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Despite only having seven US equities in our family portfolio, my wife and I closely monitor the S&P 500 Index and its prominent constituents.
In 2023, the US market is dominated by the noteworthy ‘Magnificent Seven’ mega-tech equities. However, given their soaring valuations, I am seeking value elsewhere within US companies.
Two US Equities That Appear Undervalued
During my pursuit for undervalued US equities, two well-known names unexpectedly caught my attention. I currently possess one share, while the other I greatly desire. Here are the two segments that have fallen behind:
1. The target is facing difficulties
Back in July 2022, my wife and I acquired shares in a retail powerhouse, Target Corporation (NYSE:TGT), for $156.44 each.
Regrettably, Target’s share price has experienced a considerable decline since then. As I write this, it stands at $110.45, resulting in a total estimated valuation of $50.7 billion. Thus far, we have suffered approximately a 30% loss on our initial investment. Ouch.
Over the course of one year, this US equity has witnessed a depreciation of 27.9%. Nonetheless, over a five-year period, it has demonstrated growth of 30.5% (excluding dividends in both cases).
If I possessed surplus funds, I would gladly acquire additional Target stock today. This is mainly due to the fact that it trades at an attractive price-to-earnings (P/E) ratio of 15.1, resulting in an annual earnings yield of 6.6%. This valuation is significantly lower than the wider US stock market.
Moreover, Target shares offer a comparatively high annual dividend yield of 4%. This dividend coverage is approximately 1.7 times the earnings, providing a margin of safety.
Presently, Target is confronting several considerable challenges, which include decelerating sales growth, declining earnings, and a surge in thefts plaguing their stores. Despite these issues, I remain optimistic about a sustained improvement in their prospects, and therefore, we will steadfastly retain our Target shares.
2. Bank of America’s downturn
Among the largest US banks, Bank of America Corporation (NYSE:BAC) holds the second position. However, while the US economy has exceeded expectations in 2023, their stocks are experiencing a decline.
As of my writing, BOA stock is trading at $27.27, valuing the bank at $216.8 billion. This represents only a 7.1% increase above the 52-week high of $25.46, set on October 6. Over the span of one year, the shares have fallen by 11.1%, and over five years, their value has diminished by 4.2%. Quite concerning.
At present, in comparison to sector ratings and the broader US market, this equity appears very attractively priced to me. It trades at a modest multiple of 7.9 times earnings, resulting in an annual earnings yield of 12.7%.
Furthermore, the company boasts one of the highest dividend yields among colossal US corporations. What’s even more enticing is that this cash yield of 3.5% per year covers the earnings by 3.6 times. Sounds impressive, doesn’t it?
One pressing issue for US lenders is the considerable slowdown in loan growth, which has persisted for an extended period of time. Additionally, investors are troubled by substantial paper losses stemming from the extensive ‘hold to maturity’ bond portfolios held by banks. Moreover, in the event of an economic downturn in the US, loan losses and bad loans will inevitably escalate.
Despite these concerns, if I possessed some disposable funds, I would unquestionably acquire both of these US equities today!
The post I Think 2 US Stocks Have Fallen Too Much appeared first on The Motley Fool UK.
Cliff D’Arcy possesses an economic interest in shares of Bank of America Corp. and Target Corp. Bank of America is an advertising partner of Motley Fool company The Ascent. The Motley Fool UK does not have any position in any stocks mentioned. The views expressed regarding the mentioned companies in this article are those of the author and may differ from the official recommendations provided in our membership services, such as Share Advisor, Hidden Winners, and Pro. Here at The Motley Fool, we advocate considering a wide range of insights as it can enhance our abilities as investors.
Motley Fool UK 2023