In equity markets, there is often a fine line between overvalued stocks and those that deserve their high valuations. Likewise, it is also difficult to identify which seemingly low-valued stocks are hidden treasures versus which deserve their low valuations. In both cases, the investor's challenge is to identify stocks with true long-term potential that significantly exceeds their present market valuation.
With this in mind, I set out using the GuruFocus All-in-One Screener, a Premium feature, to see if I could identify some hidden gems. Here are two of the stocks I found during my search.
Citigroup
Citigroup (C, Financial) is an intriguing contender for those seeking value stocks, in my opinion. Over the past year, the company has faced a challenging period. However, I believe Citigroup could be classified as an undervalued stock with the potential to enhance a value-focused portfolio as its price-earnings ratio is just 7.52.
The latest earnings report for June 2023 does paint a somewhat gloomy picture. Revenue slipped slightly by 1.05%, reaching $17.68 billion, and net income suffered a more significant blow, falling by 35.89% to $2.92 billion. The diluted earnings per share (EPS) experienced a dip of 39.27%, and the net profit margin contracted by over a third. These figures might appear discouraging at first glance, but it is crucial to recognize that they could lay the foundation for a compelling turnaround story. Due to adverse market conditions and disappointing investment banking revenue, Citigroup's stock price plummeted by nearly 30% in 2022, resulting in a diminished one-year return. However, the banking industry (and Citigroup) could easily recover once the stock market returns to bull territory.
Citigroup's colossal assets under management of $2.4 trillion provides a certain level of resilience against turbulent times. Furthermore, the June 2023 EPS only missed expectations by 3.32% amidst these challenges, indicating underlying strength and stability. The company's disaster during the finanical crisis was regrettable, but I believe the new regulations put in place afterwards should protect Citigroup's investors.
Usuing the GuruFocus discounted cash flow calculator, I get a 41.28% margin of safety estimate when plugging in an expected 10-year EPS growth rate of 5% and a discount rate of 10%.
Citigroup's price-earnings over the past 10 years has ranged from a minimum of 4.73 to a median of 10.28 and a maximum of 24.66. As of now, the price-earnings ratio is below the historical median, which leaves room for upside potential based on a return to past valuation levels.
General Motors
General Motors (GM, Financial) is a hot name among value stocks as it is stepping up its game in electriv vehicles. Investors are eyeing the success of pure-play EV company Tesla (TSLA, Financial) for an idea of how GM's valuation multiples could grow as it shifts its vehicle mix.
The automobile powerhouse revealed its first-quarter results for 2023 not long ago, showcasing impressive revenue growth and elevating its full-year forecast. GM reported a considerable year-over-year revenue boost of 11.13%, pushing the total to $39.99 billion. Even though net income slightly declined, there was an impressive 25.19% surge in GM's diluted earnings per share, a clear signal of the company's proficiency in effectively managing its EV transition even among a difficult supply chain environment.
Furthermore, GM is not merely concentrating on the present. Its forward-thinking ventures highlight its potential to unlock long-term value, in my opinion. Its recent purchase of the battery software startup Algolion is projected to strengthen its position in the burgeoning EV battery sector. A recent deal with Tesla to use its supercharging network highlights expansion of key charging infrastructure that is key to EV sales growth.
From my viewpoint, GM's robust financial performance, together with its progressive strategies, earmark it as a potential bargain. Given its steady growth path, I believe this automotive titan is a strong contender among value stocks
Analyzing GM's price-earnings ratio over the past decade reveals an interesting trend. It's highly volatile, which is due to the cyclical nature of the business. The lowest value recorded was 3.6, while the peak reached 62.21. The median over this period stood at 7.85, suggesting a tendency towards a lower price-earnings ratio. The current price-earnings ratio for GM is 5.98 as of this writing. Since this is a cyclical stock, the low valuation could mean the stock is at the peak of a cyclical upswing, as Peter Lynch discussed extensively in his books. However, I do not believe this is the case due to one key reason - the EV revolution. As EVs grow in popularity, EV makers should see continued increases in sales at the expense of companies that sell only gas-powered cars, helping GM to grab market share.
