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7 Undervalued Stocks to Buy

Barbara Friedberg

Undervalued stocks that look like good buys.

After more than a 24% gain in the S&P 500 this year, finding a compelling value in the stock market is a challenge. Whether it's a turnaround opportunity, an overlooked diamond in the rough or a company poised to explode, finding a potential winner is no easy feat. The following seven stocks will exhibit one or more value qualities such as a lower than average price-earnings ratio, a low P/E ratio to growth rate or a company selling for less than its discounted cash flows. Here are a few undervalued candidates to add to your portfolio in this frothy market.

Equitrans Midstream Corp. (ticker: ETRN)

Equitrans owns, operates, acquires and develops natural gas transmission, storage and water assets in the Appalachian Basin. The 16.8% yield and its trailing P/E ratio of 162 illustrate the company's current difficulties. Equitrans' challenges include improving its organizational structure, coping with problems from its largest customer, a delay in opening the Mountain Valley Pipeline and lower natural gas prices. Despite the current challenges, Benjamin Halliburton, chief investment officer at Tradition Asset Management, likes ETRN for its yield. The expected earnings per share this year of $1.50 and in 2020 of $1.60 is a good signal. This brings the forward P/E ratio down to a much more appealing 6. In addition to the low valuation, the Mountain Valley Pipeline's expected opening in 2020 is likely to benefit the firm.

Lazard (LAZ)

Domiciled in Bermuda, Lazard is a global financial advisory and asset management firm. Lazard is experiencing short-term problems resulting in lower earnings per share this year compared to the prior year. Difficulties include reduced financial advisory revenue hurt by a one-time accounting charge as well as European uncertainties such as Brexit and trade issues leading to fewer global mergers. To combat some of the existing headwinds, LAZ is reducing costs. Lyn Alden, an investment strategist, touted LAZ on her blog because of its high yield of 4.9%. This is based on the current price of around $37 and an expected year-end special dividend. Alden believes the stock price has overreacted to current news. Lazard is one of the few active investment managers with solid cash inflows most years.

Matador Resources Co. (MDTR)

Matador is involved in the exploration, development, production and acquisition of oil and natural gas resources in the U.S. Steven Jon Kaplan, CEO of True Contrarian Investments, likes MTDR for several reasons. The price-book ratio of 0.9 indicates that the firm is undervalued. There's heavy insider buying, including several purchases by the CEO. Further, Kaplan believes that MTDR is a likely takeover target by nearby larger producers. With an 8.1 P/E ratio, Matador is undervalued. Matador's third-quarter results showed a 14% increase in daily oil equivalent production and a record quarterly high of 69,600 barrels of oil equivalent production. The company's year-to-date production costs have also fallen.

Vanda Pharmaceuticals (VNDA)

Vanda Pharmaceuticals, a tiny pharmaceutical company in the District of Columbia, is focused on sleep disorders and schizophrenia. With nearly an $830 million market cap, there's room to grow. Joel Salomon, a former hedge fund manager and coach, believes the company can double its earnings next year. Aggregate analysts predict a earnings estimate of 33 cents per share this year and 63 cents per share for 2020. This undervalued stock is trading at a rock-bottom 0.6 PEG ratio, with the majority of its shares owned by institutions. Third-quarter sales rose 21% over the same period last year. Net product sales are expected to range from $215 million to $225 million in 2019 and to more than $275 million in 2020. Due to its small size and risky industry, this is an undervalued stock for most speculative investors.

Cisco Systems (CSCO)

Cisco Systems designs, manufactures and sells networking products to global customers. Scott Pederson, the owner of Harmony Wealth Management, likes Cisco's low valuation in contrast with its technology peers. The current 18 P/E ratio is below that of the S&P 500's ratio of about 23. With a current forward dividend yield of 3.1%, this undervalued dividend stock has a lot going for it, including a three-year average dividend growth rate of 14.6%, Pederson says. Reasons to consider Cisco include the firm's exposure to technology growth areas like security, data center solutions and the migration to cloud networking. Cisco should also benefit from the rollout of 5G.

Discover Financial Services (DFS)

Discover is a U.S. direct online banking and payment services company. In addition to credit cards, the company operates in the lending and saving sectors. The 2% forward dividend yield and a 9.5 P/E ratio are hard to pass up. One growth initiative includes the company's new contactless-enabled credit cards set to roll out over the next few months. This technology allows Discover Card members to use their contactless cards at millions of merchants in the U.S. and abroad by tapping the card reader with their credit card. At the recent $84 share price, the company is trading near the high end of its 52-week range. The low P/E and price-sales ratios, in contrast with the S&P 500, make Discover an undervalued stock to investigate.

Cummins (CMI)

Founded in 1919, Cummins designs, manufactures, distributes and services diesel and natural gas engines and powertrain-related products across the globe. On the cusp of innovation, Cummins recently presented its next environmental sustainability strategy. This initiative includes science-based goals to meet or surpass the Paris climate accord and targeting net-zero carbon emissions by 2050. Cummins offers a 2.8% forward dividend yield. The current P/E ratio of 11.4 compares favorably to the overall market. While the 1.1 PEG ratio suggests the company might be approaching fair value. One caveat with Cummins is that next year's revenue and earnings are projected to decline. This large-cap stock is on the cusp of being undervalued, suggesting that investors may want to wait for a pullback. Remember: Just because a stock is cheap, does not mean its price won't fall further. Do your research before making a stock purchase.

Undervalued stocks to buy now:

-- Equitrans Midstream Corp. (ticker: ETRN)

-- Lazard (LAZ)

-- Matador Resources Co. (MDTR)

-- Vanda Pharmaceuticals (VNDA)

-- Cisco Systems (CSCO)

-- Discover Financial Services (DFS)

-- Cummins (CMI)

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