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3 Undervalued Strong Buys

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James Giaquinto
·7 min read
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This doesn’t seem like a time for value, does it? The major indices are at or approaching all-time highs as we are hopefully heading for a big recovery once this pandemic ends. Who wants to invest in value when there are stocks just waiting to take off after a solid year of “social distancing”?

Smart investors, that’s who.

Undervalued stocks may not stay undervalued for long, especially if they’ve got a high Zacks Rank. These are the stable names that could be among the biggest beneficiaries of a return to normal. And we’ve got a screen that will help you find them.

The Undervalued Zacks #1 Rank Stocks screen will help you find names that aren’t on most investors’ radars… but may be in the near future. Take a look at three names that recently passed this screen. However, these positions can change quickly, especially is such hectic times, so make sure to also look at the full list for a broader view of the landscape.

American Axle & Manufacturing (AXL)

American Axle & Manufacturing (AXL) knows where the future is. This global automotive parts supplier has been successfully diversifying its business, including making great strides in its electric drive technology. Therefore, AXL also knows where the money is!

The company designs, engineers and manufactures driveline and metal forming technologies. It boasts that these products are making the next generation of vehicles smarter, lighter, safer and more efficient. AXL is not afraid to make strategic buyouts, divestments and partnerships to achieve its goals… especially the electric ones.

For example, earlier this month, AXL announced a technology development agreement with China’s Suzhou Inovance Automotive that will accelerate the development and delivery of scalable, next-generation 3-in-1 electric drive systems. These systems integrate an inverter, electric motor and gearbox.

AXL’s third quarter report was its fifth straight that beat the Zacks Consensus Estimate. “Beat” actually isn’t a good enough word. “Bludgeon” is more appropriate. Earnings per share of $1.15 bludgeoned our expectations by 447%. However, revenue missed forecasts due to you-know-what.

But the pandemic is (hopefully) on its last legs, and AXL has done a great job and generating free cash flow and cutting costs to keep its head above water. And now it can offer a 2020 sales outlook of $4.6 billion.

Shares of AXL have jumped approximately 35% since that late October report. The company will go to the plate again on February 12.

Analysts are still expecting a loss of 2020, but the deficit has narrower significantly to 10 cents from 41 cents. However, analysts are most excited for 2021. Not only is AXL expected to post a profit, but that profit is currently anticipated at a full $1.01.

International Paper (IP)

On the one hand, people are using less paper than ever before as technology promises to save trees by making us less wasteful and more responsible to our environment. On the other hand, those same people are getting practically everything delivered to their houses during this pandemic inside corrugated packaging. Or in other words… paper. Take that, trees!

International Paper (IP) is a leading global producer of renewable fiber-based packaging, pulp and paper products. Therefore, you can still get your packages AND save trees at the same time!

The company has put together an impressive 16 straight quarters of positive earnings surprises, which means this company was benefiting from the growing importance of e-commerce long before the pandemic.

And now with all of today’s challenges, it has been focusing on cash generation and a solid balance sheet to deal with the issues. The company has also been investing to improve its North American containerboard mill system, while also doing some M&A when appropriate to grow its business.

For its third quarter, IP reported earnings per share of 71 cents, which beat the Zacks Consensus Estimate by nearly 48%. It’s four-quarter average beat is also right around 48%. Net sales of $5.1 billion were down 8% year over year, but still managed to stay above our expectations at $5.03 billion.

The company said it continues to see momentum in demand for corrugated packaging. Shares of IP are up more than 17% since the report in late October. The next report comes early next month.

The Zacks Consensus Estimate for 2020 is up 2.9% to $2.88 over the past 60 days, while expectations for next year climbed 8.5% in that time to $3.84. In other words, analysts expect growth of more than 33% for this year over last.

They expect IP to continue benefiting from growing e-commerce demand. This is not something that will go “back to normal” when the pandemic ends. This is an example of “the new normal”. If anything, more consumers than ever now realize how easy it is to shop from home for cardboard boxes full of stuff.

KB Home (KBH)

If you ever thought about owning your own home or upgrading… then this is the time to make that happen! Otherwise, you run the risk of still being in that two-bedroom apartment years from now with the noisy neighbors and brick wall views. What were you waiting for?

A record number of potential homeowners are taking advantage of these historic times, which explains why the building products-homebuilders space is in the top 14% of the Zacks Industry Rank.

It’s also a pretty good explanation for KB Home’s (KBH) solid fourth quarter performance and rising earnings estimates. The homebuilder’s net orders grew 42% year over year in the quarter, as housing market conditions continue to be “robust”.

KBH has already reported its fiscal fourth quarter. Earnings per share of $1.12 topped the Zacks Consensus Estimate by nearly 29%. It has now beaten expectations in three of the last four quarters, but that miss in the fiscal second quarter was a real anomaly brought on by covid. As you can see in the chart below, KBH has quite an impressive record of positive surprises that stretches back years.

Total revenue of $1.19 billion was down from last year, but still beat our expectations by 8%. Backlog at quarter-end was up 54% to 7810 homes, and potential housing revenues from that backlog grew 63% to $2.96 billion.

Looking forward, the company expects “meaningfully higher revenue and earnings in 2021 to drive significant expansion of our return on equity”. And the analysts seem to agree.

The Zacks Consensus Estimate for this year (ending November 2021) is now at $5.11, which is up nearly 20% in 30 days. Expectations for next fiscal year (ending November 2022) are nearly as good with earnings of $5.55, marking a gain of 16.4% and a year-over-year improvement of 8.6%.

More Stock News: This Is Bigger than the iPhone!

It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 27 billion devices in just 3 years, creating a $1.7 trillion market. Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 6 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2021.

Click here for the 6 trades >>

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KB Home (KBH) : Free Stock Analysis Report
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