Though my wife and I own only seven US stocks in our family portfolio, I keep a close eye on the S&P 500 index and its larger members.
In 2023, the US market has been driven up by the ‘Magnificent Seven’ group of mega-tech stocks. But with these shares trading on sky-high ratings, I’m looking elsewhere for value among American companies.
Two US stocks that look too low
In my search for undervalued US stocks, two well-known names leapt out at me. One share I already own, while the other I would very much like to. Here are these two market laggards:
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1. Target’s in trouble
My wife and I bought shares in retailing giant Target Corp (NYSE: TGT) in July 2022 for $156.44 apiece
Unfortunately, the Target share price has been in freefall pretty much ever since. As I write, it stands at $110.45, valuing the group at $50.7bn. To date, we’ve lost almost 30% of our initial investment. Ouch.
Over one year, this US stock has lost 27.9% of its value. However, over five years, it’s gained 30.5% (both figures exclude dividends).
I’d gladly buy more Target stock today, had I the cash to spare. That’s because it trades on just 15.1 times earnings, for an earnings yield of 6.6% a year. That’s a lot cheaper than the wider US stock market.
In addition, Target shares offer a comparatively high dividend yield of 4% a year. This is covered almost 1.7 times by earnings for some margin of safety.
Currently, Target faces some strong headwinds, including slowing sales growth, falling earnings and a crime wave driven by mass shoplifting. Despite these problems, I’m optimistic for a sustained recovery in its fortunes, so we’ll hold on tight to our Target shares.
2. Bank of America slumps
In the list of biggest US banks, Bank of America Corp (NYSE: BAC) comes in at #2. But while the US economy has outperformed expectations in 2023, this stock has been sliding.
As I write, BoA stock trades at $27.27, valuing the bank at $216.8bn. This is just 7.1% above its 52-week high of $25.46, set on 6 October. Over one year, the shares are down 11.1%, plus they’ve lost 4.2% of their value over five years. Yuck.
Right now, the stock looks very cheap to me, both in terms of its sector rating and versus the wider US market. It trades on a lowly multiple of 7.9 times earnings, for an earnings yield of 12.7%.
What’s more, the company’s dividend yield is one of the highest among giant US corporations. Even better, this cash yield of 3.5% a year is covered a healthy 3.6 times by earnings. So what’s not to like?
One big problem for US lenders is that credit growth has slowed considerably of late. Also, huge paper losses on banks’ enormous ‘hold to maturity’ bond portfolios are making investors nervous. And loan losses and bad debts will surely rise if the US economy stumbles.
Despite these concerns, I’d gladly buy both US stocks today — if I had some spare cash, that is!
