The end of the year doesn’t mean the end of the search for good stock picks. With less than a month until 2023, you may be looking for a few more names to add to your portfolio before the end of the year. Keep in mind that diversification can be important when looking for value. Sometimes a stock may not be the most undervalued in the current market, but relative to its industry peers, it could be a winner. Read on for my end-of-year picks.
How to Identify Undervalued Stocks
Defining if a stock is undervalued or not, can be as complex or as simple as an investor wants. You can engage in complex, multi-level financial models, driven by sophisticated code and algorithms, all to determine the price movement of a single asset. You can also enter a few simple equations into a spreadsheet using public information while making a strong, defensible case for an assessment. Investors simply need to be consistent in applying their strategy and approach. There is no point in having a system if the investor is not disciplined in its use. In honor of this, a relative valuation based on classic high-level valuation metrics (i.e. historical P/E) is usually sufficient for most investors and that is what this article will use. Low or no coverage is also a potential indicator that a security is undervalued; If there is no visibility into a company, then there will not be enough volume to drive the stock price up and close the discount gap.
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2 Undervalued Stocks for December 2023
United Parcel Service (UPS)
- Sector: Logistics
- P/E: 15.3
- Profit surprises over the last four quarters
- Down 34% from its historic peak in February 2022
UPS is a mainstay in the freight world. Largely classified in the industrial sector but renowned as a leading delivery service, UPS is currently experiencing a downward trend in its stock price. The good news is that the company’s fundamentals appear strong. UPS and its profits are closely linked to the health of the global economy. So, the greater the uncertainty, the more the business suffers. The company still generates a profit of $1.13 billion, up from $2.58 billion in 2022, and its dividend remains a priority for senior management. That last point is the key to the thesis here: The company pays an annual dividend of $6.48, so income-oriented investors looking for a discount might benefit from further researching UPS.
A crucial labor agreement with Teamster International was recently reached, 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 satisfied and reassured employees is preferable to being responsible for what could have been one of the the most costly strikes in the history of the United States. With that behind them, investors are now betting on a slowly improving global economy if they look for an entry point into UPS in anticipation of an improving P/E. The company’s attempts to be more efficient have been reported as favorable; these efforts include faster package processing using RFID technology and new robotic setups for autonomous loading and unloading. Dividend Investors should seek a share price recovery to 2022 levels while earning a return of between 3% and 4% based on current data.
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Truist Financial (TFC)
- Sector: Banking
- S/S: 8
- Down 40% since the 2019 merger
- Spending growth remains stable
Truist Financial is another undervalued opportunity currently available in the market. The thesis on this company is based on a turnaround: the stock’s price momentum has struggled since its peak of $67.41 in January 2022. The company itself continues to post profits, with its recent 10th quarter posting net interest income of $1.18 billion. But the watchword for management is cutting expenses, and the company plans to do so as part of its plan through 2025.
Investors who dig deeper into Truist will likely encounter a lot of buzzwords and phrases thrown around by analysts, such as “balance sheet optimization” and “efficiency improvement.” What you need to know is that this essentially means that management is meeting the merger expectations originally promised. A deal between companies that does not generate significant synergies or value for the combined entity means it is a failure, despite approval from regulators and shareholders. However, according to its month of November 8-K, Truist appears to be fully committing to its cost-cutting strategy by appointing its vice president as its new COO. This news, combined with a relatively stable dividend, should be enough to hold over interested investors until turnaround efforts actually take hold. But it is also the thesis of the major risk: will there even be be a return to better performance? Truist isn’t just cutting expenses: divestment from non-core businesses (like its insurance arm) and a renewed focus on small and mid-sized businesses should be enough to fuel the bullish thesis, but those same investors should. I don’t expect them to return any time soon.
Methodology used
The methodology used here to find undervalued picks is a simple process:
- Start with your wallet. What is its purpose ? Seek to meet needs such as industrial diversification, potential income and inclusion of market capitalization size. From there, you’ll have a smaller pool of stocks to draw from.
- Select a name from this pool and review the stock’s basic valuation metrics. For most mature companies, P/E is generally sufficient, although some industries require a slightly different approach (such as price/book value (P/B) for companies with expected profits or price/funds from operations adjusted (P/AFFO). for REITs). Then, compare the current numbers to historical values ​​or current peer values. If there is a discount, price discovery may be possible.
- Construct the qualitative part of the thesis. Look for significant events like entering new markets or deploying cost-cutting strategies, then determine whether these events add or subtract from the thesis. Macroeconomic factors such as central bank decisions and geopolitical tensions must also be taken into account.
- The last thing investors need is a scenario for the future. Is this feasible under the company’s current operating conditions? Is it in line with management’s direction or does it deviate from it? Choosing a price target or expected return based on your thesis is usually the last step. However, sometimes all the research mentioned above ends up breaking the thesis, and that’s okay! This is how investors know it is time to move to a new stock in their coverage universe.
Conclusion
The choices are slim on the market right now. The current business environment feels like a waiting time; most investors have established their portfolio and are now holding it until the new year. There is still too much uncertainty among market participants, and escalating geopolitical conflicts create a situation where sensitivity analyzes are likely pointing toward a decline. Nonetheless, the two picks above also show that despite the many value traps, there are at least a few companies worth picking while they are at a discount.
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Investing in stocks is one of the best steps you can take to grow your wealth. Take a close look at the stocks recommended by the Forbes investing team in this exclusive report, 12 Best Stocks to Buy for 2024..
