Value investing is a strategy that focuses on finding undervalued stocks that are quiet and dependable, like a quartz clock. These stocks can remain resilient in turbulent markets and pay ample dividends to outperform growth stocks over the long term. This strategy is best suited for investors who are mildly risk averse, have a long timeline, and prioritize good fundamentals over stock market trends. To identify undervalued stocks, investors must form their own conclusions about a company’s potential, despite what the market has collectively decided.
The best undervalued stocks are chosen based on a quantitative, metric-based review. A stock screener is used to filter stocks based on characteristics such as a PEG Ratio below 1, Price to free cash flow (P/FCF) below 10, Debt to equity ratio (D/E) below 1, Trailing 12-month (TTM) EPS growth above 10%, Dividend yield above 2%, Upside percentage above 10%, and an average analyst rating of buy to strong buy. After applying these filters, a list of U.S. exchange-traded stocks is narrowed down to five stocks that meet the criteria.
The five top undervalued stocks to buy in May 2024 based on the methodology outlined include MetLife, Royalty Pharma, California Resources, Federated Hermes, and Select Water Solutions. These stocks have low PEG ratios, manageable debt, EPS growth, above-average dividends, and upside according to analysts. MetLife is a market leader in several geographies, while Royalty Pharma provides funding to drug developers and patent holders. California Resources explores and produces oil, Federated Hermes is a leading asset manager, and Select Water Solutions provides water management and chemical services.
These stocks offer investors the opportunity to benefit from potential growth and income diversity. MetLife recently reported strong earnings growth in certain regions, while Royalty Pharma has access to a diverse portfolio of potential investments. California Resources has demonstrated its commitment to returning value to shareholders, and Federated Hermes has seen growth in its money market products. Select Water Solutions has a business model that generated record-high revenue and net income in 2023.
Overall, investing in undervalued stocks can add stability and resilience to a portfolio. These stocks deliver modest growth and cash returns like clockwork, making them a reliable choice for investors looking for long-term success. By focusing on companies that are undervalued based on their potential rather than market trends, investors can build a strong, diversified portfolio that stands the test of time.
