Stock Market

5 Unloved and Undervalued Stocks Ready to Rebound

This episode will show you the best value stocks that are actually unloved and undervalued. Don’t miss any of these for the next rebound!

Who doesn’t love an underdog story? From Rocky to Rudy and well, I guess even Underdog…we root for the comebacks of our favorite heroes.

And why not in stocks? There’s no shortage of great stocks, great companies you know can do better if just given the time. Even better, when the rest of the stock market is ridiculously expensive, you can find these unloved shares at a discount! In this video, I’ll show you how to find the undervalued stocks ready to rebound, then reveal five stocks to watch right now. We’re talking best value stocks, today on Let’s Talk Money!

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A Look on the Latest Stock Market Winners

Nation, right now, the stock market is full of winners. The market is up 17% so far this year, more than double it’s long-term average return for entire years and even in stocks, success breeds success. Study’s support the fact that stocks that outperform over the previous six months, tend to do well in the following period.

But in studies looking further out, over three to five years, it’s a completely different story…an underdog story! In a study published by De Bondt and Thaler, stocks with lower returns in the previous three-to-five years actually outperformed those with the better prior returns over the next five years.

It seems patience is a virtue when it comes to investing and I want to show you how to find the best of these undervalued stocks for that long-term strategy. We’ll be focusing on only the best quality companies, the cash flow machines that seem to defy the stock price.

I’ll take you through the screener first for these stocks, then later show you why I picked each of these filters and why it’s important. Here we are on the stock screener on Stockcard, and I’ll start by flitering for companies in high-growth industries and only those trading on the NYSE or Nasdaq. We don’t want the riskier OTC or pink sheet stocks here.

Then I also want companies with strong operations and a positive record for sales growth but for some reason, have just underperformed the market. The undervalued stocks with the potential but getting no love from investors.

I’m also going to screen only for companies with a positive earnings trend, with no cash concerns and for those with solid management able to get the most from those assets. So again, companies with great fundamentals but trading at a discount.

Again, we’ll go over each of these later, but if I click apply, that narrows our list to just 19 stocks to research for those very best value stocks to buy.

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5 Best Value Stocks to Buy for the Next Rebound

Our first unloved stock here, FNCB Bancorp, ticker FNCB, a small community bank with 17 offices in Pennsylvania.

So this is an extremely small bank with just $1.4 billion in assets but a track record of over 111 years. It’s got a lower leverage profile compared to peers and revenue growth of nearly 10% annualized over the last five years.

And those of you in the Nation know, banks are one of my favorite industries right now. As lending comes back and interest rates rise, banks like this are uniquely positioned for returns. FNCB posted 30% year-over-year revenue growth last quarter and 12% over the last fiscal year, so really taking advantage of the recovery.

Shares pay a 3.3% dividend yield and trade for just 0.95-times book value, which anytime you can get a quality bank at less than book value, that’s a great start to an investment. The stock has underperformed the SPDR Regional Bank ETF, ticker KRE, by 8% even though it’s still produced a 14% return…so performing well but lagging its industry.

We’ve got four more of the best value stocks to highlight but I want to detail each of those factors in the stock screener to show you why we picked them, why these are important for finding those undervalued companies.

First, we started with companies with growth potential, in the industries with higher sales growth overall. And here, I wanted to find companies that…even if the company was underperforming, it was still going to get a boost from that bigger picture.

Then I want to filter for well-run companies, those with the fundamentals that are creating value for shareholders even if it’s not reflected in the share price. So here we’re screening for things like positive sales and earnings growth. We want companies that are making more money over the three-year period.

We’re also looking for management that is producing a positive return on assets, or ROA, and especially one that’s above competitors in the same industry. And finally within the fundamentals, we want companies with lots of cash on hand and lower debt.

That last one is important. These are well run companies that are creating value for shareholders through higher profits but if they don’t have the financial flexibility that comes with having a strong balance sheet, so a high amount of cash and a low debt-to-equity ratio…then they might not get the chance for a rebound. We want companies that are going to survive before they thrive.

Finally here, we’ve screened for quality companies, now we want to filter for those that have underperformed. The stocks of solid investments that have gotten cheaper for some reason.

Our next stock to watch is Meridian Bioscience, ticker VIVO, an $888 million biotech company.

Meridian is a fully-integrated life sciences and diagnostics which is rare for biotechs to have that breadth of capabilities across not just development but manufacturing and distribution. The company provides component manufacturing for antibodies and antigens as well as diagnostics in gastrointestinal, respiratory and blood testing.

COVID doubled revenue in the life sciences segment on testing and the company has guided to 31% revenue growth this year, as high as $335 million. So the shares are very cheap, just 2.6-times sales for that kind of growth.

Even better, the company has also forecast operating profitability to increase to 30% this year from just 24% last year, so becoming more profitable as it grows those sales.

Shares recently recovered from a 22% plunge in July to perform right along with the iShares Biotech ETF, ticker IBB, for the year but are still down 32% from the February peak.

It’s another cash positive company with $63 million in balance sheet cash against just $56 million in debt and strong free cash flow of $48 million a year, so a fundamentally strong company. And the average analyst price target of $32 per share puts the stock 56% higher than the current price on this one.

WeyerHaeuser, ticker WY, is a favorite among REIT investors for its stability and 2% dividend yield.

The company is one of the world’s largest timberland owners with 11 million acres in the U.S. and licenses on 14 million acres in Canada. And even though lumber prices have come down from the boom we saw earlier in the year, the U.S. alone is underbuilt by about four million homes according to Freddie Mac, just still trying to make up the deficit in construction after the housing bubble so lumber demand should remain strong for years to come.

Weyerhaeuser is a little more heavily leveraged with $1 billion in cash against $5.5 million in debt but it’s a strong cash flow company with that portfolio of real assets so you expect it to have more leverage like any real estate company. Revenue grew by 45% in the most recent quarter and 15% for the last fiscal year.

Shares are down 16% from that May peak in lumber prices but the stock is back in value territory and I like this one for a little diversification from other stocks. The timberland ownership gives the shares some stability even when construction demand falls so it’s not quite as volatile as other stocks.

The average analyst target of $41.35 per share puts it just above that May high for a 22% return on top of the dividend.

I’ll highlight those last two value stocks but another way to look for these is just to look for the best companies in the worst sectors lately. Here if you go to sectorspdr.com, one of my favorite resources, and look at the sector tracker, you can see which groups have underperformed over the last year. For example, here you see stocks in Consumer Staples and Utilities have lagged the market over the last year with returns of less than a third the market average.

So the idea here is just to look for the best stocks in those unloved sectors, companies that you know can do better but have been held back by the performance in the sector as a whole.

Quest Diagnostics, ticker DGX, is a $17 billion leader in biotech, serving one-in-three patients and half the hospitals in the U.S. with more than 1.8 million tests processed every day.

Now Quest has actually done relatively well compared to other diagnostics and testing companies over the past few months. A lot of these stocks have sold off after vaccines were approved because investors thought that would be it for COVID but the virus isn’t going away. COVID is mutating and surviving, that’s what virus do and we’re going to need testing for a very long time.

Quest booked 40% revenue growth in the most recent quarter and 22% for the last fiscal year, so definitely checks that growth box, and shares trade for just 1.6-times sales so still in that value territory.

The analyst target of $146 per share is only about 4% higher from here but the shares pay a 1.75% dividend and have produced a 13.6% annual return over the last five years so I expect this one to keep growing.

Next on our list of undervalued stocks, First Horizon, ticker FHN, is another regional bank but quite a bit larger than most.

The bank has $87 billion in total assets with $32 billion in assets under management within its wealth management segment. First Horizon has 250 locations across 12 states in the Southeast and a little more than a third of revenue is from fee income; so fees from the fixed income and wealth management segments rather than banking.

Shares are down 18% from the May peak, pretty much in-line with the performance on the SPDR Regional Bank ETF, but the stock was up 50% in the first five months of the year…so definitely one that’s leveraged to interest rates and could jump again if rates increase.

It’s booking some strong growth with 70% revenue growth in the last fiscal year though some of that is from the merger with IberiaBank but it’s also booked 33% annualized growth for three years.

Shares pay a solid 3.9% dividend yield and even though it’s a little more expensive at 1.1-times book value, the stock generally trades at a premium so it’s still a value play against its own history. The average analyst price target of $20 a share represents a 20% upside from here on top of that dividend.

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