One problem investors encounter when searching for undervalued opportunities is that not all stocks that seem cheap will be able to grow their share prices in the future. A company that is in permanent decline or is expected to see its earnings decreasing over the next few years is not very likely to see an increase in demand for its shares, even if it is trading at a discount to its current worth.
This is one of the factors that the GuruFocus Value chart attempts to address when estimating the intrinsic value of a stock. While there is no way to know the future and tell for sure which companies will grow, we can look at the estimates of expert market analysts to get an idea of which companies are likely to post increasingly positive results. The GF Value takes the following factors into consideration when estimating the value of a stock:
- The historical multiples (price-earnings ratio, price-sales ratio, price-book ratio and price-to-free cash flow) that the stock has traded at.
- A GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance from Morningstar analysts.
In this article, we will take a look at five stocks that are trading at a discount to their GF Values and have particularly high revenue and earnings growth expectations from Morningstar analysts. According to the GuruFocus All-in-One screener, a Premium feature, these stocks are trading with a price-to-GF Value ratio of less than 0.8, while analysts expect their revenue and earnings per share to both grow at least 15% over the next three to five years.
Aspen Group
New York-based Aspen Group Inc. (ASPU, Financial) is an education technology holding company that owns two universities, Aspen University and United States University. Its goal is to use online education to make higher education more affordable, thus drawing more students to attend its universities thanks to cost efficiencies.
On March 25, shares of Aspen Group traded around $6.24 for a market cap of $155.69 million. With a price-to-GF Value ratio of 0.64, the GuruFocus system rates the stock as a potential value trap, as the current price is too far below the intrinsic value estimate and the earnings history isn't stellar.
According to data from Morningstar analysts, the company is expected to grow its earnings per share by 40% and revenue by 27.61% over the next three to five years. The revenue growth rate for the past three years was 33.1%, but earnings per share has historically been choppy and in the negatives.
GrubHub
GrubHub Inc. (GRUB, Financial) is a leading American online food ordering and delivery platform that connects diners and local restaurants. Investors should note that the company is expected to be acquired by European food ordering and delivery platform Just Eat Takeaway.com NV (XAMS:TKWY, Financial). The two companies aim to close the deal by the end of 2021, and they expect that the merger will help them speed up the timeline to profitability.
On March 25, shares of GrubHub traded around $61.12 for a market cap of $5.66 billion. With a price-to-GF Value ratio of 0.56, the GuruFocus system rates the stock as a potential value trap, as the current price is too far below the intrinsic value estimate and the earnings history has been trending down.
According to data from Morningstar analysts, the company is expected to grow its earnings per share by 26.52% and revenue by 27.09% over the next three to five years. The revenue growth rate for the past three years was 36.5%, but earnings per share has historically been low and has taken a dive into the negatives in recent years.
2U
2U Inc. (TWOU, Financial) is an American education company that contracts with non-profit colleges and universities to offer online degree programs via its cloud-based software-as-a-service platform, coursework design and infrastructure support. It aims to provide an easier way for brick-and-mortar colleges to offer classes online without having to build their own tech infrastructure for the purpose.
On March 25, shares of 2U traded around $39.02 for a market cap of $2.82 billion. With a price-to-GF Value ratio of 0.77, the GuruFocus system rates the stock as modestly undervalued.
According to data from Morningstar analysts, the company is expected to grow its earnings per share by 25% and revenue by 19.22% over the next three to five years. The revenue growth rate for the past three years was 25.4%, but earnings per share has historically been low and took a sharp nosedive in 2019 as the company started a painful process of transitioning to a new business model.
Alibaba Group Holding
Alibaba Group Holding Ltd. (BABA, Financial) is a Chinese multinational conglomerate with holdings in e-commerce, retail, internet and technology assets, among many others. By volume, Alibaba is the largest e-commerce company in the world, with millions of merchants and hundreds of millions of users. It is expected to continue its trend of strong growth along with the growth of the Chinese economy and expanding access to the internet and technology.
On March 25, shares of Alibaba traded around $222.72 for a market cap of $606.30 billion. With a price-to-GF Value ratio of 0.65, the GuruFocus system rates the stock as significantly undervalued.
According to data from Morningstar analysts, the company is expected to grow its earnings per share by 21.65% and revenue by 33.67% over the next three to five years. The revenue growth rate for the past three years was 45%, while the earnings per share without non-recurring items grew at a rate of 47.9%.
Diamondback Energy
Texas-based Diamondback Energy Inc. (FANG, Financial) is an independent oil and natural gas company focused on the exploration for and development of hydrocarbon assets in the Permian Basin. Along with the rest of the energy sector, the company is expected to see its profits rise in the coming years as demand for oil rebounds following the Covid-19 pandemic and interest rates in the U.S. remain low. Diamondback also reports it has sufficient proven and provable reserves to continue growing production in the years to come.
On March 25, shares of Diamondback traded around $73.80 for a market cap of $13.09 billion. With a price-to-GF Value ratio of 0.81, the GuruFocus system rates the stock as modestly undervalued.
According to data from Morningstar analysts, the company is expected to grow its earnings per share by 20.70% and revenue by 19.52% over the next three to five years. The revenue growth rate for the past three years was 13%, though the bottom line took a much steeper hit than the top line in 2020.
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.
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