While investors chase overhyped momentum plays, smart money looks elsewhere for overlooked bargains. This article cuts through the noise, identifying undervalued, under-the-radar stocks to buy and hold using a discounted cash flow and earnings approach.
The centerpiece is pinpointing high-quality businesses trading at a substantial discount to their intrinsic worth based on quantitative metrics like Peter Lynch’s PEG ratio and “fair value” formula. Combining these with qualitative analysis allows methodically unearthing rare gems that short-sighted markets have mispriced.
In contrast to speculative story stocks, this unconventional strategy embraces the battle-tested value philosophies of Buffett and Lynch. Value investors build real fortunes over decades by buying wonderful companies at reasonable prices when others are fearful. The out-of-favor names highlighted may not excite the momentum crowd. But for patient investors, these deeply discounted, under-the-radar stocks to buy and hold represent a chance to invest in quality at a bargain — with substantial rerating potential as their worth is eventually recognized. For those with the conviction to buck the herd, this is where they can create lasting wealth.
Ulta Beauty (ULTA)
Ulta Beauty (NASDAQ:ULTA) is the largest beauty retailer in the U.S., offering cosmetics, fragrance, skincare, haircare and salon services all under one roof. Despite its dominant position and strong financials, Ulta stands as one of the better under-the-radar stocks to buy and hold.
The company’s discounted cash flow valuation reveals a fair value of $663.13 per share, over 21.5% above its current stock price of $520.37. Similarly, a discounted earnings analysis suggests an even higher fair value of $818.13, a massive 36.4% upside to current levels. These valuations highlight just how mispriced Ulta’s shares are relative to its earnings power and cash flow generation abilities.
Additionally, the market seems to be overlooking Ulta’s stellar fiscal 2023 results. Net sales rose 9.8% to $11.2 billion as comparable sales jumped 5.7%. More impressively, operating income increased 2.4% to $1.7 billion, with operating margins holding strong at 15%. Ulta is highly profitable, ending the year with $1.3 billion in net income.
With a resilient business model, Ulta has multiple avenues for future growth. Domestically, it plans to open 60 to 65 new stores and remodel/relocate 40 to 45 locations in fiscal 2024. The company ended 2023 with 1,385 stores across 50 states, still leaving plenty of room for further U.S. expansion. But the bigger growth opportunity lies internationally. For example, Ulta has announced plans to enter Mexico in 2025 through a joint venture, providing a large new market to leverage its differentiated value proposition.
With a proven strategy, financial strength, and ample growth runway, Ulta Beauty stands out as one of the more exceptional under-the-radar stocks to buy and hold.
UnitedHealth Group (UNH)
As I’ve highlighted before, UnitedHealth Group (NYSE:UNH) stands out as a blue-chip healthcare stock with remarkable potential that remains one of the highly undervalued under-the-radar stocks to buy and hold. This diversified giant operates through UnitedHealthcare, which provides health benefits to over 52 million people globally, and Optum, its data-driven health services arm serving payers, providers and life sciences firms.
UNH’s combination of rock-solid fundamentals and robust growth prospects makes it highly compelling. Revenues surged 15% to $371.6 billion in 2023, fueled by double-digit growth across both main segments. Operating earnings expanded 14% to $32.4 billion, and operating cash flow hit $29.1 billion, surpassing net income.
However, the company is significantly undervalued based on discounted cash flow and earnings models. UnitedHealth’s fair value stands at $739 per share, representing an attractive 33.7% upside from current levels of around $490. The undervaluation becomes even more pronounced when analyzing discounted earnings projections.
UnitedHealth’s unique acquisition strategy focused on smaller, complementary deals rather than risky mega-mergers has driven growth significantly. This approach has increased the company’s inflation-adjusted annual revenues by over $100 billion since 2012. It has also avoided regulatory hurdles that have stopped some competitors’ blockbuster deals.
Looking ahead, rapidly expanding value-based care services at Optum, major international markets like the planned 2025 Mexico launch and continued strong membership gains provide multiple catalysts for UnitedHealth’s next phase of growth. Therefore, this company stands out as one of the better under-the-radar stocks to buy and hold.
STMicroelectronics (STM)
Despite being a leading global semiconductor company, STMicroelectronics (NYSE:STM) remains one of the most undervalued, under-the-radar stocks to buy and hold. The company’s shares trade at a bargain valuation, with a price-to-free-cash-flow ratio of just 28.4x based on trailing twelve-month free cash flow. This represents a substantial discount to STM’s 10-year median P/FCF of 34.2x. The stock’s free cash flow yield of 3.7% also ranks in the top quartile of the semiconductor industry.
Renowned investor Peter Lynch’s metric signals STM is significantly underpriced at current levels. The company’s PEG ratio of 0.33 is well below Lynch’s threshold of 1.0 to be considered undervalued. STM’s fair value based on this methodology works out to $114.63. This represents a premium of over 160% to today’s price of around $43.
Despite this depressed valuation, STMicroelectronics posted strong 2023 results. Revenues grew 7.2% to $17.3 billion as automotive and industrial segments comprised 71% of sales. Gross margins expanded 40 basis points (bps) to 45.9% while operating cash flow increased 11% to $4.0 billion. The company also grew its net cash position to over $3.1 billion.
Looking ahead, secular growth drivers in electrification, automation, industrial systems and energy solutions should continue driving robust demand across STM’s key markets. The company is investing aggressively to scale manufacturing capacity, particularly in advanced 300 millimeter (mm) and silicon carbide facilities. It is also pioneering AI capabilities through its STM32 platform.
With its shares deeply discounted yet backed by strong financials and bright growth prospects, STMicroelectronics stands out as one of the most attractively priced under-the-radar stocks to buy and hold.
On the date of publication, Andrea van Schalkwyk did not hold (either directly or indirectly) any positions in the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
