For savvy investors, hunting down undervalued stocks can mean unearthing overlooked stocks with big potential. In any market cycle, undervalued stocks are there, waiting to be scooped up at bargain prices, but they tend to get even less attention in a bull market, as we saw in 2023.
If 2024 is a more challenging environment, undervalued and value stocks in general may perform better.
Three currently unappreciated stocks are WK Kellogg Co. (NYSE: KLG), Newmont Corp. (NYSE: NEM), and WEC Energy Group Inc. (NYSE: WEC). These stocks hail from very different industries, but the common denominator is market prices that don’t reflect the stocks’ true worth, based on growth potential.
Value investing is about more than just snagging a good deal; it's about recognizing potential that others might be missing.
For a ready-made, investable list of value stocks, take a look at the Vanguard Value ETF (NYSEARCA: VTV), which tracks performance of a large-cap index of stocks, screened according to the ratios of book value, earnings and sales to price. That’s a quick mathematical way of determining whether the company’s fundamentals indicate it should be trading higher.
The biggest companies in the Vanguard ETF are Berkshire Hathaway Inc. (NYSE: BRK.B), Exxon Mobil Corp. (NYSE: XOM), UnitedHealth Group Inc. (NYSE: UNH), JPMorgan Chase & Co. (NYSE: JPM) and Johnson & Johnson (NYSE: JNJ).
Kellogg’s: Think of it as a startup
Kellogg may sound like a tired old company, but it’s actually brand new, the result of the former Kellogg company splitting into two. Kellanova (NYSE: K) is the higher-growth company of the two, consisting of snack foods such as Pringle’s and Cheez-Its, as well as other processed foods such as Morningstar Farms, Pop-Tarts and Eggo.
WK Kellogg retains the Kellogg’s identity. It consists of the slower-growth, traditional cereal business, with well-known products such as Froot Loops, Corn Flakes, Apple Jacks, Rice Krispies, Raisin Bran and others.
WK Kellogg analyst forecasts aren’t too rosy, with the consensus estimate being “reduce,” which is not something you see very often.
However, in an interview with Yahoo, Kellogg’s CEO Gary Pilnick said he views the spinoff as a startup, with plans to make a $450 to $500 million investment in the company’s supply chain. He’s also open to growing through mergers and acquisitions.
Newmont: Will gold glitter more in ‘24?
The Newmont chart shows the stock in a long-term downtrend that began in April 2022. Mining stocks as a group fell hard the week ending January 19 as the prices of underlying commodities, including iron ore, fell. Newmont stock was down 8.13%, its third week in a row of declines.
But the road ahead could indeed be paved with gold: Newmont is the world’s largest gold miner by revenue, but it also has operations in copper, silver, zinc and lead.
Analysts expect the price of gold to rise in the next few years. MarketBeat’s Newmont analyst forecasts show a consensus rating of “moderate buy” with a price target of $53.06. That’s an upside of 53.43%, a good indication that the stock is indeed trading at lower valuations than its potential indicates.
The company reports full-year 2023 and fourth-quarter results on February 22, with analysts forecasting a 15% earnings decline for the year, to $1.58 per share.
Rising interest rates hurt gold prices in 2023, but that situation is expected to change this year, with analysts expecting a 48% increase in net income, to $2.33 a share.
Does WEC dividend increase signal growth ahead?
Utilities stocks weren’t electrified in 2023 as growth sectors took center stage. The traditionally defensive sector started the first week of the year with a jolt, but has run out of juice.
WEC Energy, which is tracked in the Utilities Select Sector SPDR Fund (NYSEARCA: XLU), serves 4.7 million customers in Wisconsin, Illinois, Michigan and Minnesota.
The stock has been in a slump, with a decline of 3.88% in the past month, and 9.42% in the past year.
As is common with utilities stocks, WEC pays a healthy dividend. The WEC dividend yield is 3.90%. That’s slightly higher than the overall utilities sector dividend yield.
Wall Street expects single-digit earnings growth in 2023, which the company reports on February 1, and this year.
This company is trading at low valuations relative to earnings potential. In part, that’s due to risks associated with recent unfavorable decisions from Illinois regulators.
WEC analyst forecasts show a consensus rating of “hold,” despite a recent Bank of America downgrade to “underperform.” Bank of Analysts said the company is “no longer reliably exceeding financial guidance.”
On the plus side, WEC increased its dividend by 7% on January 18, to 83.50 cents per share; Bank of America analysts said the increase may signal WEC’s intention to focus on growth.
