The 3 Most Undervalued Stocks to Buy Now: August 2023

Stocks to buy

The market is always presenting opportunities for investors. While the magnitude of the opportunity can only be assessed in hindsight, sometimes bargains are too obvious to pass up. Let’s take a look at some undervalued stocks in the bargain bin.

Typically, market commentators focus on the recent great performers and ignore vast swathes of the stock market. Popular names are on business new channels 24/7 leaving out other potential winners. Running a simple screen can discover bargains outside the market limelight.

Using Finviz, I ran a simple screen to unearth undervalued stocks to buy in August. First, all candidates had to be members of the S&P 500 index. It’s one of the highest-quality market indices due to its profitability criteria. Before inclusion, a company must report a profit in the four most recent quarters.

Secondly, these stocks had to have a low forward price-to-earnings below 5. Finally, these stocks had to have positive earnings growth over the next five years. Surprisingly only these three stocks passed the screen.

General Motors (GM)

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General Motors‘ (NYSE:GM) underperformance has puzzled many investors. The stock is still hovering around the post-bankruptcy IPO price of $33. In short, for 13 years, GM stock has gone nowhere. This underscores the fundamental stagnation and myriad of challenges General Motors has faced.

But you don’t buy a stock for where it has been. Instead, you purchase it based on its prospects and earnings growth. Under the leadership of CEO Mary Barra, it has set the ambitious goal of 1 million units of electric vehicle (EV) capacity in North America by the end of 2025. To support this goal, the company has made significant investments. For instance, it recently entered into an agreement with LG Chem for 950,000 tons of Cathode Active Material (CAM).

Production of its Chevrolet Silverado EV is already underway. And it expects to begin production of other EV models such as the Chevrolet Blazer, Chevrolet Equinox, Chevrolet Silverado EV RST First Edition, BrightDrop Zevo 400 and Cadillac CELESTIQ later this year.

Over the past month, GM and other automakers have endured a selloff. The threats of industrial action by the United Auto Workers (UAW) have led investors to fear the worst. A strike could disrupt production and dent General Motors’ earnings this year.

However, for the long term, GM is appropriately positioned for growth. Its line of EVs will fuel growth over the next decade. Management’s 2023 guidance calls for $7.15 to $8.15 adjusted diluted EPS. Considering the outlook, General Motors is one of the most undervalued stocks trading at a forward P/E of 5 and a price-to-free cash flow of 6.

Lastly, their autonomous driving division Cruise is a call option on the stock. It is scaling rapidly and entering more cities with over 3 million driverless miles.

United Airlines (UAL)

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Consumers craving travel experiences have been a boon for U.S. airlines. Over the past year, domestic travel has been robust. Furthermore, sky-high demand has given U.S. airlines tremendous price power in airfares.

But as recent JetBlue (NASDAQ:JBLU) and Alaska Air (NYSE:ALK) earnings showed, the strength in pricing is beginning to fade. Both airlines reported a decline in airfares in the U.S. The decrease in ticket prices has led to a selloff in the industry group. Since its peak in July, U.S. Global Jets ETF (NYSEARCA:JETS) has declined by more than 12%.

At these prices, United Airlines (NASDAQ:UAL) is one of the most undervalued stocks in the airline industry. Despite the lower fares, bookings are strong. According to Bank of America’s recent data, airline spending is accelerating. System net sales increased +9.8% year-on-year for the last week of July.

Remember, United Airlines is a significant carrier on Transatlantic routes whose traffic levels are yet to recover. As Americans start visiting Europe and inbound tourism rebounds, United Airlines is due for increased demand.

It’s not surprising that in the second quarter FY2023 results, it reported a 27% YOY increase in capacity internationally. Additionally, it’s capitalizing on international travel by expanding its Pacific routes with new flights to Hong Kong, Taipei, Manila and Tokyo.

In the quarterly report, management raised FY2023 EPS guidance to between $11 and $12. This leaves UAL stock trading at a dirt-cheap forward P/E under 5. The current valuation is too low for a company expected to grow earnings in 2023. For bargain hunters, United Airlines is one of the top undervalued stocks to buy in August.

Lincoln National (LNC)

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Lincoln National (NYSE:LNC) is down 1% year-to-date due to balance sheet problems and profitability issues. However, with the stock trading at rock-bottom valuations, there is reason for optimism.

Debt securities on the insurer’s balance sheet have been an investor concern. The $9.6 billion loss in available-for-sale securities in the first quarter didn’t inspire any confidence. The loss led to a significant reduction in book value.

However, management is turning around the situation and addressing these balance sheet problems. The recent $28 billion reinsurance agreement with Fortitude Reinsurance is a step in the right direction.

The deal will reduce Lincoln’s balance sheet by ceding 28B of in-force statutory reserves. As a result, it will improve its capital position and lead to a higher risk-based capital ratio. Besides reducing balance sheet risk, it will increase free cash flow by over $100 million annually.

In the second quarter, three of their four divisions made significant improvements. Annuities, Retirement and Group Protection generated free cash flow. Specifically, Group Protection stood out, reporting an operating income of $109 million compared to $49 million in the prior year quarter.

In the earnings call, management reiterated that their investment risk was manageable despite the rising rates. Furthermore, the insurance company continues to rebuild capital. As of this writing, the stock trades below the second-quarter book value per share of $28.49. It’s one of the undervalued stocks in the financial sector. Lincoln Financial is a strong insurance franchise with deep relationships and will weather the current challenges.

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.

Charles Munyi has extensive writing experience in various industries, including personal finance, insurance, technology, wealth management and stock investing. He has written for a wide variety of financial websites including Benzinga, The Balance and Investopedia.