When it comes to investing in stocks, investors have their preferences. Some, for instance, prefer dividend-paying stocks. Others may focus their stock-picking on sectors they feel they know well. Still other investors may favor large-company stocks over small-company stocks.
Regardless of their preferences, however, most investors would agree on one thing: They like undervalued stocks.
After all, who wants to pay more for a stock than you need to?
Today, we’re looking at stocks that aren’t just undervalued by a little bit. No, these stocks are ultracheap based on Morningstar’s metrics. Specifically, these ultracheap stocks are trading for less than half of what our analysts think they’re worth.
Such deeply undervalued stocks come with a few warnings, though. For one, ultracheap stocks are usually significantly undervalued for a reason and therefore carry sizable risks; in fact, the five ultracheap stocks on our list carry High or Very High Morningstar Uncertainty Ratings. Cheap stocks also often require patience, as the yawning gap between the stock’s current price and Morningstar’s fair value estimate can take years to narrow—if it narrows. But for risk-takers with patience, these cheap stocks may hold appeal.
5 Ultracheap Stocks to Buy
The stocks of these companies with economic moats were trading more than 50% below Morningstar’s fair value estimates as of Nov. 3, 2023.
Here are some key Morningstar metrics about these cheap stocks, as well as commentary after earnings from the analysts who cover these companies. All data is as of Nov. 3, 2023.
PayPal
- Price/Fair Value: 0.42
- Morningstar Uncertainty Rating: High
- Morningstar Economic Moat Rating: Narrow
- Morningstar Style Box: Large Core
- Industry: Credit Services
The only large company on our list of ultracheap stocks to buy, PayPal built an enviable network of merchants and consumers in the early days of e-commerce. But a worsening macroeconomic climate is pressuring top-line growth, leading management to focus on margin improvement. PayPal’s undervalued stock trades 58% below our fair value estimate of US$135 per share.
We think PayPal’s third-quarter results were mixed, and management’s guidance suggests that the fourth quarter will be a little softer than expected. However, we are encouraged by comments from new CEO Alex Chriss and see his thoughts on PayPal’s long-term prospects as being roughly in line with our own. We will maintain our US$135 per share fair value estimate for the narrow-moat company and view the shares as deeply undervalued.
Net revenue grew 9% year over year on a constant-currency basis. Volume for PayPal branded grew 6% in constant currencies, and unbranded (which is primarily Braintree) saw 32% volume growth. In both instances, the growth rate accelerated modestly from the second quarter. PayPal branded growth could be seen as disappointing, though, given that management previously communicated that this area had seen growth accelerate significantly in July. This appeared to have moderated, and management expects the trend to continue into the fourth quarter. Active accounts continued to decline modestly on a sequential basis, but year-over-year growth in transactions per active account held strong at 13%.
PayPal continues to see pressure on transaction margins, although the rate of sequential decline slowed in the third quarter. A 12% year-over-year decline in nontransaction costs created a partial offset, but adjusted operating margins declined modestly to 22.2%, compared with 22.4% last year. Management lowered its full-year adjusted margin improvement guidance to 75 basis points from 100 basis points, pointing to some additional margin pressure as the company sees a bigger volume shift to the lower-margin Braintree business. We think some margin pressure is understandable in the current situation but would like to see PayPal maintain operating margins as it moves into 2024.
Brett Horn, Morningstar senior analyst
Albemarle
- Price/Fair Value: 0.43
- Morningstar Uncertainty Rating: High
- Morningstar Economic Moat Rating: Narrow
- Morningstar Style Box: Mid-Value
- Industry: Specialty Chemicals
The stock of the world’s largest lithium producer makes our list of ultracheap stocks to buy, as it trades 57% below our US$300 fair value estimate. As the adoption of electric vehicles increases, we’re forecasting high-double-digit annual growth in global lithium demand. However, declining lithium prices have hurt Albermarle’s results this year.
Albemarle’s third-quarter results and management’s updated guidance reflected the decline in lithium spot prices that will weigh on near-term profits. In response, management said it will review the company’s lithium growth investments with the goal of preserving financial flexibility. We think the likely outcome will be Albemarle slowing its lithium capacity investment, which is in line with how the company has historically operated during a lithium price downturn.
We updated our model to assume lower volumes and reduced capital expenditures throughout our 10-year forecast period. We also updated our model for lower profits in the nonlithium battery segments and lower near-term lithium prices. As a result, we reduced our fair value estimate to US$300 per share from US$350. Of the $50 reduction, $30 comes from our outlook for lower volumes, $15 is from our reduced forecasts for specialties and profits in the Ketjen segment, and $5 is due to lower near-term lithium prices. Our narrow moat rating is unchanged.
We view Albemarle shares as materially undervalued, trading in 5-star territory and at roughly 40% of our updated fair value estimate. We think the market is concerned that lithium spot prices will fall further to the end of 2023 and into 2024 because of oversupply concerns. We disagree and expect prices will rise in 2024 as battery producer inventory destocking runs its course. In recent days, multiple top-seven lithium producers have announced supply delays or production cuts or signaled a review of growth plans in response to lower lithium prices. Further, recent announcements from marginal-cost producers in China indicate supply is beginning to shut down in response to lower prices. We think this will result in the market balancing over the next couple of quarters. As demand grows, we see lithium returning to structural undersupply in 2024, leading to higher prices.
Seth Goldstein, Morningstar strategist
Etsy
- Price/Fair Value: 0.45
- Morningstar Uncertainty Rating: Very High
- Morningstar Economic Moat Rating: Wide
- Morningstar Style Box: Mid-Growth
- Industry: Internet Retail
The only wide-moat company on our list of ultracheap stocks to buy, Etsy stock is 55% undervalued relative to our fair value estimate of US$145 per share. Etsy has made its name in e-commerce by connecting buyers and sellers through its online market to exchange vintage and craft goods; its network grows more powerful as new buyers and sellers come on board.
We believe wide-moat Etsy offers compelling value for investors despite a brutal 2023, which has seen its share price fall by a striking 45%. While we’re sympathetic to the market’s concerns regarding the craft marketplace’s growth prospects and potential operating leverage, we view its reaction as myopic. We continue to foresee a route to double-digit gross merchandise sales, or GMS, growth and the margin leverage that it begets as soon as 2025. With the firm’s $3.04 billion in GMS, $636 million in revenue, and $0.64 in diluted earnings per share all topping our quarterly estimates, we expect little change to our $145 intrinsic valuation despite worse-than-expected fourth-quarter guidance (low-single-digit GMS decline and a 2-percentage-point sequential fall in adjusted EBITDA margin at the midpoint).
Etsy is strikingly efficient for a company its size, generating $1.3 million in revenue per headcount at its core marketplace and averaging $39, $49, and $14 in average incremental GMS per dollar of research and development, general and administrative, and marketing spending, respectively, between 2018 and 2022. It continues to defend category market share in its largest online verticals despite a clear customer migration toward discounters and nondiscretionary items and has seen a clear, marked uptick in penetration with male and international buyers (up 9% and 7%, respectively) that should lay the groundwork for durable growth inflection once macroeconomic pressures ease. We continue to foresee a route to nearly $250 in GMS per buyer by 2032 and expect balanced growth between customer acquisition and spending per buyer as the firm expands its global presence and reach among the male population.
On balance, we’re encouraged by Etsy’s prospects and encourage investors to consider building a position in a marketplace that trades just 30% ahead of November 2019 prices despite boasting 3 times the revenue and 6 times the operating profit that it did in that period.
Sean Dunlop, Morningstar analyst
Match Group
- Price/Fair Value: 0.45
- Morningstar Uncertainty Rating: High
- Morningstar Economic Moat Rating: Narrow
- Morningstar Style Box: Mid-Growth
- Industry: Internet Content and Information
The second of two growth stocks on our list of ultracheap stocks to buy (with the first growth stock on the list being Etsy), Match is the leader in the online dating space. We assign Match a narrow economic moat rating due to the network effects of its more than 45 brands of online dating sites and apps. Match stock is undervalued, trading 55% below our fair value estimate of US$65.
Match Group’s price strategy is generating returns in terms of revenue growth, which, combined with continuing cost control, created operating leverage and produced an impressive third quarter. Third-quarter results displayed continuing strength of the Tinder app and its brand and further adoption and increased monetization of the Hinge app. Fourth-quarter guidance was disappointing, albeit mainly because of currency headwinds and recently heightened geopolitical tensions. Match’s initial 2024 revenue growth outlook was in line with our assumption. After reducing our longer-term revenue projections and margin assumptions—as we expect the narrow-moat firm to market its apps more aggressively next year and beyond—we are lowering our fair value estimate to $65 per share from $70.
Match also reached an agreement with Google regarding the antitrust case involving Google Play’s app distribution and fee, which we think could contribute around 20 basis points to Match’s revenue growth next year. Users of Match’s apps will now have the choice to use either Match’s own billing system, which has a lower revenue share with Google, or stick with Google Play as they did in the past.
Total revenue of $881.6 million increased 9% year over year, driven mainly by higher prices, which helped push higher direct revenue from Tinder (up 11%) and Hinge (up 44%) and more than offset declines in Match Group Asia (down 5%) and evergreen and emerging brands (down 3%). Advertising revenue growth accelerated to 8% from the second quarter’s 4%.
While Match’s user count declined 5% to 15.7 million, mainly because of the higher prices, user monetization increased 15% to $18.39 of revenue generated per user. Adjusted operating margin expanded 3 percentage points from last year to 38% owing to lower streaming costs, which increased gross margin, and a decline in general and administrative costs, since legal fees declined as the firm and Google progressed toward an agreement during the quarter.
Ali Mogharabi, Morningstar senior analyst
Sabre
- Price/Fair Value: 0.46
- Morningstar Uncertainty Rating: Very High
- Morningstar Economic Moat Rating: Narrow
- Morningstar Style Box: Small Core
- Industry: Travel Services
Sabre stock looks cheap, trading 54% below our fair value estimate of US$9 per share. Sabre is a top player in the travel industry and has built a narrow economic moat; we expect Sabre to remain a key distribution channel valued by airline suppliers, travel agents, and travelers for the next decade. However, ongoing economic and credit uncertainty may keep sentiment around the stock negative in the near term.
Like last quarter, Sabre shares rose around 20% from oversold conditions, as it once again surpassed sales and EBITDA guidance and as free cash flow inflected positive, which we have noted could serve as a catalyst. Despite management execution, shares are still down about 35% this year, which we think is driven by investors’ distaste for debt-leverage companies amid a still uncertain economic environment and higher costs of capital. We think this concern is misguided, especially given Sabre’s improved liquidity profile. We don’t plan to materially change our $9 fair value estimate and see shares of this narrow-moat company as meaningfully undervalued, although action is likely to remain volatile.
Revenue and EBITDA came in at $740 million and $110 million, respectively, compared with guidance of $725 million and $100 million. Nearly 100% of incremental sales growth flowed to EBITDA, which was up nicely from $73 million last quarter and $34 million a year ago as labor and technology efficiencies took hold. Free cash flow was $39 million versus the $20 million guidance and represented the highest result in four years.
Sabre maintained 2023 sales guidance at $2.9 billion to $3.0 billion, which is above the initial guidance in February of $2.8 billion to $3.0 billion. The firm once again increased 2023 EBITDA targets to $345 million from $340 million, well above the initial guidance in February of $300 million to $320 million. We plan to keep our $2.9 billion and $346 million respective forecasts for the full year largely unchanged.
While Sabre’s debt/EBITDA should finish around 14 times this year, it has improved its liquidity profile. At year-end 2022, it had $1.8 billion due in February 2024 at Libor plus 2% and another $2 billion maturing in 2025 at a fixed rate of 7.5%. Now it has just $435 million in debt due in 2025, $130 million in 2026, and $2.4 billion in 2027 at a blended rate of 8.6%.
Dan Wasiolek, Morningstar senior analyst
