An undervalued company stock is one that is consistently profitable and has attractive long-term growth prospects, but whose share price is cheap compared to many of its peers. Stocks like these can be great options for patient buy-and-hold investors willing to wait for hidden bargains.
Although investors are always on alert for a good deal, it's important to remember that some stocks are “cheap” for a reason. It may be that a company's growth prospects have diminished, it's losing money, or it's losing business to new competitors. Whatever the reason, stocks like these (sometimes called “value traps”) are not considered undervalued even if they trade at very low prices.
Seven top undervalued stocks
Here are seven excellent undervalued stocks to consider.
1. Berkshire Hathaway
When considering the best underappreciated value stocks, famed investor Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) deserves to be atop this list. Buffett has become one of the wealthiest people on the planet by successfully buying and holding quality companies for decades. Although Berkshire Hathaway underperformed the S&P 500 (SNPINDEX: ^GSPC) in the 2010s (as well as in 2020, when the market was favoring high-growth tech companies), that changed in dramatic fashion in 2021 and into 2022 as value stocks made a comeback.
Berkshire Hathaway is a holding company that owns insurance businesses (GEICO, among others), the largest railroad in the U.S., an energy and utility conglomerate (including a huge renewable energy division), and various other enterprises that span industries from food to apparel. Berkshire also holds significant stakes in Apple (NASDAQ:AAPL), Bank of America (NYSE:BAC), and Coca-Cola (NYSE:KO).
Buffett and his team provide updates on changes to its stock portfolio every quarter. In recent years, Berkshire Hathaway's largest stock purchase has been its own stock. The company's stock repurchases amounted to $20.2 billion during the first nine months of 2021. In his annual letter to shareholders, Buffett indicated that repurchases of Berkshire Hathaway stock will continue as long as it looks undervalued relative to the underlying businesses’ growth potential.
Although Buffett's value-focused investing style fell out of favor in the past decade, the company's ongoing stock repurchases are a clear signal to the market that he considers Berkshire Hathaway stock to be underpriced. If you’re in the market for an undervalued stock that you can buy and forget for many years, Berkshire Hathaway is a great choice.
2. Target
Target (NYSE:TGT) is a Dividend Aristocrat, having increased its dividend payout to shareholders every year for almost 50 years. After a banner year in 2020 during the start of the COVID-19 pandemic, the company increased its revenue in 2021. Best known as a big-box store, Target has transformed itself into a one-stop shop that sells everything from groceries to basic household goods. Target also has its own in-house labels in traditional department store categories such as apparel and home decor.
The company's real differentiator is that almost all U.S. residents live within 10 miles of a Target store. That has helped the retailer turn its locations into distribution centers. In fact, some 95% of all orders -- even many placed online and shipped to customers’ homes -- are fulfilled by local stores rather than distribution centers. In addition to providing a pure e-commerce experience, Target also offers curbside pickup and is expanding its Shipt delivery service.
In the coming years, Target expects to increase its annual capital expenditures to about $4 billion, spending to open new stores, remodel existing stores, and improve supply chains -- a sharp increase from the approximately $2.7 billion it allocated annually from 2016 to 2020. The company is committed to expanding its e-commerce operations while continuing to pay a reliable dividend.
The company's stock, however, still trades like it is only a brick-and-mortar retailer. Target is implementing a multi-pronged strategy that effectively leverages its physical footprint. E-commerce pure plays are all the rage, which also contributes to Target’s stock being undervalued.
3. Amazon
E-commerce pioneer Amazon (NASDAQ:AMZN) settled the debate years ago about whether its sprawling operation could ever turn a profit. It’s been quickly and steadily churning out higher rates of net income every year. However, Amazon may not be the first name to come to mind as an undervalued business. This is, after all, still very much a growth stock.
Amazon is lapping the early pandemic boom it enjoyed in the spring of 2020 when everyone was stuck at home and shopping almost exclusively online. And, as it does so, it’s still growing at a double-digit percentage clip and reporting record profits. Much of its profit is being reinvested back into the business to foster even more growth.
However, regulatory concerns have cropped up. Some worry the company’s e-commerce, cloud computing, advertising, and various other unified businesses could cause Amazon to follow some of its fellow tech giants into the crosshairs of government regulators.
Whether that happens remains to be seen. Either way, Amazon is starting to look undervalued given its enduring growth trajectory and long-term potential. The stock’s price has barely budged since the summer of 2020, even as Amazon’s top and bottom lines have continued to expand.
4. JPMorgan Chase
Retail financial services and investment banking giant JPMorgan Chase (NYSE:JPM) manages assets in excess of $3 trillion globally. It's a banking behemoth that maintains a tiny presence in many U.S. cities. The bank has an international footprint and is rapidly expanding its presence, especially in emerging markets where banking services are not easily accessible to many people. JPMorgan is particularly active in China.
JPMorgan is aware that digital banking is trending among young consumers. It offers various apps to help clients manage their cash and debt, and it prioritizes the mobile experience. The company is facing plenty of competition from technology companies seeking to make inroads into the massive financial services industry, but it’s proving its ability to evolve.
JPMorgan also has plenty of other levers that it can pull to drive growth. Its bank branches can help it to receive more deposits and issue credit cards, offer sophisticated services such as wealth management, and deepen the bank's relationship with clients. Banking services aimed at local communities to foster inclusivity have also become part of the new steady expansion strategy.
JPMorgan shares trade more like those of other traditional banks even though the company is competing in the technology space. Pure-play fintech companies trade for much higher premiums, but this massive bank will continue to strongly perform as consumers increasingly use mobile devices to manage their finances.
5. IBM
IBM (NYSE:IBM) is a storied tech name. It got its start more than a century ago and has transformed several times over to adapt to the changing competitive landscape. The company has struggled in the past decade as cloud computing has become the norm, but IBM will soon begin a new chapter in its history in an effort to squarely focus on this megatrend.
At the end of 2021, IBM separated a large portion of its existing business (specifically its managed infrastructure division) into a stand-alone entity called Kyndryl (NYSE:KD). What remains is a leaner IBM more focused on the hybrid cloud market and offering services ranging from data center construction to software development.
The new IBM supports a rapidly growing industry that includes both publicly and privately owned data centers and cloud computing service providers. IBM estimates the rise of cloud technology is creating a global market opportunity worth about $1 trillion annually.
Despite this plan, IBM stock still trades as if the company will be perpetually stuck in a slow decline. But cloud computing is a growth industry. The new IBM is one of the largest players in the market, earning revenue from cloud-related offerings that trails behind only the cloud revenues of tech giants Amazon AWS, Microsoft (NASDAQ:MSFT) Azure, and Alphabet’s (NASDAQ:GOOGL) (NASDAQ:GOOG) Google Cloud. If an underappreciated technology company gearing up for a new era of growth -- one which also doles out a healthy dividend -- appeals to you, then IBM ranks as a top pick in 2022.
6. Disney
Speaking of cloud computing, The Walt Disney Company (NYSE:DIS) is an excellent example of a non-tech company making excellent use of technology. Its 2019 launch of Disney+ marked the company's entrance into the streaming TV market. The subscription service already had 130 million subscribers at the start of 2022, plus more than 21 million ESPN+ and 45 million Hulu subscribers. Within the next few years, the subscriber base for Disney+ (marketed as Disney+ Hotstar in many markets outside the U.S.) is expected to increase to hundreds of millions, putting Disney+ in direct competition with Netflix (NASDAQ:NFLX) as the world’s largest streaming service.
Disney+ is certainly not undervalued since investors are already aware of its long-term potential, but the rest of Disney certainly could be. The company’s marquee theme park business essentially stopped generating revenue in 2020 and was a huge drain on profitability partway through 2021. The same goes for its film business since new movie releases were delayed for most of the year.
The global economy is still finding its footing amid ongoing pandemic-related challenges, including the omicron variant. But consumer travel made a big comeback in 2021, and 2022 is looking even better for the industry as effects of the pandemic gradually diminish. And, while the dynamics of the global box office may have permanently changed, the company is experimenting with new ways to monetize its movies with releases via premium access subscriptions on Disney+.
With some of the most beloved entertainment franchises in Disney's stable -- and multiple ways to monetize them through its vertically integrated operations -- the company’s non-streaming businesses have plenty of upside potential. Disney stock looks undervalued for 2022 and beyond.
7. Qualcomm
When it comes to semiconductors, Qualcomm (NASDAQ:QCOM) is a commonly understood name. Nearly every smartphone on the planet has one of Qualcomm’s chip designs in it. Apple has made waves as it’s been bringing design of its iPhone and Mac circuitry in-house, but most smartphone makers aren’t large enough to have that kind of power. With 85% of the world’s smartphones utilizing Google’s Android platform, Qualcomm still holds sway over everyday mobile devices.
As 5G mobile network deployment ramps up in the coming years, Qualcomm is finding plenty of new growth outlets for its hardware. One area is networking equipment, the stuff that actually generates wireless signals and allows for devices of all types to connect to it. The automotive segment is growing rapidly, too. Qualcomm has quickly gone from virtually no auto industry sales to one generating more than $1 billion a year in revenue.
As technology makes more inroads into modern vehicles, Qualcomm sees its auto segment doubling several times over in the next few years. From wireless connectivity to processors controlling advanced driver assist systems to actual software operating systems, Qualcomm has automakers covered with a robust tech lineup.
Working from a position of strength in mobile computing, Qualcomm has been reinvigorated lately as chips proliferate throughout the global economy. This is a top name in the semiconductor business, one that is often overlooked and trading at a discount relative to many of its peers.
How to find undervalued stocks
Undervalued companies aren’t necessarily the biggest ones out there. They could also be mid-cap or small-cap companies, or even growth-oriented companies that trade for less than their peers.
When considering whether a company is undervalued, determine if it is consistently profitable and examine the company’s long-term growth prospects. Don't just evaluate the “cheapness” of its price-to-earnings ratio. Focusing on companies with strong business fundamentals is the best way to ensure the long-term generation of wealth and affords the greatest peace of mind. High-quality businesses tend to perform well over the long term, no matter what competitive or economic challenges they may face.
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FAQs
How do I start value investing?
Value investing is an investment strategy that focuses on stocks that are underappreciated by investors and the market at large. Value investing requires a lot of research. You'll have to do your homework by going through many out-of-favor stocks to measure a company's intrinsic value and comparing that to its current stock price. Often, you'll have to look at dozens of companies before you find a single one that's a true value stock.
What are value vs growth stocks?
Value investing and growth investing are two different investing styles. Usually, value stocks present an opportunity to buy shares below their actual value, and growth stocks exhibit above-average revenue and earnings growth potential.
What are value stock ETFs?
An exchange-traded fund (ETF) that invests in value stocks uses specific criteria to find companies whose intrinsic values substantially exceed the market values implied by their stock prices. By investing in a wide range of undervalued companies, value stock ETFs confer instant portfolio diversification. Buying shares in a value stock ETF can be a safe and easy way to invest in companies in cyclical industries.
