The end of the year doesn’t mean the end of the search for good stock picks. With less than a month left in 2023, you might be searching for a few more names to add to your portfolio before the year is over. Keep in mind that diversification can be important when looking for value. Sometimes a stock may not be the most absolutely undervalued in the current market, but relative to its industry peers, it could be a winner. Read on for my year-end selections.
How To Identify Undervalued Stocks
Defining whether a stock is undervalued or not can be as complex or as simple as an investor wants it to be. You can commit to complex multi-layered financial models that are driven by sophisticated code and algorithms, all to determine the price movement of a single asset. You can also punch in some simple equations into a spreadsheet using public information and still make a defensible solid case for a valuation. Investors just need to be consistent with the application of their strategy and approach. There’s no point in having a system if an investor isn’t being disciplined with their use of it. In honor of this, a relative valuation based on high-level classic valuation metrics (i.e. historical P/E) is usually sufficient for most investors and is what this article will utilize. Low or no coverage is also a potential indicator of a stock being unvalued; if there’s no visibility on a company, then there won’t be enough volume to push the share price up and close the discount gap.
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2 Undervalued Stocks For December 2023
United Parcel Service (UPS)
- Industry: Logistics
- P/E: 15.3
- Earnings surprises in the last four quarters
- Down 34% from its all-time peak in February 2022
UPS is a mainstay in the freight world. Loosely classified in the industrials sector but well-known as a top-tier delivery service, UPS is currently experiencing a downtrend in its share price. The good news is that the company’s fundamentals appear sound. UPS and its earnings are closely tied to the health of the global economy, so the more broad uncertainty there is, the more the company suffers. The company is still producing earnings of $1.13 billion, compared to $2.58 billion in 2022, and its dividend remains a priority for senior management. This latter point is the key to the thesis here: the company is paying out a healthy $6.48 annual dividend, so income-focused investors looking for a discount could do well in researching UPS further.
A critical labor deal with Teamster International was recently passed, allowing UPS to avoid major potential losses and reputational damage in exchange for better wages and benefits for its employees. This will eat into the company’s margins, but having a satisfied and reassured workforce is preferable to being responsible for what could’ve been one of the costliest strikes in U.S. history. With this behind them, investors are now betting on a slowly improving global economy if they’re looking for an entry point into UPS under the expectation of a P/E improvement. The company’s attempts to be more efficient have LAO been reported as going favorably; these efforts include quicker package processing thanks to RFID technology and new robotic setups for autonomous loading and unloading. Dividend investors should look for a recovery in the share price back to 2022 levels while still taking home anywhere from a 3% to a 4% yield based on current data.
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Truist Financial (TFC)
- Industry: Banking
- P/E: 8
- Down 40% since the 2019 merger
- Expense growth remains in-line
Truist Financial is another undervalued opportunity currently available on the market. The thesis on this company is based on a turnaround: the stock’s pricing momentum has struggled since its peak of $67.41 in January 2022. The company itself is still pouring in earnings, with its recent 10-Q showing $1.18 billion net interest income. But the name of the game for management is expense reduction, and the company plans to do so as part of its plan through 2025.
Investors who further research Truist will likely encounter a lot of buzzwords and phrases being thrown around by analysts like “balance sheet optimization” and “efficiency improvement.” What you need to know is that this essentially means that management is executing on the merger expectations that were initially promised. A deal between companies that doesn’t lead to material synergies or value for the combined entity means it’s a failed one, despite approval from regulators and shareholders. However, per its November 8-K, Truist seems to be fully committing to its cost reduction strategy by appointing its vice chair as the new COO. This news plus a relatively stable dividend should be enough to hold interested investors until the turnaround effort truly sticks. But this is also the major risk bull thesis: will there even be a return to better performance? Truist is not just trimming the fat from its expense lines: divesting from non-core business streams (like its insurance arm) and a renewed focus on small and midsize business clients should be enough to drive the bull thesis, but those same investors shouldn’t expect their return anytime soon.
Methodology Used
The methodology used here to find undervalued picks is a straightforward process:
- Start with your portfolio. What is its objective? Look to fulfill needs like industry diversification, potential income and market cap size inclusion. From there, you’ll have a smaller pool of stocks to pull from.
- Select one name from this pool and look at the stock’s basic valuation metrics. For most mature companies, P/E is usually sufficient, although some industries require a slightly different approach (such as price-to-book(P/B) for pre-earnings companies or price/adjusted funds from operations (P/AFFO) for REITs). Then, compare the current figures to either historical values or current peer values. If there’s a discount, then price discovery may be possible.
- Build the qualitative part of the thesis. Look for significant events like entry into new markets or deployment of cost reduction strategies, then determine whether these events add or subtract to the thesis. Macro factors like central bank decisions and geopolitical tensions should also be considered.
- The last component investors need is a scenario for the future. Is it feasible under the company’s current operational conditions? Does it align with or depart from management’s guidance? Choosing a price target or expected return that’s informed by your thesis is typically the final step. However, sometimes all the aforementioned research ends up breaking the thesis, and that’s alright! That’s how investors know it’s time to move on to a new stock in their coverage universe.
Bottom Line
It’s slim pickings in the market at this time. The current trading environment feels like a “wait-and-see” moment; most investors have their portfolios set and are now holding until the new year rolls around. There’s still too much uncertainty among market participants, plus escalating geopolitical conflicts create a situation where sensitivity analyses are likely pointing to the downside. Still, the two picks above also show that despite the many value traps, there are at least a few companies that are worth picking up while they’re at a discount.
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Investing in stocks is one of the best moves you can make to grow your wealth. Take a close look at the stocks recommended by the Forbes investment team in this exclusive report, 12 Best Stocks To Buy For 2024.
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