Finding underpriced stocks to buy is one of the most common mantras in stock trading. While buying low and selling high is simple, it does not indicate which stocks are underpriced. Traders are constantly seeking out underpriced stocks to buy that have the potential to increase once investors recognize their true worth. With markets trading near record highs, it can be more challenging to identify stocks with strong upside potential yet underpriced.
One popular method for finding underpriced stocks to buy is analyzing a stock’s Relative Strength Index (RSI). Stocks with an RSI below 30 are considered oversold and may see a rebound. This strategy works best when combined with other valuation metrics, such as a low price-to-earnings (P/E) ratio.
It is common for stocks trending higher to experience temporary pullbacks driven by technical factors. These declines may make underpriced stocks to buy worthy of acquisition before they start to rise.
Ryerson Holding (RYI)
The U.S. steel industry has been facing tough competition from China. It’s unsurprising that the custom steel (and other industrial metal) processor and distributor Ryerson Holding (NYSE:RYI) has seen its stock price come under pressure. However, this is an underpriced stock to buy. It currently trades at a P/E ratio of just 8.4x, while the industry stands at an average P/E ratio of 35.3x.
The company managed to post positive sales growth and expects its EPS to return to positive when it reports its next quarter earnings. This is despite disappointing investors earlier by posting a negative EPS when analysts were forecasting a gain. The miss on expectations was due primarily to one-off effects. The company had put into operation a new service center and spent considerably on IT upgrades. It sent the stock tumbling, so its RSI fell well into oversold territory at 17.4. This makes Ryerson Holding one of the underpriced stocks to buy.
CVS Health (CVS)
The first quarter wasn’t kind to U.S. health providers. Insurance costs rose, causing CVS Health (NYSE:CVS) to miss in earnings and cut its guidance for the year.
Despite challenges in the first quarter, CVS remains an underpriced stock to buy. It offers a solid dividend yield of 4.8% and a relatively safe 50% payout ratio. The key metric for the company is the medical benefits ratio. This is the difference between how much it collects in premiums and how much it pays out in claims. That ratio went up in the first quarter, squeezing profit margins. As a result, the RSI on its stock price fell to 22.6, well into oversold territory.
CVS remains a solid dividend stock and could be considered an underpriced stock to buy. Its P/E ratio stands at just 9.8x, less than half the 25.5x average for the U.S. healthcare industry. That might mean the market has gotten a little overenthusiastic about pricing in the guidance cut. Therefore, it could be time for a rebound, as analysts believe the share price could go back up to $68.76.
BGSF (BGSF)
With weakness seen in the U.S. commercial real estate market and lackluster recent jobs numbers, investors are understandably concerned about BGSF (NYSE:BGSF). It offers consulting and workforce solutions.
However, there may be an undervalued opportunity here as analysts remain quite bullish on the stock’s prospects. Analysts expect the price to double to $14.25 per share. This follows investors exiting the stock after disappointing first-quarter results that saw EPS cut in half, driving the RSI to an oversold level of 24.4. Still, the company remains optimistic about the market moving past this phase, allowing for an upswing as expenses are rationalized.
Analysts’ enthusiasm for the stock could be fueled by BGSF’s announcement of plans to explore strategic alternatives to address the company’s undervaluation. This may help unlock improved value potential. The company is maintaining its dividend, providing an 8.3% yield, and has a P/E ratio of 13.9x, less than half the average benchmark of the S&P 500 index. Both metrics could indicate this is one of the underpriced stocks to buy.
On the date of publication, Stavros Tousios did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.