As we enter February 2024, the stock market continues to power ahead, led by Big Tech. However, pockets of overvaluation are appearing, especially with the technology sector trading at 27.5 times the next twelve-month earnings. Considering that starting valuations are a key determinant of forward returns, it’s time to rotate into some undervalued stocks in February 2024.
There are several gems that, despite possessing strong fundamentals and promising growth prospects, are trading at significant discounts. Such discrepancies are a golden opportunity to invest in solid companies at a bargain. The lower relative multiples set the stage for substantial long-term gains.
Using this Finviz screen, I selected stocks trading below a forward price-to-earnings and price-to-trailing twelve months free cash flow multiple of 10. Among the plethora of stocks, these three stocks stand out for their potential to outperform in the long run.
Notably, these are established companies with durable businesses. They have faced some execution challenges that have pressured earnings in the near term. That said, they are still robust businesses that will generate significant value for shareholders in the long term.
Bank of America (BAC)
This economic bellwether is a prime example of an undervalued stock flying under the radar. One of the leading banks in the U.S., Bank of America (NYSE:BAC) boasts an irreplaceable franchise. Its diversified operations span retail banking, wealth management and investment banking.
Since numbers don’t lie, let’s scrutinize Bank of America’s valuation. Typically, book value per share is the most reliable metric in valuing banks. Per Q4 2023 results, this metric was $33.34. Thus, BAC stock is priced at book value as of this writing, a clear bargain. For comparison, peer JPMorgan Chase (NYSE:JPM) trades at 1.6x book value.
Given this significant discount, this bank is one of the top undervalued stocks in February 2024. The bank does not deserve the undervaluation, given the quality of its banking franchise. First, it is ranked number one in U.S. retail deposit market share, closing fiscal year 2023 with average deposits of $1.9 trillion.
Furthermore, the bank’s diversification into wealth management and investment banking positions it to capitalize on various market environments and opportunities. At the end of 2023, it ranked third in investment banking, with a growth rate of 7% in Q4 2023.
Wealth and investment management is another growth segment. It continues to see solid organic growth, with 40,000 net new relationships added in 2023. Furthermore, assets under management increased by $52 billion due to existing clients putting money to work and new clients’ money.
Bank of America’s consumer banking franchise is one the best. Add the growing wealth management and investment banking divisions, and you get a high-quality bank. This quality franchise won’t stay undervalued for long.
CVS Health (CVS)
In the current landscape where healthcare and wellness have taken center stage, CVS Health (NYSE:CVS) is a compelling opportunity. With its integrated healthcare model, CVS will benefit from the increasing demand for healthcare services. Currently, the company has three segments: Healthcare benefits, Health services and Pharmacy & consumer wellness.
According to the Centers for Medicare & Medicaid Services projections, national health expenditures will grow 5.4% annually. CVS, the largest drugstore chain in the U.S., will capitalize on an aging baby boomer population. Moreover, the company’s strategic expansion into preventive health services and community-based health hubs seems perfectly timed to benefit from these trends.
Management has done a great job diversifying revenues by adding value-based care capabilities. Last year, in February, it acquired Oak Street Health, a multi-payor primary care provider. Then, in March 2023, it completed the acquisition of Signify Health, a clinician practice that does home evaluations.
These acquisitions have made CVS Health one of the largest healthcare delivery organizations in the U.S. For instance, Signify Health, with over 11,000 licensed clinicians, did over 3 million home visits in 2023, providing essential services like diagnostic tests. Overall, value-based care is having a huge revenue impact, delivering about $6 billion in revenue in 2023.
With medical insurance, the benefits manager, retail pharmacies, and value-based care services like Oak Street, MinuteClinic, and Signify, CVS has become a fully integrated healthcare ecosystem. Despite these strengths, CVS’s stock remains attractively priced at 8 times forward EPS. It is one of the undervalued stocks in February 2024 to consider.
AT&T (T)
AT& T (NYSE:T) rounds out the list of undervalued stocks to consider. It trades at a forward P/E of 8, making it one of the best undervalued stocks in February 2024. Furthermore, it pays a healthy dividend of over 6%.
The increasing demand for high-speed, reliable mobile services buoys AT&T’s steady growth trajectory. Indeed, the firm is seeing strong growth in the mobility segment, adding over 1.7 million customers in 2023. The firm has transitioned from losing to gaining a share in wireless and ended the year with 71.3 postpaid phone subscribers.
Another area of strength has been fiber, where it’s the largest broadband provider in the U.S. The company added over 1.1 million fiber customers in 2023, raising the total to 8.3 million. That was the sixth consecutive year of 1 million-plus growth. As customers seek faster speeds, they are subscribing to higher-value plans, driving growth. As a result, fiber’s average revenue per user increased from $64.82 in Q4 2022 to $ 68.50 in Q4 2023.
Another catalyst for T stock is a reduction in capital expenditure going forward. As AT&T moves past the peak of its investment phase, it will free up more financial resources for debt reduction and shareholder returns. For 2023, capital investments were 23.6 billion. In their 2024 guidance, management forecasted lower outlays between $21 billion to $22 billion.
Due to lower spending, management expects $17 – $18 billion in free cash flow in 2024 compared to $16.8 billion in 2023. That’s more than double the amount required to cover the current 6.15% dividend. AT&T has a lot of financial flexibility and is a bargain at 8 times 2024 adjusted EPS guidance of $2.15 – $2.25.
On the date of publication, Charles Munyi did not hold (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.
