One method that famous fund manager Peter Lynch liked to use to search for value opportunities was to look for stocks that were trading below what their price would be if they were to trade with a price-earnings ratio of 15 or their median historical price-earnings ratio.
Ever since he detailed this method in his book “Beating the Street,” value investors have been using it as a tool to find potential investment opportunities. GuruFocus has also built the “Peter Lynch chart” based on this method, which is included in the summary pages of stocks to provide a quick reference.
After the markets became overheated in 2021, many stocks have finally entered value territory once again thanks to the recent selloff. While we have no way of knowing when the market will hit its bottom as recession fears abound, the basic principles of value investing remain the same: namely, ignoring market timing and focusing on buying stocks at a discount to your analysis of their long-term intrinsic value.
According to their Peter Lynch charts, three stocks that are trading below their intrinsic values currently are Qualcomm Inc. (QCOM, Financial), Pfizer Inc. (PFE, Financial) and Comcast Corp. (CMCSA, Financial). These stocks also appear in the portfolios of more than 20 of the Premium gurus followed by GuruFocus. High guru ownership is a positive sign, seeing as GuruFocus’ Broadest Owned Model Portfolio has outperformed the S&P 500 over the past decade.
Qualcomm
Qualcomm (QCOM, Financial) is a multinational semiconductor company based in San Diego. Its main focus is on communications technology, particularly for use in smartphones, 5G and artificial intelligence. It is perhaps best known for its widely used cellular modems.
On June 23, share traded around $119.13 each for a market cap of $133.09 billion. The Peter Lynch chart shows the stock is trading below both its earnings line and its median historical valuation.
There are 24 gurus who own shares of Qualcomm. The top investors include Primecap Management with 0.61% of shares outstanding, the T. Rowe Price Equity Income Fund with 0.28% and Jim Simons (Trades, Portfolio)’ Renaissance Technologies with 0.16%.
Qualcomm is seeing increasing demand for its wireless and high-performance, low-power processor technologies. It is a leading producer of application processors, integrated GPUs and baseband modems for mobile devices. Due to its patents, it profits from virtually every smartphone sold, even if said phone does not use Qualcomm’s chips.
The company is navigating the semiconductor supply chain issues well, largely due to its shift to focus more on the higher-end Snapdragon SoCs, which have less exposure to materials that are in short supply. The company has also made efforts to diversify its supply chains, reducing the risk of complete bottlenecks.
Since Qualcomm is a tech stock, it is facing significant price pressure, compounded by its heavy reliance on smartphone sales. The smartphone market could cool off in the coming years as it exits the latest upgrade cycle.
Pfizer
Pfizer (PFE, Financial) is a multinational biopharmaceutical company headquartered in New York. Its main areas of research are internal medicine, inflammation and immunology, oncology, rare diseases, vaccines and anti-infectives. Its most recent success has been its Covid-19 vaccine that was developed in partnership with BioNTech (BNTX, Financial).
On June 23, shares were changing hands for approximately $49.92 apiece with a market cap of $280.10 billion. According to the Peter Lynch chart, the stock is trading below the earnings line as well as the median historical valuation.
There are 27 gurus who hold shares of Pfizer, including the Vanguard Health Care Fund (Trades, Portfolio) with 1.01% of shares outstanding, Diamond Hill Capital (Trades, Portfolio) with 0.17% and Renaissance Technologies with 0.11%.
Pfizer’s stunning operational growth continues to be led by sales of its Covid-19 vaccine. Its three-year earnings per share without non-recurring items growth rate has reached 83.1% as of the most recent full fiscal year. First-quarter 2022 results continued strong with an 82% rise in operational growth, though without the Covid-19 vaccine and treatment, operational growth was just 2%.
Aside from its Covid-19 operations, Pfizer continues to develop treatments primarily in the areas of inflammation and immunology, vaccines, oncology and rare diseases. The company is also actively pursuing acquisitions, such as its March 2022 acquisition of Arena Pharmaceuticals and its planned acquisition of ReViral Ltd.
Over the next few years, the explosive growth of Pfizer’s Covid-related vaccines and treatments is expected to slow down, which will likely weight negatively on earnings multiples. Nevertheless, Covid continues to evolve and will likely be with us for many decades to come, just like the flu, and Pfizer is also pursuing other avenues of growth.
Comcast
Comcast (CMCSA, Financial) is an American telecommunications conglomerate that operates through two main segments: Comcast Cable, which provides video, high-speed internet and phone plans to residences under the XFINITY brand, and NBCUniversal, which owns a portfolio of television news and entertainment assets.
Shares traded around $39.01 each on June 23 for a market cap of $174.74 billion. The Peter Lynch chart shows the stock is trading below its earnings line and its median historical valuation.
There are 39 gurus with positions in Comcast, including Dodge & Cox with 1.89% of shares outstanding, First Eagle Management with 0.67% and Andreas Halvorsen (Trades, Portfolio) with 0.31%.
A leader in the internet and cable businesses for decades, Comcast is one of the old giants that is still going strong. Growth has slowed down in recent years due to cord cutting as more cable customers switch fully to streaming services, but Comcast’s high-speed internet revenue has surpassed its cable revenue, and this segment is still in a growth phase.
The NBC Universal segment is expected to continue to benefit from pent-up demand for theme park visits from the beginning of the pandemic. Comcast has also been building out its streaming partnerships, including a joint venture that will launch SkyShowtime in Europe and a multi-year licensing deal with Amazon (AMZN, Financial).
Judging by history, this stock is unlikely to make any big breakouts, especially since the founding family seems inclined to focus more on share buybacks than acquisitions. However, the combination of a lower-than-usual valuation and a dividend yield of 2.60% could make it attractive as a long-term defensive investment.
