In this article, we’re going to present 3 options for possibly undervalued stocks to get in 2023 along with some of the reasons why the stock may be undervalued in relation to its peers. The number of listed companies on the United States of America (USA) stock market surpasses 4,000. It’s almost impossible to analyze each one of them or even to dive deep into a single company.
The objective of this analysis is to assess basic metrics and perform a short brief about the company’s potential in the future. There are many undervalued stocks in the market, but all you’ll get here is a perspective about 3 specific stocks that may be undervalued. It’s always up to you to perform your due diligence at all times. It’s my opinion here but is your money there.
What is an undervalued stock?
Technically speaking, a company worth its future cash flow discounted to the present date. Simple as that. The problem is that we don’t know what the future cash flow will be and we also don’t have a clear idea of the exact discount rate to use. There are financial metrics like the CAPM concept that we’ve covered here, but the rates are too volatile, and isn’t easy to make a perfect application of it.
Every publicly traded company is obliged to publish its financial reports, so is easy to look at the numbers. In addition to this, these companies also provide guidelines for the upcoming months about their results. So that’s what you have when you deal with stocks: the present cash flow and what the company’s administration told you about the future. Now you have to add your cost of capital and boom… you should get a fair price. Right? Wrong. Easier said than done.
The company’s administration may (just may) be too optimistic about its results. It’s their company after all, right? A good example of this can be Meta and Zuckerberg’s optimism about the revenue growth that would be generated by their Metaverse. The market trusted him and the stocks got incredibly high. If you don’t know what happened yet, take a look here.
In this article, we’re going to judge the numbers, not the company administration’s optimism. If the company is growing, has low or controllable debt, undervalued financial metrics, and a good growth perspective, then we can consider it to be “possibly” undervalued. Why “possibly”? Because a true stock analysis must be done in depth. It takes months of research, which isn’t our goal here.
Stock #1 – ENGIY (Engie SA)
We’ve talked about this company here along with 10 more options, so I’ll just repeat some important things that I’ve said before.
“Engie is a French multinational enterprise that invests in renewable energies (wind, solar, geothermal, biogas, biomethane, biomass, green hydrogen, hydropower), energy solutions, thermal energy, and infrastructures. The company “takes on the challenge of the energy transition through its three businesses: electricity, natural gas and energy services”.
The company is focusing on Renewables worldwide and targets to reach 50GW by 2025. Its income statement shows some important results in Figure 1 below. The total revenue was at the $65 – $70 billion USD level before COVID came (2020), but managed to get back on track in 2021.
The operating and net margins are on the rise since 2017. This means that even though COVID struck its revenue in 2020, the company is efficiently managing its costs and expenses over time.
Figure 2 shows a decrescent but positive cash flow. The net debt (total debt – cash) is sustainable and the stock is being traded at only 3.51 P/CF. The median P/CF for the Utilities sector is about 11x. Given its fast expansion and highly profitable portfolio with controllable debt, ENGIY can be an undervalued stock to get your eyes into.
Stock #2 – IBDRY (Iberdrola SA)
Another company from the Utilities sector. Iberdrola is a global energy leader also focusing on renewables. The company aims to exceed 60MW of energy capacity by 2025.
Following the same analysis as done before for ENGIY, here is what Figure 1 shows:
Different from Engie, Iberdrola has managed to increase its total revenue by 20% per year. The margins are also following and increasing over time. On the other hand, the stock price has gone down from $60 in January 2021 to $46 right now.
The price going down while the fundamentals go up can be an explosive combination in the long run if well used today. Let’s take a look at Figure 4 to find out about the other metrics:
This looks beautiful: a steadily growing cash flow, controllable net debt, and a stock price that represents the same P/CF level as in February 2020. Note that this company trades at a much higher P/CF than Engie (maybe because of its cash flow resilience), but is still lower than the sector median of 11x.
Considering its growth perspectives along with solid past results, IBDRY definitely can be a nice pick. Dive deep into it.
Stock #3 – SMCI (Super Micro Computer Inc)
Just like ENGIY, the SMCI stock was also part of our choice here. Just quoting the last article: “The company is a global technology leader committed to delivering first-to-market innovation for Enterprise, Cloud, AI, and 5G Telco/Edge IT Infrastructure”.
COVID has done a mess with the worldwide supply chain among several sectors and semiconductors were one of them. The cryptocurrency boom led the GPU mining activity to push Video Graphics cards to the highest prices as ever seen before. After the Ethereum merge, the miners started to dump their cards and the prices started to go back to lower levels.
All of these movements impacted the SMCI financial results that decided to (as mentioned in our last article) “build an inventory of strategic components like memory, SSDs, GPUs, and CPUs.”. Let’s see the income statement’s results:
Not much to say here. Despite the COVID crisis, the company managed to increase everything: total revenue, operating margin, and also net margin. Let’s see the other metrics in Figure 6.
Note that the cryptocurrency boom may have contributed to the cash flow increase from $84B (2018) to $262M (2019). The negative cash flow of -442M represents the company’s strategy to build an inventory. If this strategy will be successful or not, only time will tell.
It makes no sense to look at P/CF if the CF is negative, so P/E (Price to earnings) can be a better metric in this case. The stock is being traded at its lowest level since 2017. Even though the EPS (earns per share) is going up (not shown in charts) from $1.55 (2017) to $2.46 (2021), the price isn’t following. This is why P/E is going down. The sector (Information Technology) median for this metric is about 18x.
Super Micro is a leading supplier for sectors that are on a great expansion: 5G, OEM, Metaverse, PCs, Servers, Microprocessors, and many others. The company is very well positioned with a robust financial condition and strong capability to meet the growing demand needs. It may be a great pick for the long run.
Conclusion
Investing shouldn’t be as difficult as some people say it is. Is hard to dive deep into a company, but there are many analysts doing this already. After all, is their job.
If you are a small investor, you don’t need to have the same expertise and spend months of research on a particular company. You can do that, but it is practically unviable in most cases.
The small investor must be financially prepared to perform their own due diligence. To understand the basics of an income statement, balance sheet, and cash flow is the first and most important step.
After all, investing is a matter of understanding how healthy a company is, how much it can deliver, and how much you are willing to pay for it today. In addition to this, you’ll need patience. A lot of it. If done well, you can achieve a very nice retirement.
Disclaimer
The stock analysis presented on Echo Chamber site is meant to be used for educational purposes and doesn’t represent any kind of financial advice such as buying, selling, or holding shares of any particular stock. Past performance is no guarantee of future results. Investments in variable income can result in the loss of wealth.
The objective of this analysis is to didactically present just a few metrics that can be used to analyze an asset. A full analysis must go further and consider many other financial statements like the income statement, balance sheet, and complete cash flow.
In addition to that, knowing the company, the sector, the economy, and the administration’s guidelines about the company’s future along with basic knowledge of corporate finance are required in order to perform a full stock valuation.
It’s strongly advisable that any investor conduct their own research on any company prior to investing in it. Any suggestion from third parties should be carefully analyzed and used as input, a part of the information needed in the investment decision-making process.
The choice of using the TradingView platform it’s personal without any commercial purpose. I consider this platform one of the best available in the market. The free version offers enough resources for a good analysis, but the paid plans can also offer much more value depending on the investor’s objectives and expertise to use the information available.