Business Consultant Kavan Choksi Identifies Undervalued Stocks
According to business consultant and finance expert Kavan Choksi, investing during a recession requires caution, vigilance, and understanding to take advantage of the exceptional opportunities that the turbulent market presents. While it can be challenging to navigate these difficult environments, it is possible to create value by strategically investing in the right mix of assets.
During recessions, companies that are highly leveraged, cyclical, and speculative tend to underperform, and their investors are at a high risk of losses. For investors to survive and thrive during these periods, they should consider pivoting their focus towards high-quality companies with strong balance sheets, low debt, good cash flow, and resilient industries.
By remaining vigilant and taking a calculated approach, investors can safely navigate the market’s uncertainties and identify optimal opportunities to invest in high-quality assets at discounted prices.
Exploring Stocks Amid Recession and Risk
Investing during a recession can be a daunting task, and investors should be aware of the potential risks associated with certain types of assets. When it comes to selecting stocks, the biggest recession risks are typically found in highly leveraged, cyclical, or speculative investments.
Highly Leveraged Companies
One of the factors that investors must consider is a company’s level of debt and its corresponding Debt-to-Equity (DE) ratio. Kavan says during an economic downturn, it is particularly important to scrutinize highly leveraged companies that carry substantial debt on their balance sheets.
Such companies face an elevated risk of default as they struggle to make interest payments while simultaneously contending with decreased revenues brought about by the economic downturn. Therefore, it’s smart for investors to avoid these companies, as they are more likely to experience a significant decrease in shareholder value or even declare bankruptcy.
Cyclical Stocks
These are unique segments of the stock market that are tied to consumer confidence and employment trends. Typically, this sector performs well during economic booms, when consumers have more discretionary income to spend on luxury items like high-end cars, furniture, or clothing.
However, when the economy takes a turn for the worse, consumers tend to cut back on their spending, particularly on non-essential expenses like dining out, traveling, or leisure services. Consequently, cyclical stocks tied to these industries usually suffer during recessionary periods, which can make them less attractive investments for investors looking for a stable return.
Speculative Stocks
Kavan explains these are a type of investment that often attracts investors who are looking for the next big opportunity. These investments are not yet established and often carry a high degree of financial risk. Speculative stocks are typically overvalued, buoyed by optimistic investors who believe that the asset will appreciate over time.
However, this optimism is often tested during recessions, with these assets frequently being the worst performers in a downturn. In times of economic turbulence, investors often flee speculative stocks in favor of safe-haven investments such as gold or bonds. Speculative asset prices are frequently driven by economic bubbles that can form during an economic boom, and when these bubbles burst, the value of the assets can plummet.
Understanding Undervalued Stocks
Undervalued stocks are a concept that every investor should be familiar with. These are stocks that trade below their perceived value, making them a potentially lucrative investment opportunity. Although undervalued stocks might have the potential for long-term growth, the stock market has not yet reflected this growth potential. This scenario generally occurs when the industry sector or the overall market experiences a downward trend. These types of investments should not be overlooked as they often have a solid track record of being profitable in the long run. Therefore, investors who are aiming to gain an edge with new opportunities should look towards undervalued stocks.
Investors seeking opportunities that have the potential for significant growth are always on the lookout for undervalued stocks with strong fundamentals that can deliver valuable returns in the long run. Kavan notes that the Center for Financial Research and Analysis (CFRA) has identified some stocks with forward price-to-earnings ratios of less than 15 for investors. A couple of these examples from the CFRA include JP Morgan Chase & Co., Chevron Corp., and Merck & Co. Inc (source: U.S. NEWS).
JPMorgan Chase & Co. stands among the top global banks and financial service providers, with assets exceeding $3.9 trillion. However, even top-ranked banks are not shielded from economic downturns and the financial sector’s unfavorable market trends. In 2023, a wave of bank failures shook the industry, leading to decreased investor confidence. Amidst this tumultuous time, JPMorgan Chase played a significant role in restoring faith in the financial sector by acquiring First Republic Bank after it failed and was seized by the FDIC. As a result of this acquisition, JPMorgan has taken steps to strengthen its balance sheet and continue to deliver high-quality financial services to its customers.
Merck & Co. Inc. is a global leader in the pharmaceutical industry, providing innovative and life-changing products to patients around the world. According to its recent second-quarter report, the company has demonstrated continued growth, with a 3% year-over-year increase in revenue. Particularly impressive was the exceptional 19% sales growth from its leading cancer drug, Keytruda, which is increasingly becoming a preferred treatment option for patients. In addition, sales for Merck’s Gardasil, a vaccine for human papillomavirus (HPV), showed a remarkable 47% boost. With its successful growth and unwavering commitment to improving the health and well-being of patients, Merck is a company worth investing in.
Cisco Systems Inc. is a renowned technological company specializing in networking, security, collaboration, cloud computing, and other advanced technology solutions. Despite facing temporary challenges, including component shortages, the company has continued to leverage long-term demand drivers such as the Wi-Fi 6 upgrade cycle and ongoing 5G core deployments. In addition, the rise of data center solutions and the growth in bandwidth consumption are projected to be growth catalysts for the company. According to analyst Keith Snyder, Cisco is expected to achieve revenue growth of 1.6% in fiscal 2024 and 2.7% growth in 2025.
The Bottomline
Considering undervalued stocks can be a smart strategy for investors looking to navigate turbulent markets. Companies whose stocks are undervalued often have strong cash flow and balance sheets, further positioning them as a valuable investment. Even if the prices of these undervalued stocks dip, investors may still buy in anticipation of the stock’s future growth potential, especially if they believe that the current price is below the stock’s true value- this is because undervalued stocks have the potential to shoot up in price as market conditions change, which presents a unique opportunity for investors to gain an advantage in the long run.
Moreover, Kavan mentions that when a company with potential experiences exponential growth, its undervalued stock will also become more attractive to investors, especially considering the potential for a return on investment. Despite the occasional volatility or dips in price, investing in undervalued stocks can be a wise decision for investors seeking a solid long-term investment.
