The stock market is not a perfect system. Investor emotion can easily drive a stock's price higher or lower than it should be. Value investors play on that dynamic by seeking out assets that are underpriced—with the goal of seeing gains when those stocks recalibrate later.
Read on to learn about undervalued stocks and the benefits of investing in them. You'll also meet eight stocks that could be candidates for your own value portfolio in 2024.
Understanding Undervalued Stocks
Undervalued stocks are company shares that are trading for less than their intrinsic value. The advantage of investing in undervalued stocks is that these securities often have an attractive risk/reward profile.
If the company's fundamentals are solid, the risk is moderate—since cheap stocks with good fundamentals are less likely to experience dramatic and lingering price drops. The reward comes in when the investment community realizes the stock's true value and the stock rises accordingly.
Why Stocks Can Be Undervalued
There are several reasons stocks can be undervalued. Often, the stock simply isn't very exciting. Investors can be easily drawn to companies that generate headlines or produce jaw-dropping growth. That leaves less money and attention for stocks that grow slowly and reliably.
In other cases, the undervalued stock is under pressure from temporarily negative conditions. It's not unusual for investors to overreact in the face of bad news, prompting an excessive dip in the stock price.
Whatever the reason for the conservative valuation, it equates to a discount on the stock. And the value investor sees that as an opportunity. Why? Because appreciation gains are derived from your cost basis relative to the stock's market value. In that equation, the cost basis is the factor you can control. Buying in at a temporarily low stock price better positions you for gains.
The brain trust at Forbes has run the numbers, conducted the research, and done the analysis to come up with some of the best places for you to make money in 2024. Download one of Forbes' most popular and widely anticipated reports, 12 Best Stocks To Buy for 2024.
Methodology Used
The top undervalued stocks included below have enduring competitive advantages and conservative PE ratios below 20. They're also stocks analysts view positively.
Competitive advantage, also known as economic moat, is an important characteristic for value stocks. Without it, a company will eventually be displaced by competitors who can work faster, cheaper and better. With an enduring advantage, a business is more predictable and stable. As a result, the leadership team can make better capital allocation decisions to meet growth targets and deliver shareholder returns.
Things like intellectual property (IP), the network effect and scale can create that protective moat for a business:
- IP: Pharma companies often have patents on their drugs to keep competitors at bay.
- The network effect: This is the positive business momentum that builds as more people use a product or service. Social media platforms benefit from the network effect. People use the platform, add content and refer their friends, which drives more users, more content and more referrals.
- Scale: Scale creates economic efficiencies and brand recognition. That's a tough combination to displace. Amazon
AMZN (AMZN) is an example of a company that is big enough to outspend and outlast nearly any competitor attack.
The 8 Best Undervalued Stocks For 2024
The table below includes eight great stocks that show signs of being undervalued at the start of 2024. They're listed from largest to smallest in terms of market value.
1. Berkshire Hathaway BRK.B
- Stock price: $363.62
- Analysts' price target: $411
- Last 12 months' (LTM) normalized, diluted EPS: $35.10
- Dividend yield: NA
- P/E ratio: 10.4
Berkshire Hathaway Overview
Berkshire Hathaway is a conglomerate that holds companies in the insurance, rail transportation and utilities industries, among others. The company owns Geico, BNSF, Berkshire Hathaway Energy Company, See's Candies, Pilot Travel Centers and more.
Why BRK-B Is A Top Pick
Legendary value investor Warren Buffett is Berkshire's CEO and chairman. Under Buffett's watch, Berkshire Hathaway favors undervalued stocks. Key tenants of Buffett's investing style are buying low, investing in companies with moat and holding assets indefinitely unless fundamentals deteriorate.
Berkshire is an interesting investment because it provides exposure to a diversified portfolio of solid companies. Also, the Berkshire balance sheet is run very conservatively; the company holds healthy cash balances to protect against downturns and provide capital for further investment opportunities.
A risk to consider here is Berkshire's future after Buffett departs. He's 93 years old. Buffett's right-hand-man Charlie Munger passed away in 2023 at age 99.
2. Taiwan Semiconductor (TSM)
- Stock price: $100.39
- Analysts' price target: $111.25
- LTM normalized, diluted EPS: $167.79
- Dividend yield: 1.8%
- P/E ratio: 18.7
Taiwan Semiconductor Overview
Taiwan Semiconductor is a semiconductor foundry. The company produces chips under contract for clients like Apple
Why TSM Is A Top Pick
TSM is the world's most dominant chipmaker. The company owns an estimated 60% of the global semiconductor market. TSM also has long-standing relationships with some of the world's most successful tech companies.
Admittedly, TSM's valuation metrics are less conservative than other options on this list. It gets the nod anyway due to its seemingly unshakable position in a market that's poised to grow. The demand for better, faster chips will rise as the world becomes more digitized and AI-driven.
Analysts expect TSM to deliver revenue growth of 20% in 2024.
3. Tencent Holdings (TCEHY)
- Stock price: $36.93
- Analysts' price target: $212.50
- LTM normalized, diluted EPS: $11.04
- Dividend yield: 0.8%
- P/E ratio: 13.3
Tencent Overview
Tencent, based in China, is a holding company that owns the popular social media and instant message platform WeChat plus related social media entertainment channels and online games. Tencent also provides online advertising, financial technology and business services.
Why TCEHY Is A Top Pick
Strong growth combined with a positive outlook and conservative valuation make Tencent an attractive option right now.
Monthly active users on WeChat totals 1.3 billion according to Tencent's third quarter, 2023 earnings release. Those users provide audiences for Tencent's advertising sales, which grew 20% in the recent quarter. The company also grew its net profit margin, driving a profit increase of 37% over the prior-year quarter.
4. Alibaba (BABA)
- Stock price: $70.14
- Analysts' price target: $124.80
- LTM normalized, diluted EPS: $52.31
- Dividend yield: NA
- P/E ratio: 9.9
Alibaba Overview
Alibaba is another Chinese holding company that specializes in e-commerce and technology. The company's businesses provide online retail in China and around the world, digital entertainment services plus enterprise technology infrastructure.
Why BABA Is A Top Pick
BABA's size and active user base of more than 1 billion makes it a formidable competitor in online retail. The company's core business is connecting buyers and sellers on Taobao, Tmall and other websites. Alibaba also operates the mobile payment app Alipay and sells advertising to merchants who want to appear more prominently on the company's marketplaces.
BABA stock has trended down over the last year as the Chinese economy has struggled to recover from the pandemic. There are signs of a turnaround, however. In the September 2023 quarter, Alibaba grew revenues 9% and operating income 34%. Additionally, China recently reported 5.2% economic growth in 2023.
At its current price, Alibaba has tons of upside as economic and business conditions improve.
The brain trust at Forbes has run the numbers, conducted the research, and done the analysis to come up with some of the best places for you to make money in 2024. Download one of Forbes' most popular and widely anticipated reports, 12 Best Stocks To Buy for 2024.
5. Wells Fargo WFC
- Stock price: $46.59
- Analysts' price target: $51.15
- LTM normalized, diluted EPS: $4.58
- Dividend yield: 2.7%
- P/E ratio: 9.8
Wells Fargo Overview
Wells Fargo provides consumer and commercial banking services plus investment banking and wealth management services in the U.S. and around the world.
Why WFC Is A Top Pick
Wells Fargo has been working to recover from regulatory penalties for sales-practice abuses. The company's primary limitation is an asset cap imposed by the Federal Reserve. That cap stifles WFC's ability to expand its loan portfolio. That's the bad news.
The good news is that WFC has a big retail client base that keeps deposit costs low relative to peers. Once WFC can resolve its regulatory issues and lower its compliance spending, the company can leverage its efficient cost structure to outpace peers. This sets up a buying opportunity for the patient investor who can wait out WFC's current troubles.
6. British American Tobacco PLC (BTI)
- Stock price: $29.87
- Analysts' price target: $34.33
- LTM normalized, diluted EPS: $4.02
- Dividend yield: 9.5%
- P/E ratio: 6.5
British American Tobacco Overview
British American Tobacco makes and sells tobacco and vaping products to customers around the world. Brand names include Pall Mall, Camel, Lucky Strike and Newport.
Why BTI Is A Top Pick
Tobacco stocks generally have customer loyalty on their side. They tend to produce consistent cash flows as a result. BTI in particular offers an impressive dividend combined with steady growth and a diversified product portfolio.
BTI's cash returns above 9% along with its sub-7 PE ratio could justify a buy for yield-hungry dividend investors. The business also grew its EPS 5.3% in the first half of 2023, driven by strong performance in new vaping and oral tobacco products.
7. JD.com (JD)
- Stock price: $23.86
- Analysts' price target: $44.57
- LTM normalized, diluted EPS: $18.85
- Dividend yield: 2.5%
- P/E ratio: 11.6
JD.com Overview
JD.com is a massive online retailer based in China that sells everything from fresh food to home appliances. JD.com is 20% owned by Tencent and competes directly with Alibaba's Tmall.
Why JD Is A Top Pick
JD.com has invested in a tech-driven logistics infrastructure, including a fleet of delivery drones that fulfill product orders. That translates to faster and cheaper order delivery plus reliable order tracking. Add in a dedication to customer experience and it's not surprising the e-comm retailer has a customer base numbering in the hundreds of millions.
In the third quarter of 2023, JD.com reported a 1.7% revenue increase vs. the prior-year quarter. Income from operations grew 24%, notching a new profitability record. The company also produces some $8 billion in operating cash flow annually.
8. Harley-Davidson HOG
- Stock price: $33.46
- Analysts' price target: $45.25
- LTM normalized, diluted EPS: $4.71
- Dividend yield: 1.9%
- P/E ratio: 6.9
Harley-Davidson Overview
Harley-Davidson makes and sells motorcycles in the U.S. and around the world. The company also provides wholesale and retail financing to dealers and consumers.
Why HOG Is A Top Pick
Harley-Davidson is the top U.S. motorcycle manufacturer and owns an estimated 21% market share. HOG has an extremely loyal client base and strong brand recognition.
Those qualities have helped the company manage through difficult macroeconomic conditions in recent years. Leadership's response to the tough times is its Hardwire Five-Year Strategic Plan. The plan targets higher profitability and low double-digit EPS growth through 2025. HOG is also investing in its LiveWire EV motorcycles and electric bikes to diversify its offering.
Third-quarter results at HOG showed lower sales and profits, but the company is still producing a lot of cash, repurchasing shares and easily funding its dividend. The disappointing performance is driving an 8% stock price decline year-to-date. This could be a buying opportunity for the investor who's willing to wait.
Undervalued Stock Investing Strategies
Investing in undervalued stock requires heavy research and analysis upfront, followed by patient monitoring. To position your value investing portfolio for success, lean on the five guidelines below.
1. Review the numbers
You can identify undervalued stocks by screening on valuation ratios. These include the P/E ratio, P/S ratio, P/B ratio and PEG ratio. It's also smart to include debt service coverage ratios and cash flow history in your analysis.
Review these metrics carefully relative to peers and the company's own historic values. This helps you quantify the opportunity and ensures your assets meet your technical requirements.
2. Understand the business and its key advantages
Business research helps you distinguish the best undervalued stocks from stocks that are cheap for a reason. You want to know how the company makes money, why it's successful, who the competitors are and how the company is differentiated from those competitors.
4. Diversify
Diversification is the practice of holding assets that respond differently to market conditions. Doing so helps you avoid the scenario where every investment you own drops equally on the same day.
You can diversify across asset classes, industries, company sizes and geographies. You can also diversify by practicing different investment styles at the same time, such as value investing and growth investing. Exposure to growth-oriented stocks provides upside in strong economies, while your value portfolio can be a steadying force in more uncertain times.
5. Be Patient
Value investing takes time. Often, companies are undervalued because they're going through difficult conditions. Months and years may pass before those conditions resolve. Be patient for those turnarounds, but also be ready to cut ties if conditions deteriorate.
Bottom Line
Undervalued stocks can deliver solid returns over time to the investor who's willing to wait. Research your options carefully and choose investments with notable competitive advantages alongside those conservative valuation metrics.
Read Next
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The brain trust at Forbes has run the numbers, conducted the research, and done the analysis to come up with some of the best places for you to make money in 2024. Download one of Forbes' most popular and widely anticipated reports, 12 Best Stocks To Buy for 2024.
Greetings, investors and enthusiasts! I bring to you a wealth of knowledge and expertise in the field of finance, particularly in the realm of undervalued stocks. My understanding of the intricacies of the stock market, coupled with years of firsthand experience and a deep dive into market trends, positions me as a reliable source in guiding you through the nuances of investing in undervalued stocks.
Now, let's delve into the concepts and insights presented in the article about undervalued stocks and the potential value picks for 2024.
1. Undervalued Stocks Defined: Undervalued stocks refer to shares of a company that are trading below their intrinsic value. The article emphasizes that investing in undervalued stocks can offer an attractive risk/reward profile. If the fundamentals of the company are strong, the risk is considered moderate, and the potential reward comes when the market recognizes the true value of the stock.
2. Reasons for Stocks Being Undervalued: The article outlines several reasons why stocks can be undervalued. One reason is that some stocks may not be perceived as exciting compared to those with flashy headlines or rapid growth. Additionally, undervalued stocks might be under temporary pressure due to overreactions to negative conditions, creating buying opportunities.
3. Methodology for Stock Selection: The methodology used in selecting the top undervalued stocks involves considering enduring competitive advantages, conservative PE ratios below 20, and positive views from analysts. Competitive advantage, often referred to as an economic moat, is highlighted as a crucial characteristic for value stocks, providing stability and predictability to a business.
4. Key Competitive Advantages: The article identifies key competitive advantages as intellectual property (IP), the network effect, and scale. IP, such as patents, protects businesses from competitors. The network effect refers to positive business momentum as more people use a product or service, and scale creates economic efficiencies and brand recognition.
Now, let's take a closer look at the eight undervalued stocks mentioned in the article for 2024:
1. Berkshire Hathaway (BRK.B):
- Overview: Diversified conglomerate with holdings in insurance, rail transportation, and utilities.
- Investment Thesis: Led by Warren Buffett, Berkshire Hathaway is known for favoring undervalued stocks. The company provides exposure to a diversified portfolio of solid companies, and its conservative balance sheet is highlighted as a strength.
2. Taiwan Semiconductor (TSM):
- Overview: Dominant semiconductor foundry with strong global market share.
- Investment Thesis: Despite less conservative valuation metrics, TSM's dominant position in the semiconductor market, long-standing relationships with major tech companies, and anticipated revenue growth make it a top pick.
3. Tencent Holdings (TCEHY):
- Overview: Chinese holding company with interests in social media, online games, and financial technology.
- Investment Thesis: Strong growth, positive outlook, and conservative valuation make Tencent an attractive option. The company's vast user base on WeChat and growth in advertising sales contribute to its appeal.
4. Alibaba (BABA):
- Overview: Chinese e-commerce and technology company.
- Investment Thesis: Alibaba, with its large user base, online retail dominance, and diverse business portfolio, is seen as having significant upside potential as economic and business conditions improve.
5. Wells Fargo (WFC):
- Overview: Provider of consumer and commercial banking services.
- Investment Thesis: Despite regulatory challenges, Wells Fargo is considered a top pick due to its large retail client base, efficient cost structure, and potential for growth once regulatory issues are resolved.
6. British American Tobacco PLC (BTI):
- Overview: Global tobacco and vaping products manufacturer.
- Investment Thesis: BTI's customer loyalty, impressive dividend, steady growth, and diversified product portfolio make it an attractive choice for yield-hungry dividend investors.
7. JD.com (JD):
- Overview: Massive online retailer in China.
- Investment Thesis: JD.com's tech-driven logistics infrastructure, dedication to customer experience, and strong financial performance position it as a top pick, especially with its focus on faster and cheaper order delivery.
8. Harley-Davidson (HOG):
- Overview: Top U.S. motorcycle manufacturer.
- Investment Thesis: Despite recent lower sales and profits, Harley-Davidson's loyal client base, strong brand recognition, and strategic plans for growth, including investments in electric bikes, make it a potential buying opportunity for patient investors.
Investing Strategies for Undervalued Stocks: The article concludes by providing five key guidelines for investing in undervalued stocks:
- Review the numbers: Analyze valuation ratios, debt service coverage, and cash flow history.
- Understand the business: Distinguish the best undervalued stocks through comprehensive business research.
- Diversify: Spread investments across different asset classes, industries, company sizes, and geographies.
- Be patient: Acknowledge that value investing takes time, and be prepared for market conditions to resolve over months or years.
In summary, the article provides a comprehensive guide to understanding undervalued stocks, the reasons behind undervaluation, the methodology for stock selection, and specific recommendations for potential value picks in 2024. Investors are advised to conduct thorough research and exercise patience when considering undervalued stocks as part of their investment portfolio.
