[Editor's note: This story was previously published in February 2019. It has since been updated and republished.]
Overall, the stock market has made a huge improvement at the start of 2019 from where it ended in 2018; it has been a complete turnaround from last year's drop, when stocks entered bear-market territory.
But even though many stocks have completely erased all of their losses and made it back into the green, not all stocks have done so well. What this means is that while there are still plenty of duds out there, there are also a few undervalued stocks to buy; it has just become a little trickier to find them amid all the flashy comeback stories.
To find the best stocks to invest in now, disciplined investors might start with their own watch list, which should contain "wish list" stocks that are usually too expensive or have been put there to be on the backburner for later. Among such stocks, companies that got left out of the rally are the most compelling. Even better, the best undervalued stocks to invest in are those that dropped by double-digit percentages during the current rally.
Why is that?
Markets that are pricing in the negative news typically lower the risk for investors. Such companies may work to resolve the business problem at hand, which improves its prospects and leads to a higher share price in the long run. As long as the bad news reported is a temporary setback and the business model is not broken, the risks behind buying a stock on a dip are lower.
With all of that in mind, here are five undervalued stocks to invest in that aren't as scary as they seem.
Investors expected more from Sony's (NYSE: SNE ) earnings report when the company posted results on Feb. 1. Revenue of 2.4 trillion yen in the third-quarter missed estimates for 2.67 trillion yen.
Adding salt to the wound, many SNE investors are fretting over Sony's weaker sales outlook, with smartphone and camera sales lagging. On the flipside, the PlayStation 4 business still could rebound. Even though the console cycle is many years old, customers will continue to buy new game titles. And in the smartphone space, a refresh in the second half of this year may give customers a reason to buy a new Sony device again.
Sony is clearly not a broken company, so the stock's drop from $50 on Feb. 1 to $46 appears overdone. Trading less than 10% above its 52-week low and about 25% below its 52-week high, Sony stock clearly deserves its spot among the best undervalued stocks to consider now.
Celestica (NYSE: CLS ) reported fourth-quarter revenue of $1.73 billion, up 10% from last year. Net earnings rose $46.5 million to $60.1 million, bringing in earnings of 44 cents a share. However, investors were unimpressed with the weak sequential revenue in its Communications, ATS and CCS segments, which were either flat or down. Still, revenue from all segments grew in the double digits from last year.
Celestica ended the year with $422 million in cash and cash equivalents. Net cash fell $335 million for the year. And the balance sheet is not as strong as it could be, with non-IFRS debt leverage at 2.6X.
The company supplies equipment in ATS - aerospace and defense, industrial, smart energy, health tech and capital equipment. Its enterprise unit consists of servers and storage. Why then, should investors believe the company will offset the weakness it faces in the eroding semiconductor market?
Celestica is cutting costs in operations to align the business with the lower revenue. It will continue to build its capital equipment business. Management believes the fundamentals in this space will only improve in the long run. As next-generation adoption in display continues, its OLED business, for example, will add to its bottom line.
Celestica stock is an undervalued play worth considering.
Generic drug supplier Allergan (NYSE: AGN ) fell over 10% in late January and early February for two reasons. First, its fourth-quarter earnings report did not please investors. Operating income sank 11.8% year-over-year, and revenue fell 5.8% YoY to $4.08 billion.
On Feb. 1, the Food and Drug Administration approved Evolus' (NASDAQ: EOLS ) Jeuveau. This product competes directly with Allergan's Botox. Pricing could come in at 20% below that of Botox, putting pressure on Allergan's bottom line.
Be warned: it's likely that AGN stock will continue to sell off as investors price in the worst case scenario for Botox. Even though management already expects some pricing erosion, it is confident that the sales volume will taper off slowly. But this is good news for investors in search of a bargain, as the more the stock falls, the more discount value investors get on AGN stock.
As Allergan launches new products this year, it will offset the negative impact of generic drug competition for Botox, making it an undervalued stock to watch.
Innoviva (NASDAQ: INVA ) is another stock in the drug space whose large drop starting in late January appears greatly overdone. The market all but erased the powerful uptrend in the stock that began after INVA sold off in November 2018 and bottomed at $14.
The FDA approved Mylan's (NASDAQ: MYL ) generic version of Advair, which GlaxoSmithKline (NYSE: GSK ) produces. This forced investors to worry about Innoviva's prospects because the company is paid royalties from Glaxo. In the third quarter, Innova received $65.1 million in royalty revenues from Glaxo; $51.7 million came from global net sales of Revar/Breo Ellipta.
On Feb. 6, Innoviva reported revenue of $79.86 million, up 14.9% from last year. With the stock trading at a forward price-to-earnings ratio of 7.7, the price-earnings-to-growth ratio is 0.39. As such, this general pessimism has created an appealing entry point to INVA stock.
Investors appear to be overreacting to the generic competition. If demand for Innoviva's formulation does not drop and prices hold , royalty revenues should not fall as much as markets think, which makes INVA an ideal undervalued stock to invest in now.
Telecom stocks are out of favor. For example, just look at AT&T (NYSE: T ), which is down over 20% from its 52-week high. But Vodafone (NASDAQ: VOD ) is down the most among the major names in the sector, falling over 40% from its 52-week high.
Third-quarter results for VOD, which ended on Dec. 31, missed analysts' consensus sales forecasts. Vodafone continued to under-perform in Europe, due to rising competition. Although the company highlighted improving customer trends in Italy, Germany, and reduced churn in Spain, this was not enough to prevent revenue falling 5.6% in Europe and 6.8% overall.
With all that bad news, it is little wonder why the stock has been marching lower. But VOD still has ways to mend the wound. The company could trim the dividend and re-allocate its resources toward advertising and capital expenditures. That would put it in a better position to compete with its European counterparts. And the stock would respond if those efforts lead to better revenue numbers.
Vodafone shares pay a dividend yield in excess of 6%. If Vodafone grows its U.K. business as it signs on users to its 5G services and cuts costs as it signs on more customers, VOD stock will finally move higher.
As of this writing, Chris Lau owned shares of Innoviva.
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