutions, the $138 billion company is quickly making up for lost time –– and presenting an undervalued bargain in the process.
Excitement over Qualcomm’s AI initiatives contributed to a blistering 54% gain in its stock over the past six months alone. But the shares still trade at just 25 times earnings. That low valuation also results in a chunky 1.85% dividend yield and sets a floor for further upside, as Qualcomm’s AI business ramps up in earnest.
No matter what, Qualcomm remains a 5G juggernaut powering the latest generation of telecom infrastructure and mobile devices. Its mobile chip division, while facing headwinds, continues generating reliable cash flows. Those steady streams allowed Qualcomm to raise its dividend over 6% this past year, a bullish signal about management’s confidence.
Qualcomm put its recent struggles behind it in the first fiscal quarter of 2024. After reporting revenue declines for several quarters, the top-line turned positive with 5% year-over-year growth to $9.46 billion. Net income jumped 24% from a year earlier to $2.67 billion.
That return to growth mode, combined with gathering AI momentum, has set the stage for an extended stock advance from historically-depressed levels. Keep an eye on Qualcomm.
Nvidia:
The Unstoppable AI Giant Stretching Its Lead Let’s be honest –– when it comes to cutting-edge AI capabilities, Nvidia (NVDA) is in a class of its own. The chipmaker’s outrageous financial results in recent quarters reflect just how far it’s separated itself from the competition.
Fourth fiscal quarter revenue skyrocketed 265% year-over-year to $6.05 billion, while net income exploded 769% higher to $1.83 billion. While AI constitutes a relatively small slice of Nvidia’s overall business, those sales are doubling every quarter and will soon represent a majority of total revenue.
Nvidia’s share price predictably went into the stratosphere, more than tripling over the past year. Still, at 36 times earnings, the valuation doesn’t look terribly stretched considering:
- Nvidia’s breakneck sales and profit growth
- Its near-total domination of an industry tipped to grow exponentially in the coming decade
- Co-founder Jensen Huang’s track record of expertly pivoting the company into new booming markets like AI
Yes, the white-hot AI fervor will eventually moderate. But there’s little reason to doubt Nvidia will continue trouncing the market for the foreseeable future. Its head-start, finely-honed AI capabilities, and innovative tendencies make the company an absolute juggernaut.
JPMorgan:
Wall Street’s “800-Pound Gorilla” Plots Expansion With regional bank failures potentially on the horizon, America’s biggest lenders stand to benefit most from the aftermath. None are better positioned than JPMorgan Chase (JPM) –– the “800-pound gorilla” of Wall Street with an appetite for opportunistic expansion.
Federal Reserve Chair Jerome Powell recently warned that some regional banks face challenges due to distressed commercial real estate portfolios. Translation: More regional bank failures could be coming. When they occur, JPMorgan will likely scoop up valuable assets and customers on the cheap.
Savvy banking analysts see this playbook playing out again after JPMorgan capitalized on last year’s regional turmoil. In some ways, the failures could be a blessing for the bank’s ambitions of broadening its national footprint.
Perhaps investors are preemptively betting on this scenario. JPMorgan shares are up a solid 43% over the past year. Still, at just 12 times earnings, the stock trades right in line with sluggish peers like Bank of America –– but JPMorgan’s results have been significantly better. In 2023, JPMorgan grew revenue 8% while BofA’s top-line shrank 1%.
The $412 billion megabank, which grew its consumer deposits by 17% last year, offers prodigious earnings power and an unmatched competitive position. Powell’s warning, though ominous for the banking sector, translates to opportunity for JPMorgan.
Walmart:
The Recession-Proof Behemoth with Hidden Growth For decades, Walmart (WMT) has been the ultimate defensive stock during uncertain economic times. Its business model –– providing affordable essentials to the masses –– tends to thrive when consumers trade down and tighten their purse strings.
But most investors are overlooking the company’s lurking growth engines. And at just 32 times earnings, the market doesn’t seem to appreciate Walmart’s e-commerce and advertising momentum. Either that, or investors are simply stuck viewing the $385 billion giant through an antiquated, brick-and-mortar lens.
In its fiscal fourth quarter, Walmart’s e-commerce sales surged 23% year-over-year as the company jousted with Amazon for digital dollars. Even more impressive –– the company’s advertising business grew 33% from a year earlier to approach a $2 billion annual run rate. Walmart’s acquisition of streaming device maker Vizio could further turbocharge its ad division in 2024 and beyond as smart TVs proliferate.
Walmart’s 5.7% Q4 revenue growth rate seems puny for a high-flyer, but it’s phenomenal for a mature company of its size. The company’s 1.4% dividend yield won’t excite income investors, but that payout should grow consistently thanks to Walmart’s ability to steadily expand earnings.
Just as importantly, the stock’s valuation leaves room for multiple expansion once investors fully appreciate its growth levers. While not nearly as scorching as its high-growth tech peers, Walmart’s stable of powerful franchises enables steady-but-unspectacular advancement –– exactly the kind of stable holding for jittery markets.
Texas Roadhouse:
A Sizzling Steakhouse Chain Ready to Supersize In these inflationary times, splurging on an upscale steakhouse dinner has become a luxury for many budgeted Americans. That’s making casual steakhouse chains like Texas Roadhouse (TXRH) particularly enticing to diners seeking quality at an affordable price.
The $10 billion company owns and franchises 647 restaurants across 571 cities, meaning its brand likely resonates in your hometown. In its most recent quarter, Texas Roadhouse grew revenue 15.3% year-over-year, while earnings per share jumped 21%. Even without deploying heavy discounting, the company broadened its operating margins to over 6% thanks to menu price increases and operating efficiencies.
Those results reflect the sweet spot Texas Roadhouse occupies in the dining hierarchy. Those craving a juicy ribeye and loaded baked potato can visit the chain instead of shelling out significantly more at a premium steakhouse. Yet by maintaining quality ingredients and a lively dining environment, the restaurant avoids a “cheap” identity turn-off.
Texas Roadhouse aims to keep its strong sales trajectory alive, opening a combined 45 new company and franchise locations in 2023. Even after 2024’s 11% dividend hike, the stock yields 1.65% -– a nice supplement to its capital appreciation potential.
Oh, and did we mention the stock trades at 33 times earnings? That’s an absolute steal if the company’s strategic positioning keeps paying dividends.
Finding Value in Unheralded Places In investing, the most compelling opportunities often lurk where few are looking. While splashy tech giants and legacy bluechips draw the spotlight, bargain hunters can profit by venturing into overlooked sectors and uncovering fundamentally-sound companies flying under the radar.
The seven stocks highlighted here span different industries and market capitalization ranges. But they share a common theme –– deceptive undervaluations that could rapidly correct as the investing herd wakes up.
Time will tell if these are indeed unheralded gems or value traps. But given their strong financial performances and distinct growth drivers, any share price surges shouldn’t come as a surprise.
