The market’s summertime rally is losing momentum, but there still are undervalued stocks out there if you look.
The rally’s short-term bullishness benefited traders, while investors who sat out of markets missed out. Fortunately, the resumption of the bear market of 2022 will reward investors seeking undervalued stocks.
After markets ignored them, stocks that fell out of favor are at steep discounts. The further they are from fair value, the greater the stock’s margin of safety.
Markets are in no hurry to increase their allocation of stocks, which means these undervalued stocks might take awhile to get started. In fearful times, investors prefer to hold cash and bonds. Still, the stock discount will reward investors who see the potential value in those beat-up companies.
| AMAT | Applied Materials | $101.48 |
| ACLS | Axcelis Technologies | $72.39 |
| DQ | Daqo New Energy | $62.23 |
| FTNT | Fortinet | $50.16 |
| LYB | LyondellBasell Industries | $88.25 |
| TSM | Taiwan Semiconductor | $85.56 |
| TOL | Toll Brothers | $46.22 |
Applied Materials (AMAT)
Applied Materials (NASDAQ:AMAT) earned $1.85 a share in its fiscal third quarter of 2022. Revenue grew by 5.2% year on year to $6.52 billion. For Q4, Applied expects revenue of around $6.65 billion. The revenue is plus or minus $400 million because it includes an expected impact of ongoing supply challenges.
AMAT stock fell immediately after the report even though the semiconductor supplier beat revenue and earnings expectations.
Shortsighted investors are worried about the current quarter slowdown. Savvy investors who listened to the conference call will expect better prospects for 2023.
Chief Financial Officer Brice Hill said that demand in 2023 is still significantly above AMAT’s ability to supply.
Supply constraints limit the company’s growth. Management identified issues that are disrupting the supply chain. As it works directly with its suppliers and secondary suppliers, the company may resolve the disruption.
It could work through its backlog faster than markets expect. The higher revenue would trigger a relief rally. Applied benefits from long-term demand from the automotive and industrial automation sectors.
Axcelis Technologies (ACLS)
Axcelis Technologies (NASDAQ:ACLS) supplies capital equipment for the semiconductor manufacturing industry globally. Founded in 1978, the company posted system bookings and backlog in the second quarter that hit record levels, making it one of the undervalued stocks to buy in the sector.
Axcelis posted revenue of $221.2 million. Operating profit rose from $48.9 million in Q1 to $54.1 million in Q2. For the full year, the firm expects revenue to exceed $875 million. The gross margin will be approximately 42.5%. The company cited record levels of shipments and system bookings for the strong outlook.
On its conference call, CEO Kevin Brewer said that its original equipment manufacturers are seeing an improving supply chain.
The company has plenty of capacity to meet manufacturing demand. In addition, after costs rose, they are starting to fall. Commodity prices are dropping, helping to lift customer satisfaction rates. This is driving demand and booking trends higher.
Axcelis expects demand growth from its automotive and industrial customers. Conversely, in the memory segment, the PC and phone slowdown is slowing. In 2023, it may soften slightly.
Daqo New Energy (DQ)
Daqo New Energy (NYSE:DQ) is headquartered in Chongqing, China. It is a supplier to solar photovoltaic systems, which enjoys strong demand.
While most stocks in China face political and trade war risks, DQ stock is the exception. Its second-quarter results validated that view suggesting that it is one of the undervalued stocks to buy in the solar industry.
In the second quarter, Daqo posted polysilicon average cash cost falling from $9.19/kg in Q1/2022 to $6.51/kg in Q2/2022. The average selling price rose from $32.76/kg to $33.08/kg.
In the next two quarters, CEO Longgen Zhang expects continued polysilicon price strength. The company expects Q3 price strength. In Q4, poly price strength will depend on minimal disruption to the supply channel.
In 2023, Daqo will watch out for new polysilicon supplies flooding the market. New players could enter the industry. Still, the company prepared for the competition: it invested in developing its technology and increased its capacity.
Investors should expect prices of around $250/kg in the first half of 2023. By the second half of 2023, prices could fall to $180 – $200 per kg. Fortunately, demand for polysilicon in the industry should continue.
Fortinet (FTNT)
Fortinet (NASDAQ:FTNT) is a cybersecurity firm. FTNT stock fell by more than 15% after posting quarterly results on Aug. 3. The firm’s revenue grew by 28.6% year over year to $1.03 billion. Bookings rose by 42% year over year to $1.38 billion and billings increased by 36% to $1.3 billion.
Investors did not like Fortinet’s business outlook. In Q3, it expects to earn 26 cents to 28 cents a share on revenue in the range of $1.11 billion to $1.14 billion. Still, this is close to Wall Street analyst expectations. Astute investors should listen to CEO Keith Jensen’s outlook.
On the conference call, the CEO said that the backlog would rise by $72 million sequentially to $350 million. He cited strong demand for the higher backlog. Within the backlog, network equipment accounts for 50%. FortiGates, which is the heart of the Fortinet security fabric, is 40% of the backlog.
Fortinet faces low cancellation rates for its backlog of around 4%. It was previously expecting 5%. Its guidance does not reflect the strength ahead. Instead, management is offering a prudent view for back-orders. It preferred to forecast a steady shipment in the quarter ahead.
Fortinet’s exit from Russia did not hurt its service revenue, which only accounted for 1.5%. That’s what recommends it as one of the top undervalued stocks to buy here.
LyondellBasell Industries (LYB)
CEO Peter Vanacker said that LyondellBasell Industries (NYSE:LYB) expects its new propylene oxide capacity will add meaningfully to its results in 2023.
The firm earned $1.6 billion in net income or $4.98 per share. It generated $1.6 billion in cash from operating activities. Despite the strong results, LYB stock is traded in the $85 – $90 range in the last month.
Executive Vice President of Global Olefins & Polyolefins Kenneth Lane said that volatility in the polypropylene market this year is a result of industry downtime. Maintenance in the U.S. is a requirement for increasing production efficiency and maximizing safety. This is mostly over. Looking ahead, favorable inventory levels will benefit the company.
LyondellBasell expects some softening demand for durable applications. This will hurt polypropylene markets slightly. However, strong demand for packaging will offset those headwinds.
Impatient investors are discounting LYB stock for the softness ahead. Beyond the short-term weakness, China and Europe will emerge to pick up demand.
Taiwan Semiconductor (TSM)
Taiwan Semiconductor (NYSE:TSM) is out of favor because markets worry that China will invade Taiwan. Markets are forgetting that the chip manufacturer posted strong revenue growth and solid gross margins.
In the second quarter, TSM reported revenue growing by 36.6% to $18.16 billion. The gross margin topped 59.1%. In Q3/2022, the company expects revenue in the range of $19.8 billion to $20.6 billion. The gross profit margin is up to 59.5%.
Taiwan Semiconductor’s customers will decrease their inventory levels this year. The inventory correction is necessary to adjust for macroeconomic uncertainties. It will not hurt long-term demand.
TSM leads in the advancements of semiconductors used in specialty technologies. It has a strong high-performance computing portfolio. In addition, it has strategic customer relationships. This keeps its capacity tight, maximizing operating margins.
TSM is investing smartly to prepare for 3-nanometer manufacturing. Its capital expenditures will prepare it for future opportunities. It already planned 2023 expenses. This will position the firm to grow by 15% to 20% on a compounded annual growth rate.
Toll Brothers (TOL)
Toll Brothers (NYSE:TOL) is a home builder. It has around 30% of its customers as first-time buyers.
In the last quarter, the company accumulated $9 billion of inventory. $6 billion of that inventory accounts for that backlog. This mix will generate margins in the high 20% to low 30% range.
TOL stock is trading in the $45 – $50 range. Investors are unwilling to bid the stock high despite its price-to-earnings multiple of below six times. Markets are concerned that rising interest rates will hurt home demand further. Demand could weaken further. Inflation concerns are hurting its European portfolio.
Home affordability will improve as rates hurt home prices. Toll’s affordable luxury portfolio will not perform well. Conversely, the company has less expensive homes in Phoenix and Idaho. In addition, it has lower-priced markets in Myrtle Beach and Greenville. In the months ahead, it will build more homes in those locations to maximize profits.
On the date of publication, Chris Lau 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.