My task today is to find seven of the most undervalued long-term stocks to buy now. We need to determine two things before stock selection takes place. First, it’s important to define what is meant by long-term. Secondly, we need to classify what makes a stock undervalued.
Every person’s opinion on this subject is different. That’s what makes investing so exciting. For me, long term is three years, at a minimum, and probably more like five to 10. As for undervalued, I generally select stocks with a high return on invested capital
As you consider the undervalued long-term stocks below, keep in mind Warren Buffett’s oft-quoted saying, “Price is what you pay. Value is what you get.”
Undervalued Long-Term Stocks: Williams-Sonoma (WSM)
Williams-Sonoma (NYSE:WSM) is my favorite stock on this list. In June 2016, I called the specialty retailer of home furniture and other household products the best stock in retail. Since then, WSM is up 135%, 87 percentage points better than the First Trust Consumer Discretionary AlphaDEX Fund (NYSEARCA:FXD), an equal-weighted consumer discretionary ETF.
CEO Laura Albert was recently named to Forbes’ 50 over 50 list in the Lifestyles category. Forbes noted that Alber is “the longest-standing female CEO for a company of its size with $8.25 billion in sales.”
Retailers are facing myriad headwinds. For evidence, just look at Target’s (NYSE:TGT) latest earnings debacle. But Williams-Sonoma caters to a different, more affluent crowd, with the average shopper having a six-figure household income. Therefore, investors may find the retailer to be more resilient amid an economic downturn.
WSM stock is down more than 28% year to date to trade around $122, around the same price it did at the beginning of 2021. Any opportunity to buy WSM under $110 should be taken.
According to Morningstar, Williams-Sonoma’s ROIC is 44%, while its earnings yield is 13.1%.
While Moderna (NASDAQ:MRNA) has lost 28.5% of its value in 2022, the stock is up 876% over the past five years compared with 50% for the S&P 500. The stock’s identity and fortunes continue to be tied to its Covid-19 vaccine.
In early November, shares popped after Moderna announced it received approval from Health Canada for its bivalent Covid-19 booster for BA.4 and BA.5 subvariants. The same thing happened in mid-October when the company said the FDA authorized its Covid-19 booster for children aged 6 to 17 in the U.S.
Management expects to generate $18 billion to $19 billion in revenue from the Covid vaccine this year. While down from its previous estimate of $21 billion, news of a recent partnership with Merck (NYSE:MRK) to jointly develop and sell a cancer vaccine should allay fears that Moderna is a one-trick pony.
The plan is to combine Moderna’s messenger RNA vaccine technology with Keytruda, Merck’s very successful cancer drug to treat patients with high-risk melanoma. Interestingly, the agreement with Merck was signed in 2016, long before Moderna had a commercial product available. But Merck just paid Moderna $250 million to get the project underway, and the companies plan to split the costs and profits down the middle.
This development is something for Moderna’s shareholders to cheer and a good reason to consider adding MRNA to your long-term portfolio.
According to Morningstar, Moderna’s ROIC is 78%, while its earnings yield is 15.3%.
Undervalued Long-Term Stocks: Buckle (BKE)
I wrote about Nebraska-based specialty retailer Buckle (NYSE:BKE) in July 2019 as a retailer that was down but not out. I felt at the time that even though its same-store sales had fallen for four straight years, the fact that it was still making money was a bit of a modern miracle.
Fast-forward to Buckle’s annual report for fiscal 2022, which ended Jan. 29. Buckle had sales of $468 per square foot, higher than in fiscal 2015 when its stock was trading near $50. It ended fiscal 2022 with no debt and $286 million in cash. The company has generated nearly $220 million in free cash flow over the past 12 months.
On Nov. 3, Buckle released its October sales data. Same-store sales increased by 1.4% over October 2021 despite the tough retail environment.
In June 2020, it suspended its dividend due to Covid-19 store closures. It reinstated it later that year. So far, in 2022, it’s paid out 70 cents in dividends per share (35 cents per quarter). In December 2021, it paid out a special dividend of $6 per share.
The business remains steady and very profitable. According to Morningstar, Buckle’s ROIC is 35.4%, while its earnings yield is 12.4%.
Pinterest (NYSE:PINS) reported Q3 results at the end of October that were better than analyst expectations. On the top line, revenue of $684.6 million was up 8.2% year over year and nearly $20 million higher than the consensus estimate. Non-GAAP net income of 11 cents per share beat the Zacks consensus estimate by 5 cents. Notably, the company saw its first quarterly increase in monthly active users since Q3 2021, ending the quarter with 445 million MAUs.
E-commerce and payments specialist Bill Ready, whose last gig was running Google’s shopping and payments efforts, took the helm on June 29, replacing former CEO Ben Silbermann. Ready has already managed to gain the support of Elliott Investment Management, Pinterest’s largest shareholder.
On the company’s Q3 conference call, Pinterest CFO Todd Morgenfeld said he expects the company’s recent investments to pay off: “We firmly believe the investments we made this year will enable us to continue innovating to enhance both the user experience and our advertising platform. As we exit 2022, we’re focused on maximizing the return from these investments. We are still committed to meaningful margin expansion in 2023.”
The company’s margins should accelerate next year despite inflation headwinds. With 445 million monthly active users and a much better shopping experience for those users, investors should expect shopping ad revenue to grow over the next 18-24 months.
According to Morningstar, Pinterest’s ROIC is 2.3%, while its earnings yield is 0.4%. While those numbers are not impressive, the stock’s 5.9 price-to-sales ratio is near the lowest level in the stock’s history.
Undervalued Long-Term Stocks: Starbucks (SBUX)
Starbucks (NASDAQ:SBUX) is one of the undervalued long-term stocks for the ages. The coffee purveyor always seems to bounce back from tough times and currently appears to be in the beginning stages of another resurgence.
Before Starbucks can return to the good times shareholders have become accustomed to, though, the company will have to figure out how to make its employees happy. Leaders of the Starbucks Workers United union say the company is not bargaining in good faith on labor contracts. As a result, more than 100 stores held a one-day strike on Nov. 17 to protest the company’s slow pace of negotiations.
While labor unrest is an issue that needs to be resolved post haste, the business is doing very well. Starbucks reported healthy fiscal Q4 results on Nov. 3. They included adjusted earnings per share of 81 cents, 9 cents higher than the analyst estimate, and revenue of $8.4 billion, $90 million better than the consensus. U.S. same-store sales rose 11% during the quarter versus an expected 7.8%.
“We saw accelerating demand for Starbucks coffee around the world in Q4 and throughout the year,” said interim CEO Howard Schultz. “And our Q4 results demonstrate early evidence of the success of our U.S. Reinvention investments.”
Never count Starbucks out. More often than not, it will make you look foolish. According to Morningstar, Starbucks’ ROIC is 18.1%, while its earnings yield is 54.8%.
Netflix (NASDAQ:NFLX) is in the beginning stages of a massive transformation that includes developing a lower-cost, ad-supported version of its streaming platform.
BofA Securities analyst Jessica Reif Ehrlich delivered a note to clients on Nov. 15 that suggested the streaming giant’s ad-supported version could attract younger users who tend to have less disposable income, namely the “highly attractive and younger demos who have cut the cord or were never part of the linear pay-TV universe.” Ehrlich believes that the additional pricing tier will provide significant financial upside. I agree with this assessment.
Since the beginning of the month, Netflix has launched its ad-supported version in 12 countries, including the U.S., Canada and Mexico. I believe that some new and current subscribers who try out the ad-supported version will eventually upgrade or return to the higher-priced plan once they realize the entire Netflix library isn’t available and that they can only use one device for $6.99 per month.
On Oct. 18, Netflix reported strong Q3 results. After reporting big subscriber losses in the first two quarters of the year, the company said it added 4.5 million subscribers. While operating income declined due to the strong U.S. dollar, the company earned $3.10 a share on $7.9 billion in revenue, both better than expected.
Undervalued Long-Term Stocks: Century Communities (CCS)
At the time, I wrote: “Since 2016, the company’s revenue and earnings have increased by 259% and 464%, respectively. Barring a collapse in housing demand, investors can expect both of these numbers to keep rising.” Of course, as we know, housing demand did collapse in 2022, and CCS stock is down 43% on a year-to-date basis.
On Oct. 26, Century reported record Q3 results. Net income was up 27% year over year to $144.5 million on a 19% jump in revenue to $1.1 billion. Both numbers were better than analysts were expecting. However, CCS stock sold off following the report as management warned of a demand slowdown in the current quarter.
Housing market weakness could continue to weigh on CCS in the near term. Yet, the company has successfully navigated housing market downturns in the past, reporting a profit for 19 consecutive years.
According to Morningstar, Century’s ROIC is 18.9%, while its earnings yield is 39.2%. Shares haven’t been this cheap since 2019 on a price-to-sales basis.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.