With markets trading near all-time highs it can be tough to find undervalued stocks with growth potential. Here are two that fit the bill.
Despite COVID-19, stock markets performed very well in 2020, with the S&P 500 up an improbable 16.3%.
Of course, pockets of the market handily exceeded those returns, including Technology (up 40.8%), Consumer Discretionary (25.9%), and Communication Services (23.6%).
Yet, other sectors didn’t do well at all, including Energy (-36.5%), Real Estate (-7.1%), and Financial Services (-5.9%).
The trend has largely continued into the first two weeks of 2021. Overall, the S&P 500 is trading at some pretty high levels—a price-earnings ratio of 38.0. You should know that the historical average (since the 1870s) is around 16.8. Yet, I know the market is not always efficient, so there just had to be some seriously undervalued stocks out there.
With that in mind, I set out to uncover some of these gems—undervalued stocks that had good growth prospects.
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I began with valuation—the price-earnings ratio. The Price-earnings ratio (P/E) is the price of one share of a company’s stock divided by four quarters of its earnings per share (usually the last four quarters; the trailing P/E ratio). The P/E ratio is of utmost importance in determining if a company’s shares are over- or under-valued.
You can find the P/E ratio on any financial site, but if you want to compare the P/E of a company you are considering, I like the Reuters website. Just go to Reuters, enter your stock symbol, then select Financials and compare the current P/E of the company to its average P/E for the last 3-5 years, to its estimated future P/E and to the average P/E of its industry or sector.
I asked my search program to find me the companies with P/Es less than 10. I was surprised to see 333 companies that fit those parameters.
Next, I wanted high growth companies, so I selected companies whose 5-year projected earnings growth is more than 25%. That is some pretty healthy growth, and that definitely narrowed the field—to just 17 companies.
Then, I chose companies that had a “buy” or better analyst ranking. That winnowed the field even further—to just eight undervalued stocks.
Lastly, I put each of those eight stocks into my Technical Analysis program, which measures moving averages, relative strength, hi/low limits, etc. In essence, while these companies look strong fundamentally, that doesn’t necessarily mean that they are at a good entry point. My technical analysis weeds out those that aren’t quite ready to buy. The result: Just two undervalued stocks that look ripe for buying at this level. And interestingly, they are both in the Communications sector.
2 Very Undervalued Stocks
The first undervalued stock is Gray Television, Inc. (GTN).
Gray Television owns and operates television stations and digital assets in the United States. The company also broadcasts secondary digital channels affiliated with ABC, CBS, and FOX, as well as channels affiliated with various other networks and program services, including CW Plus Network, MY Network, the MeTV Network, Justice, Circle, This TV Network, Antenna TV, Telemundo, Cozi, Heroes and Icons, and MOVIES! Network, and local news/weather channels in various markets.
In addition, it is also involved in the video program production, marketing, and digital businesses including Raycom Sports, Tupelo-Raycom, and RTM Studios, and production of PowerNation programs and content. As of February 21, 2020, it owned and operated television stations in 93 television markets. Gray Television was founded in 1897 and is headquartered in Atlanta, Georgia.
This election year has been very, very good to Gray. The company recently announced that its local television stations and digital platforms have now run more than $400 million in political advertisements since January 1, 2020. And the company just launched its first NextGen TV (ATSC 3.0) station in a low power station in Tallahassee, Florida, using the new transmission standard, which simulcasts four HD program streams and one standard definition stream with a very robust signal.
The company is trading at a price of 16.76 and a P/E ratio of 7.67. Its current target price is 23.13, and it carries a 1.6 analyst rank. Gray beat analysts’ EPS estimates by $0.25 last quarter, and it is expected to grow at a 5-year annual growth rate of 36.9%.
The second undervalued stock is Nexstar Media Group, Inc. (NXST).
Nexstar Media operates as a television broadcasting and digital media company in the United States. The company focuses on the acquisition, development, and operation of television stations and interactive community websites in small and medium-sized markets. It offers free over-the-air programming to television viewing audiences. The company provides sales, programming, and other services through various local service agreements to 36 power television stations owned by independent third parties, and owned, operated, programmed, or provided sales and other services to 197 television stations in 115 markets in 39 states plus Washington, D.C.
It also offers a digital publishing and content management platform, digital video advertising platform, social media advertising platform, and other digital media solutions to media publishers and advertisers, and owns WGN America, a national general entertainment cable network. The company affiliates with ABC, NBC, FOX, CBS, The CW, MNTV and other broadcast television networks. Nexstar Media Group, Inc. was founded in 1996 and is headquartered in Irving, Texas.
Nexstar Media had been in a carriage dispute with Dish Network, which had taken 164 Nexstar stations and the cable network WGN America off the air for more than three weeks. But that dispute was just resolved and Nexstar just signed a multi-year distribution agreement with DISH Network. The agreement includes adding Nexstar’s wholly-owned cable network, WGN America, to DISH Network’s programming line-up. WGN America will also launch on DISH’s streaming service, Sling TV, in early 2021.
Additionally, Nexstar announced that it has also reached its first-ever multi-year comprehensive agreement with Hulu to be carried by the streaming service beginning Jan. 19, 2021.
The company is trading at a price of 108.10 and a P/E ratio of 9.55. Its current target price is 128.30, and it carries a 1.6 analyst rank. Nexstar beat analysts’ EPS estimates by $0.98 last quarter, and it is expected to grow at a 5-year annual growth rate of 57.4%.
Although many communications stocks have risen to new highs in the last year, these two have not. Yet both the fundamentals and technicals look pretty good.
If either or both of these undervalued stocks appeal to you, I would recommend that you begin your ownership with a minimal number of shares to start, and then add as the momentum improves.
Nancy Zambell, Chief Analyst of the Financial Freedom Federation, has spent more than 30 years helping investors navigate the minefields of the financial industry. Nancy's book, Make Money Buying & Selling Stocks is an introduction for new investors and a reminder for experienced investors on how to profit in the stock market.Learn More
*This post has been updated from an original version, published in 2020.