One piece of advice that’s good for all investors who are looking for undervalued stocks is to “follow the money.” But this doesn’t mean chasing stocks that are on their way up. It means paying attention to what stocks are getting interest from institutional investors, particularly when the market is down.
Here’s how it works. Institutions have the liquidity to cause big moves in the market. They identify companies that they believe are going to make a big move and buy or sell in advance of those moves. Often times, the retail investor catches on too late. In a volatile market like this, that can lead to missing out on the best gains at best and being on the wrong side of a trade at worst.
In this article, we’ll take a look at seven undervalued stocks that are drawing interest from institutional investors but still have some upside according to analysts.
American International Group
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While many bubbles have popped, commodity prices continue to climb. This includes the price of aluminum. That’s a large part of the bullish case for listing Alcoa (NYSE:AA) as an undervalued stock. As of the end of the first quarter, aluminum was double the price it was in 2020.
One reason for the increased demand is that aluminum is a key component for the electric vehicle (EV) industry. Revenue and earnings are expected to peak this year and come down after that. However, over the next five years, both are expected to remain above pre-pandemic levels.
Following a sharp sell-off that started in late March, AA stock is down 17% in 2022. For investors who look for fundamental metrics, AA stock has a price-to-book ratio of 2.4 and is trading at 5.1 times forward earnings. And institutional buyers have outnumbered sellers by 93% in the last 12 months with 76% more money flowing into the stock than being sold.
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Nutrien (NYSE:NTR) provides another opportunity for investors looking for undervalued stocks. Like Alcoa, Nutrien is a play on the commodities boom. The Canadian-based company is the world’s leading manufacturer of potash and the third largest manufacturer of nitrogen fertilizer. Russian exports of fertilizer have ceased, and Nutrien is benefiting.
To that end, the company has raised its earnings per share (EPS) estimates for the coming year. The company is forecasting EPS in a range of $16.20 to $18.70 for its full year 2022.
Even if the company comes in at the low end of that estimate, it would be posting a 160% year-over-year gain from the prior year. Most analysts give NTR stock a buy rating with a price target of $118.28. And the company has a forward price-to-earnings ratio of 5.8.
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For obvious reasons related to its Covid-19 vaccine, Pfizer (NYSE:PFE) stock has seen strong growth over the last two years. Right now analysts suggest that the capital growth may be topping out. However, institutional buying remains very strong. In the last 12 months, there have only been about 33% more buyers than sellers. But those buyers are committed to the tune of 98% more inflows than outflows in PFE stock.
One reason for this is the company’s pipeline. The long-term possibilities for mRNA vaccines are numerous and potentially game changing for patients with a number of conditions. Pfizer has always been good at generating free cash flow (FCF). And 2021 saw the company bring in a record $29.9 billion. That gives the company quite a war chest that it’s likely to use to bring other vaccines and therapeutics to market.
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3M (NYSE:MMM) recently announced that it was expecting a $300 million decline in revenue in the current quarter and a corresponding decline of 30 cents per share. This is due to the Covid-19-related lockdowns in China, which have only recently begun to ease. This is complicating a supply chain that doesn’t need any more choke points.
The broader concern is that this announcement makes it highly likely that 3M will post a second consecutive quarter with a YOY decline in revenue and earnings. However, that doesn’t appear to be keeping institutional investors away. In the last 12 months, institutional buyers have outnumbered sellers by 25% leading to 39% more money flowing into MMM stock than out of it.
With a P/E ratio of 13.4, 3M has an appealing valuation. And the company continues to generate significant free cash flow to support its dividend. Speaking of which, the company is part of the select group of Dividend Kings, having increased its dividend in each of the last 63 years.
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At some point, investors will begin to buy back into the electric vehicle sector. When they do, BorgWarner (NYSE:BWA) is likely to be on their shopping list. BorgWarner is an automotive supplier that does business in several countries. And recently, the company announced that it will supply battery management system technology for commercial vehicles starting in 2023.
BWA stock is likely flying under the radar of many investors. But it’s garnering plenty of interest from institutional investors. The stock has nearly 91% institutional ownership. BorgWarner is projected to grow earnings at a 15% annual rate over the next five years. That bodes well for investors because the company has no problem generating significant free cash flow and is committed to returning shareholder value.
American International Group (AIG)
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The next of the undervalued stocks on my list shows that boring can be beautiful. American International Group (NYSE:AIG) is the definition of a defensive stock. And that’s reflected in the amount of interest by institutional investors.
Institutional buying and selling has been close to 50/50 in the last 12 months, but the stock is still owned by a whopping 93% of institutional investors.
The story that investors should pay attention to is earnings growth. 2021 was a banner year for the company, which reported 19% YoY topline growth. However, revenue projections for the next five years are relatively flat. That’s not unusual for insurance companies.
That being said, the company’s EPS is projected to rise at an attractive rate of over 18% over the next five years which should create plenty of upside for AIG stock.
Vale S.A. (VALE)
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The last company on my list of undervalued stocks is Vale (NYSE:VALE). The mining company is the world’s largest nickel miner. And it recently secured a long-term deal with Tesla (NASDAQ:TSLA). But not only is the company supplying Tesla with nickel, it has a goal of supplying 30% to 40% of its class 1 nickel sales to the EV industry as a whole.
In what’s becoming a theme of this article, VALE stock is up 13% for the year largely due to rising commodity prices. Institutional sentiment is still rather light, but it’s been growing. Institutions did sell-off VALE stock sharply in the first quarter, but that is likely due to the overall market volatility.
However, it won’t be long until they pay attention to the price of nickel, which has more than doubled in the past two years. When they do, they’ll notice a company that continues to generate strong earnings.
On the date of publication, Chris Markoch had a long position in MMM. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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