5 Deeply Undervalued Stocks Based On Growth

Includes: AAPL, CSCO, F, HPQ, PFE
by: Investment Underground

Using discounted cash flow analysis, I have been able to identify five stocks that are undervalued. This analysis includes a variety of well-known brands, including a car company, three technology companies and a pharmaceutical company, but they all have one thing in common - they are grossly undervalued based on how much they are growing. Let's see why these stocks are worth the investment, and make great candidates for further research:

Ford Motor Co. (NYSE:F) is the only one of the "Big Three" automakers in the US that did not require a federal bailout in 2009; as such, it is the only US automaker where employees can contractually call a strike. Ford has shed a significant uncertainty regarding labor with the United Auto Workers (UAW), having finally signed a four-year agreement. Ford stock should benefit now that it has been able to project its costs with more precision going forward.

Ford, which I identified as a value play, has a PEG of 0.8, indicating it is likely undervalued on a growth basis, but so does General Motors Company (NYSE:GM), its closest competitor, at 0.44. However, Ford is in a better position to manage costs given that it has fewer employees, and a higher operating margin at 6% to GM's 4%. Add to this the fact that auto sales continue to climb Ford's refocus on design has continued to benefit it through sales and acclaim. Ford's Fusion has won an EyesOn design award. You'll be able to pull a decent profit but if you are going to earn more than inflation and transaction fees. Moreover, major analysts agree, Ford is expected to double in value within the next 12 months. On a DCF basis, I value shares at $18 apiece.

Cisco Systems, Inc. (NASDAQ:CSCO) has been taking an aggressive stance with its competitors, and has maintained a website that reviews competitor Juniper Networks (NYSE:JNPR). However, many commentators see this as a prelude to Cisco acquiring Jupiter. If this prediction is correct, Cisco's value will rise over the intermediate-term because of its increased market share.

Further, Cisco is pioneering a series of new products that could make its value increase. Cisco is currently trading around $19 per share; even if there is no Jupiter deal or its recent innovations fail to cause an increase in value, Cisco is still predicted to rise to $21 within the next 12 months. From an analytical standpoint, Cisco has a PEG of 1.3, so it could be fairly valued on a projected growth basis, but its forward price-to-earnings ratio is around 10 with an estimated annual growth rate over 12%. This stock is cheap on a DCF basis, with shares worth $22 apiece.

Pfizer, Inc. (NYSE:PFE) is expected to grow at a rate of approximately 3-4% per year, far less than competitors like Johnson & Johnson (NYSE:JNJ) and Abbott Laboratories (NYSE:ABT), which are expected to grow at 6% and 9%, respectively. However, expectations may be low and inflating its PEG of 3 and its price-to-earnings ratio of 15. These are on par with, if not better than, its competitors - for instance, JNJ's PEG is 2 but its price-to-earnings ratio is around 16. Moreover, Pfizer has a forward ratio around 9 and a higher EBITDA than JNJ at $25 billion versus $20 billion, and a higher revenue figure at $67 billion versus $63 billion, in spite of having a lower market cap $165 billion versus $175 billion). For another reason to take a look at Pfizer, it has reduced uncertainty now that its is spinning off its nutritional unit. Pfizer shares are worth $25 apiece on a DCF basis.

Apple, Inc. (NASDAQ:AAPL) is currently trading around $420 per share, but it is still undervalued. It has a PEG of 0.65, indicating it is undervalued, combined with a price-to-earnings ratio of 15. Given analyst expectations, Apple is expected to increase by 25% within the next 12 months, to $508. The best part about this business is that the company still has significant growth ahead of it, particularly in Asian markets. Recently, the company botched one of its store openings in China.

So, why buy now if you haven't already? Apple's price-to-earnings ratio is low for a high-growth company; if analysts continue to up their estimates, the price target will continue to swell. Thus, if you buy now, you can take full advantage of estimate expansion. I think Apple shares have little downside from here. On a DCF basis, shares are worth around $500 apiece using a 10% cost of equity, with significant growth potential five to ten years out due to emerging market growth.

Hewlett-Packard Co. (NYSE:HPQ) may be near its nadir- it is currently trading around $26, down from its 52-week high of $49.39. The discount may be discouraging, but there are three reasons you should consider researching HPQ: it has a 1.8% dividend yield; its share price estimate is at $31 for the next 12 months; and, with its share prices taking such a sharp decline, HPQ could be an acquisition candidate. HPQ competitor Oracle Corporation (NYSE:ORCL) is a likely buyer, given that its WebOS could be a key platform for Oracle products. If HPQ can continue to meet its earnings estimates, ORCL could earn a return on its investment around 18% in the event of a buy out, in addition to significant cost synergies. HPQ's shares are inexpensive, and valued at $38 apiece on a DCF basis.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.