Standout undervalued stocks

Some of the cheapest stocks, according to analysts, tend to be early stage biotech or pharma companies. For example, micro cap Tempest Therapeutics trades 2,200% below its share price target. However, I’d be wary not to be drawn in by these figures as these stocks are typically only covered by one or two analysts. The reality with early stage biotechs is they are more likely to crash and burn than they are to be the next big winner — and that’s not reflected in the price target.

So, ignoring those anomalies, here are some companies that stand out:

Just a starting point

These share price targets should be seen as a starting point. It’s worth recognising that analysts don’t update their outlooks all the time, and as such, there can be something of a lag. However, if I were looking to make investments in these companies, I’d certainly find this consensus data encouraging.

It may also pay an investor to pick holes in these high price targets. For example, will Currys’ shareholders look to take profits after the recent rally or are tanker stocks the right place to be as oil demand pushes lower?

Focusing in on Scorpio Tankers

Having said this, one stock investors may consider looking more closely at is Scorpio Tankers (NYSE:STNG). After retreating from previous highs, the refined petroleum shipper now trades at attractive valuations, with a trailing price-to-earnings (P/E) ratio of 3.62 as of January 2025 — 56% below its decade-long average. Analysts project modest P/E expansions to 4.75 times for FY 2024 and 6.3 times in 2025 based on consensus estimates, suggesting room for revaluation if operational strengths persist.

The company boasts a 20% return on capital employed (ROCE), outperforming industry peers by nearly 70%, while strategically expanding its market position through a recent $131.5m stake increase in VLCC operator DHT Holdings. However, there are some risks, including falling hydrocarbon demand in the near term, which could be exacerbated by climate policies.

Offsetting these concerns, Scorpio’s modern fleet (average age 8.6 years) positions it to capitalise on tightening tanker supply, with shipyard backlogs limiting new vessel deliveries. Scorpio’s fuel-efficient LR2 tankers are better equipped than most peers for emissions regulations, meaning it‘s also better positioned to bid for prime contracts. Last time I checked, I couldn’t buy this stock through my brokerage, but it’s one I’m watching closely nonetheless.

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Scorpio Tankers (NYSE:STNG) is a company benefitting from a series of global events that, in turn, have sent demand for their services soaring. Let’s take a closer look at why this is.

Pandemic hangover

Scorpio Tankers, as the name suggests, is a company providing tanker services for hydrocarbons products. It’s a major player in the sector with a market cap around $3.5bn and 112 wholly owned vessels. It also has a relatively young fleet, with an average vessel age of eight years.

So, what’s this pandemic hangover? Well, it’s impacting the whole industry. Tanker companies made a significant reduction in new vessel orders during the pandemic, reflecting lower demand but also uncertainty going forward. This also resulted in shipyards going bust or going dormant.

It’s also important to remember that these mammoth vessels can’t be built overnight. In fact, they can take up to four or five years to build. And with many shipyards out of action, new vessels can’t be fast-tracked.

The result is an industry with really tight supply, and one of the oldest global fleets in living memory. And the thing is, demand for hydrocarbon products is strong. As such, there’s a really big imbalance, and it may not be corrected for years.

In Q1 2024, average daily rates were recorded at $39,357. That’s up 20% from Q4 of 2023, but they could go much higher.

Exacerbating factors

We may be entering something of a super cycle in the tanker sector because of the aforementioned supply and demand imbalance. However, there are two additional factors that are aggravating supply constraints.

The first of these is the Houthi attacks on vessels transiting the Bab el-Mandeb strait. Because of safety concerns, many vessels are now rerouting, and that means going around the Cape of Good Hope. It’s a huge detour and it means there’s less available supply of tankers on the market.

The second is the drought in Panama, which has meant water levels dropping significantly on the canal. In fact, in January, only 18 vessels were crossing daily, down from 50 in normal conditions. In turn, tankers either wait their turn in the queue, or travel some thousands of miles more round Cape Horn.

The bottom line

Scorpio Tankers stock has surged over the past year, but that doesn’t mean the super-cycle is thoroughly priced in. In fact, at 5.8 times forward earnings, it certainly doesn’t look expensive. There could be some near-term pullback in the share price if disruption in Panama and around Yemen is reduced.

However, Scorpio Tankers is a company prospering in the current environment. The average share price target is around 14.5% higher than the current price. And that gives me confidence. It’s also got great momentum — often one of the best indicators of forward performance.

If my brokerage offered Scorpio, I’d add it to my portfolio.

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When we talk about earning a second income, those of us more familiar with investing will naturally think about dividend stocks. These are companies that look to reward investors by sharing profits directly with them through payments during the year.

However, if we’re starting investing and we’ve only got say £5,000 in our account, we need to recognise that investing in dividend stocks — which at best provide yields of 9% — won’t provide us with a substantial second income.

Instead, we need to focus on building a much larger portfolio over time. And if I’m looking for growth, I’d be looking for growth-oriented stocks, and not mature dividend stocks. So here’s how I’d invest today for a second income in the future.

Current trends

One of the most interesting trends at this moment in time, for the investing world at least, is rising day-rates in the shipping industry. And that’s why I like tanker firm Scorpio Tankers (NYSE:STNG).

There are several factors at play. During the pandemic vessel and crew numbers fell, and now demand is surging.

But more recently, we’ve seen trouble near the Gulf of Aden — more specifically the Bab el-Mandab Strait.

And this means vessels, predominately travelling between Asia or the Middle-East and Europe, have taken a 30% longer route round the Cape of Good Hope.

So with limited supply, surging demand, and ships having to travel further to get to their destinations, day-rates are surging. These have also been positively impacted by the drought affecting the Panama Canal.

Of course, the tanker market can always go into reverse. And that’s a risk worth bearing in mind. However, Scorpio stock looks particularly attractive at just 6.9 times forward earnings.

Buying growth

Celestica (NYSE:CLS) shares jumped on 30 January following another earnings beat by the supply chains solutions company. It was the fourth time that earnings had beaten expectations in 2023.

However, this stock still looks like good value despite the surging share price. My favourite metrics is the price-to-earnings-to-growth (PEG) ratio. It’s an earnings ratio that is adjusted for growth, with a value of one suggesting fair value, and anything below suggesting undervalued conditions.

Celestica has a PEG ratio of 0.73, inferring that it’s still significantly undervalued. This metric is calculated by dividing the forward price-to-earnings ratio by expected growth (three-to-five years). And given the company’s positive outlook for Q1 2024, analysts may upgrade their outlooks.

A slowing North American economy could derail the company’s growth. That’s something I should be aware of. But to date, the US economy has been incredibly strong, and the company’s own outlook is improving.

The bottom line

As noted, I believe these two companies could outpace the index average. And that could allow me to turn my small portfolio into a much larger one. One capable of generating a sizeable second income.

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