Undervalued stocks are those with current stock market prices that are considered lower than what they should be based on the company’s current or future earnings and growth prospects. Investors strive to identify undervalued or cheap stocks because they have the potential to appreciate faster than the stock market as a whole — in effect the stock “catches up” to what its valuation should be.
Here are nine stocks to buy as you review your portfolio for year-end 2017 and begin looking ahead to the best stocks to buy in early 2018.
1. Seagate Technology (NASDAQ: STX)
Seagate Technology is a data storage company allowing businesses to archive, analyze and understand data. Adam C. Parris, chief investment educator at Searching for Value, recommends Seagate as one of the undervalued stock purchases for the upcoming year. “[The company] has a healthy balance sheet with a current ratio of 1.96, earnings yield of 10 percent and the company is set to grow,” Parris said. “[It has] a five-year return on investment of 25 percent and a return on equity … of 84 percent. …You can earn in addition to the 10 percent earnings yield with a dividend of 6.22 percent. Giving you a total stock yield of 16.22 percent. For those reasons, [I would] recommend Seagate Technology to my clients.”
- Third Quarter: Unavailable; first quarter revenues were $2.6 billion
- Net Income: $181 million
- Earnings Per Share: $0.62
2. Pepsico (NYSE: PEP)
Food and beverages stocks were rocky in 2017 since consumer preferences have been changing. However, that hasn’t stopped some companies like Pepsico from charging ahead. With reliable dividends, 45 years of not only paying dividends but increasing dividends, and strong profitability, it’s a good choice for investing in the coming year. Revenues are generated about equally from its drink and food products and geographically as well among the United States and the rest of the world.
- Third Quarter: 1.3 percent increase
- Net Income: $43.9 million
- Earnings Per Share: $1.49
3. Paycom (NYSE: PAYC)
Growth opportunities are wide open for Paycom, cloud software used by companies internally to handle payroll and human resource processes. Revenue retention rate last year was 91 percent. Paycom’s competitive advantage is the hassle of changing payroll provider systems with the attending data and documents. Once hooked, clients seem to stay in place as demonstrated by the 91 percent retention rate.
- Third Quarter: 31 percent increase
- Net Income: $101.3 million
- Earnings Per Share: $0.43
4. Alarm.com (NASDAQ: ALRM)
Alarm.com is a home and business security firm. “ALRM has exceeded earnings expectations every quarter this year and has outperformed the market,” said Kevin Kleinman, founder of WatchHimTrade.com. “It is down roughly 20 percent from its recent high, offering an attractive entry point.”
- Third Quarter: 33 percent increase
- Net Income: $90 million
- Earnings Per Share: $0.59
5. Amazon (NASDAQ: AMZN)
One way of looking at undervalued stocks is to see which stocks major money managers have in their portfolios. Amazon is the third largest retailer in the world, lagging behind only Walmart and CVS. Amazon stock is found in the portfolios of Steve Cohen of Point 72 Asset Management and Ken Griffin of Citadel, an investment firm.
- Third Quarter: 34 percent increase
- Net Income: $256 million
- Earnings Per Share: $0.52
6. Groupon (NASDAQ: GRPN)
Groupon went nowhere in its first year as a public company in 2011. The stock never recovered to more than $11 a share since going public at $20 a share. However, the good news is that after a big turnaround in 2017, the company is poised for a lucrative 2018. Groupon offers discounts from local merchandisers, retailers, restaurants and service providers.
- Third Quarter: Down $1.97 million
- Net Income: $3.8 million
- Earnings Per Share: -$0.06
Related: 10 Stocks That Plummeted in 2017
7. AT&T (NYSE: T)
AT&T is the choice of Robert Johnson, president and CEO of The American College of Financial Services at Bryn Mawr. “I expect the telecommunications sector to be a strong performer in 2018, rebounding from a poor 2017,” he said. “My choice in the sector is AT&T. The firm is selling at a PE ratio of 18, which is a substantial discount to the market. Additionally, it has a sizable dividend yield of 5.3 percent. The firm is well positioned, having undertaken several acquisitions in the past few years.”
- Third Quarter: $118.8 billion
- Net Income: $3.0 billion
- Earnings Per Share: $1.69
8. Axon Enterprises (NASDAQ: AAXN)
Axon, formerly known as TASER, has branched out beyond tasers and into body cameras and video storage. The market has increased dramatically based on the rioting incidents and emphasis on law enforcement reactions. The company’s unique marketing strategy is to give the body cameras to the police department when the departments agree to use the Evidence.com platform for storing and analyzing the data.
- Third Quarter: Up 26 percent
- Net Income: $0.4 million
- Earnings Per Share: -$0.01
9. Uniti Group Inc. (NASDAQ: UNIT)
Mark Painter, the founder of Ever Guide Financial Guide, recommends Uniti Group Inc. “This is a REIT, real estate investment trust, that focuses on wireless and internet infrastructure,” he said. “The company pays a 13 percent yield and has had problems because its largest tenant Windstream is having financial issues and a very heavy debt load that could trigger bankruptcy. Given the master lease structure would most likely force Windstream to honor the lease in case of a bankruptcy because of the critical nature of the infrastructure that Uniti provides. While this company and industry has its risks, the valuation, dividend, and cash flow provide safety and potential for a significant return.”
- Third Quarter: $245.2 million
- Net Income: $4.8 million
- Earnings Per Share: -$0.02
The search for most undervalued stocks is an ongoing quest for many investors, who believe the stock market does not always accurately value a company. It’s almost like a treasure hunt, except the gold won’t be deposited in an investor’s treasure chest until sometime in the future. The time and effort you put into identifying these nuggets can be well spent, as you build a winning portfolio for 2018 and beyond.