5 Undervalued Stocks to Buy for Valentine’s Day

Ruth Saldanha: Folks, it’s close to St. Valentine’s Day, a day of love and relationships where many of us celebrate by buying gifts for the people closest to us. If you’re like me, though, you probably sometimes wonder about the point of spending money on gifts that don’t appreciate in value once given. If this is you, then we have some ideas for stock gifts that are currently trading either cheap or cheaper than usual, making them a gift that could add a bit of green to both your day and your portfolio. Dave Sekera is the chief U.S. market strategist for Morningstar, Inc., and he is here today to tell us the five stocks he loves.

Dave, thank you so much for being here today.

David Sekera: Hi, Ruth. Good to see you.

5 Undervalued Stocks to Buy for Valentine’s Day

1. The Hershey Company HSY
2. Tapestry TPR
3. Estee Lauder EL
4. Carnival Cruise Lines CCL
5. Medtronic MDT

Saldanha: Let’s talk about the first stock, which is the maker of chocolate Kisses, The Hershey Company. It’s currently trading at 3 stars. Tell us a little bit about this stock.

Sekera: What is Valentine’s Day without chocolate? As you mentioned, Hershey’s stock is a 3-star-rated stock. It trades pretty close to our fair value. But I do think this is a good opportunity to be able to buy a high-quality, low-volatility company at what we consider to be a reasonable valuation. In fact, when I look at the stock chart over the past five years, this stock has actually traded pretty far above its fair value for quite a while. I think it was even a 1-star stock in early 2023. Since then, it has sold off. It’s down about 30% from its peak and is back to that 3-star level.

Now, from a fundamental point of view, we do rate Hershey with a wide economic moat. That’s based on a combination of two things. First, its intangible assets. So, the company does have a 45% market share in chocolate in the U.S., and I think its next closest competitor is only 30%. We also think it has a cost advantage based on its scale that allows for low unit costs as well as low distribution costs and some greater supply chain efficiency. Lastly, we do rate the company with a Low Uncertainty Rating. It does have a very healthy balance sheet. And just to follow things up, the stock does pay a 2.5% dividend yield, not exactly a real high-dividend-paying stock, but still about twice the average of the S&P 500 right now.

Saldanha: Another stock that makes the cart is Tapestry, which owns brands like Jimmy Choo, Coach, and Kate Spade. Now, I would like a Kate Spade bag for Valentine’s Day, but this stock is cheap. Do you think that might be a better bet?

Sekera: I’m not sure if it will be a better bet for you or not, but the stock is undervalued. It’s a 4-star-rated stock, trades around a 30% discount to our fair value, and I think it currently yields about 3.4%. It’s also a company we do rate with a narrow economic moat. Now, I would note this one is a little bit of a story stock. So, last fall, Tapestry announced it was acquiring Capri, one of its competitors, and the market did not like the deal at that point in time. However, our equity analyst team actually sees the deal favorably. A couple of the different attributes they like is the way that it combines some of the different brands in the handbag sector. So, it does put together Coach, Kate Spade, and Michael Kors. And among its other luxury segments, our team also noted they think that Tapestry management might be able to better grow the Versace and the Jimmy Choo brands better than Capri management had. I’d note the stock has traded up after its recent earnings announcement, so we still think there’s further for this stock to run from here. However, I will note that this isn’t necessarily an overnight story. I do think it may take at least several quarters after the merger before we really start to see some meaningful results from that acquisition.

Saldanha: Another popular Valentine’s Day gift is cosmetics, and a beauty company makes the cut on your list. Tell us a little more about that one.

Sekera: It’s Estee Lauder. The company is a global leader in the prestige beauty market and includes products such as skincare, makeup, fragrance, and so forth. The stock soared in 2020 and 2021, but we thought it just got too far ahead of itself back then. That stock did reach a 1-star rating. It has since sold off pretty dramatically since then. In fact, it’s really round-tripped all the way back toward prepandemic levels.

Now, I will note results have been under pressure for you a couple of different quarters. Mostly it’s really just from the softer economy and weak consumer spending, especially in its Chinese markets. And that has pressured its top line and compressed operating margins. Now looking forward, we do forecast that the company will generate 7% sales growth over the next decade. We look at that company as being able to generate a 16.2% operating margin. Now this stock also had a nice pop after earnings, but it still remains significantly undervalued. Now it also may be, in my view, an interesting play on when Chinese consumer starts to recover. And then lastly, I would note it’s a 4-star-rated stock that trades at about a 30% discount to fair value. It’s a company we rate with a wide economic moat and currently has a medium uncertainty and a 1.8% dividend yield.

Saldanha: If you’re the type of person who actually prefers experiences over stuff, there’s a stock for you as well. Dave likes Carnival Cruise Lines, which is a perfect gift for a romantic getaway. Dave, tell us a little bit about this stock.

Sekera: Sure. So, Carnival is the world’s largest cruise line company. And I would note here that the stock had really just plunged with the emergence of the pandemic. And I’d note it’s actually failed to meaningfully recover since then, which is why we think the stock is so undervalued today. It’s a 4-star-rated stock and trades at about a 40% discount to our fair value. Although I’d note it does not pay a dividend. So, if you’re a dividend investor, this may not necessarily be for you. It’s a company we rate with a narrow economic moat. It does have a High Uncertainty Rating. So again, maybe more better for investors that can take that high uncertainty in their portfolio.

Now looking forward, we do think the cruise industry is improving. Bookings have substantially recovered. And when we look at pricing, we’re expecting pricing to increase up to enough in 2024 that it actually will be ahead of pricing back in 2019. Now there have been some inflationary headwinds like fuel costs having gone up. But we also do think that higher occupancy levels will offset some of those higher costs. In fact, some of the things that the company is doing is that they’re scrapping some of their older underperforming ships. And as such, we expect margins should improve over time. Our team is forecasting their EBITDA margin to expand to 29% from their historical average of 27%.

Saldanha: The final stock on your list is slightly unusual but actually deals with matters of the heart. It’s medical-device manufacturer Medtronic. Whether you’re heartbroken or not, eventually all of us might need some amount of cardiac care, which is probably why you like this stock, Dave. Is that right?

Sekera: That is. So, the stock is currently rated 4 stars. I think it trades a little bit over a 20% discount to our fair value, and the company stock yields about 3.2%. A high-quality company, one that we rate with a wide economic mode. We also assign a Medium Uncertainty to the stock here. And I’d just note Medtronic is one of the largest medical-device companies in the world. It makes medical devices for chronic diseases, and its products include pacemakers, defibrillators, heart valves, and stents. And according to our healthcare team, Medtronic is one of the best-positioned med tech companies for the continued aging of the baby boomer generation.

Saldanha: Great. Thank you so much for joining us today with your perspectives, Dave.

Sekera: Of course. Always happy to speak with you, Ruth.

Saldanha: For Morningstar, I’m Ruth Saldanha.

Watch “The Best Types of Stocks to Buy in Today’s Fully Valued Market” for more from David Sekera.