AMR - The 7 Most Undervalued Long-Term Stocks to Buy Now

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My task today is to find seven of the most undervalued long-term stocks to buy now.

We need to determine two things before stock selection takes place. First, it’s important to define what is meant by long-term. Secondly, we need to classify what makes a stock undervalued.

Every person’s opinion on this subject is different. That’s what makes investing so exciting.

For me, long-term is three years, at a minimum, and probably more like five to 10. As for undervalued, I will select stocks with a high return on invested capital (ROIC ) and high earnings yields. For those who follow Joel Greenblatt, I’m using his Magic Formula to keep it simple. 

Each of the stocks on my list will have a market capitalization of at least $500 million. Further, I’ll make sure that I’m selecting stocks from at least five sectors.

It could be the only seven stocks you’ll need to deliver market-beating returns.

Undervalued Long-Term Stocks: Williams-Sonoma (WSM)

Williams-Sonoma (NYSE:WSM) is easily my favorite stock on this list. In June 2016, I called the specialty retailer of home furniture and other household products the best stock in retail. In the six years and four months, WSM is up 136%, 99 percentage points higher than the First Trust Consumer Discretionary AlphaDEX Fund (NYSEARCA:FXD), an equal-weighted consumer discretionary ETF.

According to Morningstar, Williams-Sonoma’s ROIC is 44.0%, while its earnings yield is 13.17%. Both are excellent.

CEO Laura Albert was recently named to Forbes’ 50 over 50 list. Alber was named in the Lifestyles category. Forbes noted that Alber is “the longest-standing female CEO for a company of its size with $8.25 billion in sales.” She joins other well-known women such as Kris Jenner, actresses Angela Bassett and Sandra Bullock, and entrepreneur Emilia Fazzalari, the co-founder of Cinco Spirits Group.

Down more than 28% year-to-date, it’s trading at the same price it did at the end of 2020.

It’s a long-term buy.

Alpha Metallurgical Resources (AMR)

I recently put Alpha Metallurgical Resources (NYSE:AMR) on a list of seven under-the-radar stocks with 100% upside potential. 

Owning AMR makes sense because it’s unlikely that its metallurgical coal used to make steel will go out of fashion anytime soon. It produces 21% of the country’s metallurgical coals. To say it has a big chunk of the market is an understatement.

The company’s ROIC is 132.0%, while its earnings yield is 44.16%. That makes Williams-Sonoma look like an underperformer.

In September, Investor’s Business Daily reported that coal demand was surging due to a natural gas supply squeeze.

“If you were able to survive the last decade or so, you’re doing really well right now,” Investor’s Business Daily reported Harrison Fell’s comments. Fell is a professor of energy economics at North Carolina State University.

Most of those coal mines have all of their coal already contracted out, and what they can sell on the spot they’re selling at a massive premium right now.

AMR stock is up 146% YTD.

Undervalued Long-Term Stocks: Dynavax Technologies (DVAX)

Representing the healthcare sector, Dynavax Technologies (NASDAQ:DVAX) stock hasn’t done much for shareholders over the past five years. It’s down nearly 46% with almost half the losses coming in 2022.

Dynavax develops and commercializes vaccines to protect people against infectious diseases. It currently has two in commercial production — Heplisav-B and the CpG 1018 adjuvant — with several others, including tdap (tetanus, diphtheria, and Pertussis) and shingles vaccines that are currently in Phase 1 clinical trial.

Heplisav-B is a vaccine to treat Hepatitis-B. It is the first that requires just two doses in a single month to complete the treatment. It generated $32.7 million in revenue in the second quarter, up 139% from $13.7 million in Q2 2021.

CpG 1018 is an adjuvant used with Heplisav-B to help create a more robust immune response from people taking the vaccine. Its sales in Q2 2022 were $222.6 million, 471% higher than a year earlier. It expects full-year 2022 revenue of $575 million at the midpoint of its guidance.

The risk to investors is that CpG 1018 is used in conjunction with various Covid-19 vaccines. There is the possibility that sales could slow in the future.

HP (HPQ)

In the first two quarters of 2022, Berkshire Hathaway (NYSE:BRK-A, NYSE:BRK-B) bought 121 million shares of HP (NYSE:HPQ). Warren Buffett’s holding company now owns 12% of the maker of laptops, desktops, and printers. 

While the $3.1 billion stake is significant for most people, it’s a drop in the bucket for Berkshire, representing just 0.9% of the company’s $325 billion equity portfolio.

What does Warren Buffet see in the legacy Hewlett-Packard business that others don’t?

Buffet sees a company that operates a decent-sized business whose products will continue to be in demand for years. Maybe not to the extent that they were a decade ago, but when you pay a $1 annual dividend, Berkshire will gladly accept the company’s $121 million in dividend payments.

In the meantime, the company has the cash flow to ride out a challenging consumer market, which has slowed more than expected on inflation concerns and other economic headwinds.

Once those issues subside, HPQ stock will be back in the $30s.

Undervalued Long-Term Stocks: Mesabi Trust (MSB)

Mesabi Trust (NYSE:MSB) is the tiniest of the seven stocks on my list, with a market cap of $222 million. 

Mesabi is a royalty trust that generates income from the Peter Mitchell mine in Babbitt, Minnesota. It got the name Mesabi because the mine is located at the eastern end of the Mesabi Iron Range.

A subsidiary of Cleveland-Cliffs operates the mine. It takes taconite rock, crushes it, separates the iron particles, and turns that into pellets, which steel producers then use for their blast furnaces.

As the same suggests, Mesabi receives royalties from the Cleveland-Cliffs subsidiary based on the price of the pellets produced at the mine. Mesabi’s revenues are passed through to its unitholders.

Investors should be warned that this is no slam dunk.

The Trust is currently in arbitration with both Cleveland-Cliffs and its Northshore Mining Company subsidiary for underpayment of royalties between 2020 and 2022. The trust alleges that the companies failed to use the highest price arm’s length iron sale to determine the royalties owed.

As a result of the impasse — partly due to Cleveland-Cliffs idling its Northshore facility — zero pellets were produced in the three months that ended July 31, compared to 1.16 million a year earlier.

Through the first two quarters of 2022, Mesabi has declared $1.88 per unit in distributions. It chose not to declare a distribution for October, so there’s no incentive to buy its units until the situation is resolved through arbitration.

Once this happens, the unit price will jump immediately. It’s a timing thing.

Moderna (MRNA)

Moderna (NASDAQ:MRNA) has lost Nearly 60% of its value over the past year. That’s the bad news. The good news is that its stock is up 621% over the past five years, compared to 45% for the S&P 500. 

I haven’t paid much attention to Moderna in 2022.

On Oct. 12, Moderna’s stock jumped more than 8% on the news it was partnering with Merck (NYSE:MRK) to jointly develop and sell a cancer vaccine. The plan is to combine Moderna’s messenger RNA vaccine with Keytruda, Merck’s very successful cancer drug. The cancer vaccine is intended to treat patients with high-risk melanoma.

So, it hasn’t just sat back and counted all its Covid-19 money.

In 2022, it expects to generate $21 billion in revenue from its Covid vaccine. Successfully combining it with Keytruda could be enough to satisfy investors that it’s not a one-trick pony.

Interestingly, the agreement with Merck was signed in 2016, long before Moderna had a commercial product available. Merk paid Moderna $250 million to get the project underway. The companies will split costs and profits down the middle.

Something to cheer for if you’re a long-time Moderna shareholder.

Undervalued Long-Term Stocks: Buckle (BKE)

One of the last times I wrote about Buckle (NYSE:BKE), the Nebraska-based specialty retailer, was in July 2019. It was one of seven retail stocks that were down halfway through the year but not out. 

I felt at the time that even though its same-store sales had fallen for four straight years, the fact that it was still making money was a bit of a modern miracle.

Fast-forward to Buckle’s 2021 annual report.

Buckle had sales of $468 per square foot, higher than in 2015 when its stock was trading near $50. It still had no debt, $286 million in cash, and a free cash flow (FCF) of $292 million. That’s a FCF yield of 16.5%, 480 basis points higher than in 2015.

The business remains steady and very profitable.

In June 2020, it suspended its dividend due to Covid-19. It reinstated it later that year. So far, in 2022, it’s paid out $1.05 in dividends per share ($0.35 per quarter). In December 2021, it paid out a special dividend of $5.65, a dividend yield of 16.0%.

I like it a lot.

On the date of publication, Will Ashworth 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 .

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