Undervalued Gems: 7 Stocks Set for a Major Rebound
Focusing on undervalued stocks can be a rewarding investment strategy, but value investing is not as simple as finding the stocks trading at the lowest valuations, buying them, and waiting for big returns to come rolling in.
Plenty of value and deep value plays can be best described as “value traps.” Those are stocks that look cheap on paper, yet fail to appreciate in value, as issues such as lack of growth, legal liabilities, or other headwinds keep investors away.
However, alongside these “value traps,” are scores of stocks that have fallen to low valuations, and have strong potential to quickly bounce back. Improved fundamentals, the resolution of a major issue, or merely an improvement in investor sentiment can result in a big re-rating to the upside within a reasonable time frame.
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The following seven undervalued stocks to buy all fit within this category. Each one has fallen by 25% or more from its 52-week high, currently trades at a low or reasonable valuation, and could experience a faster-than-expected recovery.
Undervalued Stocks: Archer-Daniels-Midland (ADM)
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Last month, an accounting scandal knocked Archer-Daniels-Midland (NYSE:ADM) to rock-bottom prices. Shares in the agribusiness giant have started to recover, as investors look into the details of the scandal, and determine that the market’s initial response may have been an overreaction.
With the alleged accounting irregularities occurring within a business unit making up less than 10% of the company’s overall revenue, the potential impact of this scandal may be minimal. That’s not to say ADM stock will quickly return to pre-scandal prices immediately, but a steady climb back to prior levels may happen in the months ahead.
Beyond recovering from this scandal, a rebound in global food demand/prices will likely help agribusiness stocks like Archer-Daniels-Midland bounce back as well. Trading for just 8 times forward earnings, and with a 3.6% dividend to boot, joining the crowd of contrarian investors snapping up ADM right now could prove profitable.
Bristol-Myers Squibb (BMY)
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Bristol-Myers Squibb (NYSE:BMY) may be one of the best undervalued stocks to buy in the pharmaceuticals sector. After sinking more than 35% from its 52-week high, shares in this big pharma firm trade for only 6.6 times earnings.
BMY stock also has a forward dividend yield of 4.91%. Sure, on the surface, Bristol-Myers Squibb may seem like a potential value trap. Forecasts call for negative earnings growth this year. The company has also extended its sales ramp-up timeline for new drug products that are needed to replace existing blockbuster drugs experiencing declining sales due to generic competition.
Still, with negative sentiment so heavily priced-in, it may not take much to drive a big partial recovery for BMY. Even the potential upside from a partial rebound could exceed downside risk, given the extent in which this pharma stock has been discounted by the market.
Undervalued Stocks: Hasbro (HAS)
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Since early 2023, shares in toy and game giant Hasbro (NASDAQ:HAS) have attempted to make a recovery. But, after experiencing a strong rebound between March and September of last year, the stock has since fallen back by around 31.5%. Chalk this up to uncertainty about Hasbro’s near-term operating performance.
However, as I argued when last writing about HAS stock in December, the company’s turnaround efforts could prove successful, shifting sentiment from bearish back to bullish. Turnaround plans have included the sale of non-core businesses to raise cash for de-leveraging purposes. Hasbro has also made efforts to reduce costs through layoffs.
If these efforts lead to stronger earnings in the quarters ahead, the stock (at around $50 per share today) could swing back to its 52-week high of $73.58 per share, or even higher. While waiting for the turnaround, you can collect HAS’s 5.72% dividend.
Li Auto (LI)
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Admittedly, it may seem odd to include Li Auto (NASDAQ:LI) in the “undervalued stocks” category. After all, shares in this China-based electric vehicle (EV) maker trade for 23.3 times forward earnings. Yet given how many of Li’s early-stage competitors, like Nio (NYSE:NIO) and Xpeng (NYSE:XPEV) currently operate at a loss, this valuation appears more-than-reasonable.
The valuation of LI stock also appears more-than-reasonable, when you consider the extent in which Li’s earnings could grow in 2024. Consensus calls for earnings growth of around 40.8%, but the high end of forecasts call for earnings to nearly double, from $1.25 to $2.45 per share.
While not guaranteed, Li’s strong January 2024 delivery numbers – up 105.8% year-over-year – suggest that achieving such high levels of growth this year is very possible. In turn, this could help LI – down 38% from its 52-week high – make a strong recovery this year.
Undervalued Stocks: Paramount Global (PARA)
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Paramount Global (NASDAQ:PARA) is another value stock that could experience a rapid recovery. In fact, shares in the media conglomerate could reach higher price far sooner than many of the other stocks discussed above and below.
Why? In Wall Street parlance, Paramount Global is “in play.” Media mogul Byron Allen recently made a $14.3 billion bid for the whole company. Not all of Allen’s past media takeover bids have resulted in deals. However, Allen could end up with portions of the company, such as its television assets.
Other strategic buyers are interested, including Skydance Entertainment and Warner Bros. Discovery (NASDAQ:WBD). Paramount has formed an independent committee to assess possible strategic alternatives like a sale. The Redstone family, who control the company, appears interested in making a deal. If you are interested in taking a speculative position in a potential takeover stock, PARA is one such opportunity.
The Children’s Place (PLCE)
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Look up The Children’s Place (NASDAQ:PLCE) on a stock screener, and at first it may not seem like it’s one of the undervalued stocks. Based on trailing earnings, shares in this children’s apparel retailer are not cheap. The company has reported heavy losses over the past twelve months.
However, as a Seeking Alpha commentator bullish on PLCE stock recently pointed out, The Children’s Place remains on track to reduce debt and make big improvements in profitability. This gives credence to sell-side earnings forecasts, which call for PLCE’s earnings to go from negative 49 cents last fiscal year ending January 2024 to $2.54 per share this fiscal year ending January 2025.
Achieving such an earnings recovery will undoubtedly result in a recovery for The Children’s Place shares. At $22 per share today, the stock trades at less than half of its 52-week high of $47.26 per share.
RCI Hospitality Holdings (RICK)
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RCI Hospitality Holdings (NASDAQ:RICK) is a publicly-traded gentlemen’s club operator. Yet while RCI’s risqué business alone may be enticing, what’s especially appealing to value investors is the stock’s low valuation and potentially-oversold status.
RICK stock currently trades for just 12.75 times earnings, and has fallen by nearly 32% from its 52-week high. The recent U.S. economic challenges have weighed on RCI’s operating performance. This explains why shares have tumbled over the past year.
However, as I argued last month, a post-slowdown recovery may lead to an earnings and stock price rebound. Cooling inflation and lower interest rates may enable RCI to hit forecasts calling for earnings of $6.38 per share next fiscal year ending September 2025. Hitting this level of earnings, coupled with a re-rating to the upside could send this stock – in the mid-$60s per share today – up to over $100 per share.
On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.
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