3 Undervalued Stocks Warren Buffett Would Like to Own

The retail investor has an undeniable advantage over Wall Street professionals. The big ones have to show quarterly returns; otherwise no performance fee can be collected. This places a severe limit on the investment horizon on the type of assets they can purchase.

Another limitation concerns sizing. Value investors like Warren Buffett can’t buy companies below a certain market cap, as it would be an insignificant position to fail to move the needle on the entire fund. Aside from their smaller market capitalization, three stocks would meet the investment value criterion today, but large funds cannot act on them.

Names like Abercrombie & Fitch Co. New York Stock Exchange: ANF, Chemical and Mining Society of Chile NYSE: MQand even FMC Co. NYSE:FMC it could give retail investors their own Buffett moment without the need for billions of dollars in purchasing power.

It’s time for a consumer reset

Q1 2024 earnings from financial stocks such as Bank of America Co. NYSE:BAC show a U.S. consumer choked by inflation in credit card delinquency rates and declining FICO scores. However, consumers are shaking off these trends.

With US consumer confidence hitting a 3-year high, it appears that expectations of lower interest rates in the future are causing a bullish psychological effect for the consumer sector. This is where the apparel industry comes into play.

With cotton futures down as much as 22% over the past month, investors may want to examine the apparel sector’s potential new bull run. However, not all actions are created equal; that’s why Abercrombie & Fitch fits.

Compared to the retail sector’s P/E valuation of 23.6x, Abercrombie & Fitch stock offers investors a 25% discount thanks to its current P/E valuation of 17.7x.

More importantly, for those who justify a cheap share price, the company operates at industry-leading gross margin rates above 60%, invisible to competitors like American Eagle Outfitters Inc. NYSE:AEOwhose financial data shows a gross margin of only 38.7%.

These margins allow management to efficiently invest remaining capital, generating rates of return on invested capital (ROIC) of up to 15% annually, significantly higher than American Eagle’s 8.3%.

Analysts at Jefferies Financial Group raised their valuation of Abercrombie to $155 per share, predicting a 40% upside from today’s stock price.

With consumer credit deteriorating, as evidenced by bank earnings, the Fed may look to lower interest rates sooner, helping to further revive the sector after its recent breakout.

FMC’s race to supply the world

According to its fourth quarter 2023 earnings report, FMC’s competitor, CF Industries Holdings Inc. NYSE:CFsays the agricultural sector may be at a cyclical low.

With stock-to-use ratios set to hit lows in 2022, the world may need to start growing crops more aggressively as the end of the winter season impacts global supply. This is where FMC fertilizers and specialty chemicals come in.

The services PMI shows that the agriculture sector is pushing for a third consecutive month of expansion, raising the odds of a quarterly earnings surge for stocks supporting this expansion (think FMC).

Trading just 46% of its 52-week high, the stock is starting to fit the potential bargain profile. Its P/E valuation of 5.5x is now 65% lower than the chemical industry’s average multiple of 15.6x. Wall Street analysts, particularly those at UBS Group, see a higher valuation for the stock.

These analysts set an $84 stock price target on FMC. The stock would need a 45% rally to prove these predictions right. Additionally, the stock is 92% owned by institutions, which gives investors a seal of quality.

Electric vehicles are not electric vehicles without lithium from Sociedad Quimica

After having entered into an exclusive agreement with BYD Co. OTCMKTS: BYDDFSociedad Quimica y Minera is now the main supplier of lithium to arguably the world’s leading manufacturer of electric vehicles (EVs).

As BYD serves Asia’s fastest-growing middle classes, demand for electric vehicles in the region could send new orders through the roof, boosting demand for lithium as batteries cannot be produced without the commodity.

This is where Sociedad Quimica y Minera shares become a target, trading at just 55% of its 52-week high and making the most upside ever.

Analysts expect the stock to grow its earnings per share (EPS) by up to 34.7% over the next 12 months. Investors can gain exposure to this growth at just 6.4x P/E, a 45% discount to the Mining sector’s average valuation of 11.7x.

With a consensus price target of $66 per share, this stock is set to advance 46.7% from where it trades today, solidifying the market thesis behind the electric vehicle wave’s demand for lithium .

Like cotton, lithium prices have fallen 82% from peak 2022 prices, which could signal a potential cyclical bottom for lithium.

Before you consider BYD, you’ll want to hear this.

MarketBeat tracks Wall Street’s highest-rated and best-performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market takes hold… and BYD wasn’t on the list.

While BYD currently has a “buy” rating among analysts, top analysts believe these five stocks are better buys.

View the five stocks here