- After a bad 2022 for markets, 2023 saw a strong and consistent rebound, thanks to a more resilient economy than expected and the apparent end of interest rate hikes. 2024 looks to continue this trend, and the market has already gained about 10% since the beginning of the year.
- Although there seems to be a lot of euphoria in the market now, there are still some high-quality companies at a good price that investors can catch for the long term and increase their wealth.
- In this article, we will go over our top five stocks to buy for 2024. We believe these undervalued stocks will perform extremely well over the long term, starting from this year.
Note: In this article, we are NOT going to show the very best five stocks recommended by the Everest Formula algorithm, which helped investors obtain an astounding 30% CAGR over the last 22 years. If you are interested in discovering them, consider subscribing to the Everest Formula.
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1. Alibaba Group – BABA
Alibaba Group Holding Ltd. (BABA) stands as a global giant in the e-commerce and technology industry, founded by Jack Ma in 1999. The company has evolved into a multifaceted conglomerate, with its core businesses encompassing e-commerce, cloud computing, digital media, and entertainment. Alibaba’s dominance in the Chinese market and its expanding global footprint have made it a compelling investment option for many in the past.
Nonetheless, the stock sharply declined over the past 3 years, eventually losing more than 70% of its value. This is not so much caused by the performance of the company itself (which is continuing to grow) but by investors’ growing distrust of China and its market.
Investment Tesis
- Resilience: despite the uncertainty in the Chinese market and the impositions that the Chinese government has given to its tech companies in recent years, the performance has proven to be solid and BABA’s business is resilient. If investor negativity subsides in the coming months, the stock may be poised to explode.
- Diversification: Alibaba’s strategic diversification beyond e-commerce into segments such as cloud computing (Alibaba Cloud), digital media and entertainment has created multiple growth engines.
- Strong financial position: The company has a ton of cash, virtually zero debt, and is starting to reward its investors by issuing dividends.
Risks
- Regulatory Uncertainty and Government Intervention: The primary risk associated with investing in Alibaba stems from the uncertain regulatory environment in China. The Chinese government has shown a willingness to intervene in the operations of major tech companies, as witnessed in the last few years. Potential regulatory changes or government intervention could further impact Alibaba’s business.
- Global Economic and Geopolitical Challenges: Alibaba’s ambitious international expansion plans expose the company to global economic and geopolitical risks. Economic downturns or geopolitical tensions could adversely affect cross-border trade, impacting Alibaba’s revenue streams from international operations.
- Competition and Technological Disruption: The rapidly evolving nature of the technology sector exposes Alibaba to intense competition and potential technological disruptions. Emerging technologies or shifts in consumer preferences could pose challenges to Alibaba’s market position.
Valuation
The Everest Analyzer gives Alibaba stock a quality score of B. The balance sheet is clean and the margins are good (even if declining in the last years). The profitability (i.e. ROTCE) is not enough, however, to be eligible for the top 10 of the formula.
From a valuation perspective, the score is A. There is no doubt that Alibaba is one of the most undervalued companies in the market, because of its geopolitical context. Alibaba is one of the most popular tech companies, with valuation metrics similar to companies in the utility sector.
We also extracted an intrinsic stock valuation using a discounted cash flow model and a mix of inputs from analysts’ estimates and historical data. The result is that the stock is currently 39% undervalued, with an intrinsic value of 120.25$, well above the current price of 73.09$. BABA is definitely an undervalued stock to buy now for investors who think the Chinese situation will improve over time.
2. Google (Alphabet) – GOOGL
We took a look at the Everest Screener, configured to find the most undervalued stocks among big caps:
The first-ranked stock is Alphabet, which we already suggested in 2023, and since our suggestion the stock has risen more than 45%. Let’s find out if Alphabet is still a bargain or not.
Investment Tesis
Google is one of the companies with the biggest MOAT in the world. It is challenging to imagine a world without Google’s services ten years from now. It has built world-class advertising technologies for its customers to run their digital marketing businesses. Google’s competitive advantages continue to grow through data collection, allowing the company to provide the right ad at the right time.
Risks
Alphabet’s management expects several obstacles to slow growth, if not decrease earnings in the coming months, including:
- Possible slowdown in advertising demand due to the inflationary environment that causes spending reviews and less money circulation.
- Foreign exchange rate, with the strong dollar being a headwind due to worldwide sales as opposed to research and development spending that is primarily U.S.-based
- Possible legislative hurdles: The U.S. Senate and the European Community have initiated tough new legislative efforts to counter Alphabet’s “unfair market dominance.”
Valuation
The Everest Analyzer gives Alphabet stock a quality score of A. There’s no surprise that Google is one of the best companies from a quality perspective.
From a valuation perspective, the Analyzer gives a score of B. The P/E of 23 is a bit high but in line with the average historical valuation and below competitors. Google still looks attractive from a quantitative point of view.
We have updated the DCF from last year, using the last earning report and slowing down the expected future growth from 12% to 9.6%, according to the most recent analyst’s estimates.
The result is that the stock is currently fairly priced, with an intrinsic value of 140.58$, in line with the current price of 137.05$. It could still be a good investment right now, but we would prefer to wait for a drop of at least 15-20% before making a new investment in GOOGL.
3. Nucor Corporation – NUE
The next two stocks come directly from the top 10 stocks of the Everest Formula: NUE and MOH.
Nucor is one of the largest steel producers in the United States and has a diversified product portfolio ranging from carbon and alloy steel to steel joists and decks. Its vertically integrated business model, which includes raw material sourcing and downstream processing, provides cost advantages and supply chain resilience.
Investment Tesis
- The company is coming off its third most profitable year in history. Management has initiated a series of solid, long-term investments to grow the business.
- The company has a solid balance sheet with manageable debt levels and ample liquidity, enabling it to invest in growth initiatives, return capital to shareholders through dividends and buybacks, and weather economic downturns effectively.
Risks
- Nucor’s business is cyclical, i.e. closely tied to the overall health of the economy and the price of steel. Economic downturns and fluctuations in manufacturing activity can significantly impact steel prices and demand, affecting Nucor’s profitability and stock performance.
- Nucor operates in a highly competitive industry with both domestic and international players. Intense competition, particularly from low-cost foreign producers, can exert downward pressure on steel prices and margins.
- Nucor is subject to various regulatory requirements related to environmental protection, workplace safety, and emissions standards. Changes in environmental regulations or compliance costs could increase operational expenses and affect the company’s profitability.
Valuation
NUE is a company with outstanding profitability (ROTCE of 38%, ROIC of 29%), good operative margins, and low debt. These characteristics are combined with extremely low company valuations (P/E of 10, FCF/EV of 10.4%). So, it should come as no surprise that it has a perfect A score in both quality and valuation, and is currently one of the best companies recommended by Everest Formula.
We simulate through the DCF model a realistic scenario in which the revenue slowly grows by 3.5% per year and margins are maintained as they are now, according to analysts and the historical average. The result is that the stock is 18% undervalued, with a target price of 228.02$.
NUE is one of the top undervalued stocks to own right now.
4. Molina Healthcare – MOH
Molina Healthcare is the second stock we want to highlight among the best companies according to the Everest Screener.
The company provides managed healthcare services (insurance and so forth) in the U.S. under Medicare and Medicaid, with 5.2 million booked members at the end of 2023, up 31k Year over Year.
Investment Tesis
- Molina Healthcare operates in the rapidly growing healthcare sector, particularly focusing on government-sponsored programs such as Medicaid and Medicare. With an aging population and increasing healthcare expenditures, there is a significant demand for managed care services.
- This type of business requires very little incremental capital to maintain its competitive position, or grow. There are no inventories, minimal CapEx requirements, and capital (float) is received prior to service.
- Molina Healthcare has a strong track record of managing healthcare costs while improving patient outcomes. Through care coordination, preventive services, and innovative healthcare delivery models, the company aims to provide high-quality care at lower costs.
Risks
- Molina Healthcare’s business is heavily influenced by government regulations and policies, particularly those related to Medicaid and Medicare. Changes in reimbursement rates, eligibility criteria, or program structures could impact Molina’s financial performance and operational strategies
- Bottom-line margins are low, averaging around 3%, so just a small decline will make a big difference in the full-year EPS MOH generates.
Valuation
The profitability of MOH is outstanding, and the balance sheet is strong and with low debt. Everest formula assigns A to the quality of the company. We would just prefer the margins to be a little higher, but this is mainly due to the type of business rather than the company itself.
Even the valuation score is A, thanks to the huge amount of free cash flow that the company generates each year and that is both reinvested for growth and returned to shareholders in the form of buybacks.
From the DCF model we discover that, despite the consistent rise in its stock price over the past year, MOH still appears to be 12% undervalued, with a fair price of 444.10$ compared to a current valuation of 392.59$.
Molina Healthcare is a good buy right now.
5. Qualcomm Inc. – QCOM
The last stock we want to bring to the attention of investors is QCOM. Qualcomm is a global leader in designing and manufacturing semiconductor chips and related technologies, particularly in the mobile communications industry. The company’s strong intellectual property portfolio, including patents for essential wireless technologies such as 5G, positions it well to benefit from the proliferation of smartphones, IoT devices, and emerging technologies like autonomous vehicles, artificial intelligence, and connected infrastructure.
Shares of Qualcomm have jumped significantly in the past year thanks to the growing hype that gravitates around AI. Nevertheless, this growth seems to be supported by an increasing free cash flow. Let’s take a look at the stock’s EV/FCF ratio on the chart below: it does not seem extraordinarily high; on the contrary, it appears to be below the average of the past 5 years:
Investment Tesis
- Qualcomm is a global leader in designing and manufacturing semiconductor chips and related technologies, particularly in the mobile communications industry. Qualcomm has recently announced the latest Snapdragon processor which brings generative AI capabilities to the top-tier Android smartphones, which makes it one of the best stocks to ride the upcoming AI trend.
- Qualcomm has a history of investing in research and development to innovate and diversify its product offerings beyond smartphones. The company is expanding into adjacent markets such as automotive, IoT, and networking, leveraging its expertise in wireless connectivity and computing.
Risks
- While Qualcomm is diversifying its revenue streams, the company remains heavily dependent on the smartphone market for a significant portion of its revenue. Declining smartphone sales, saturation in mature markets, or changes in consumer preferences could impact demand for Qualcomm’s products and services.
- Qualcomm’s business operations are subject to supply chain disruptions, component shortages, and technological challenges inherent in semiconductor manufacturing.
Valuation
QCOM receives a score of A for quality, and B for evaluation. All the profitability and balance sheet robustness metrics are good, while in terms of valuation, both the price-earnings and price-sales ratios are a little high compared to the average.
The DCF model gives us a more negative vision of the stock, showing that the stock is actually overvalued by 7%. Certainly Qualcomm is a good company to ride the AI trend and to keep on the watchlist, but in our opinion, it would be better to wait for a retracement of at least 20-25% before thinking about buying.
Top stocks to buy – Conclusions
We have identified the best stocks to buy and watch for 2024, thanks to the Everest Formula which allows us to identify the most undervalued stocks of the moment.
The Everest Strategy is a strategy that has returned more than 30 percent annually on average over the past 23 years. If you are interested in applying it to your portfolio, subscribe now.
