As market tailwinds are expected to cool off in the second quarter, investors are trying to figure out what’s next. While there are no major catalysts to sustain a long-term run up like last year, investors just need to know where to look to find gains. 

Stocks across the board have frothy valuations, meaning if you know where to find value, you can still generate substantial gains this year. And you don’t need to go searching in little-known micro caps for those returns.

There are three top companies that I’ve been tracking that have strong growth drivers and are still trading at a discount. Walmart Inc. (WMT), Novartis AG (NVS), and Merck & Company, Inc. (MRK) are all undervalued by the market and poised to rise above the fray over the next two quarters. But first, let’s recap the week before I dig deeper into these companies.

Market Commentary

Stocks were mixed Monday as investors assessed the potential impact of a massive margin call for Hedge fund Archegos Capital Management. The fund had to liquidate positions that were worth near $30 billion. There is concern that other funds are over-levered. With little news on Tuesday, stocks were mostly down. Investors were awaiting details on the President’s infrastructure plan.

The market was mixed on Wednesday as details emerged from the infrastructure-spending plan. While the plan is considered a positive for consumer spending and employment, the corporate tax hike weighed on investors’ minds. Investors appeared to have a change of heart today, with stocks rising on the plan’s economic growth expectations. The S&P 500 traded above 4,000 for the first time.

Market Outlook

As stocks posted a solid first quarter, many strategists believe the market is running out of growth drivers. The previous tailwinds of COVID-19 vaccinations, government spending, and fourth-quarter earnings have likely peaked.

The economy has been bouncing back from the damage caused by the lockdowns last year, but this is likely priced into the market. Cyclical stocks, especially, have been outperformers recently, but they may run out of steam at some point.

This is leading investors to look for the next big catalyst. In the meantime, investors like you and me can take advantage of mispriced stocks in the market. These are large well-known companies still trading below their actual values. Not only are their valuations low, but they are trading well below their average analyst price targets.

This is why I am highlighting the three stocks below.

Walmart Inc. (WMT)

The world’s largest retailer, WMT operates Walmart Stores, Supercenters, and Sam’s Club locations across the United States. Its fast-growing e-commerce business, including Walmart.com and Jet.com is gaining steam on Amazon.com (AMZN) in the e-commerce space. The retailer offers two-day shipping on many items to any customer, something that requires membership on AMZN.

WMT’s omni channel platform is expected to keep bringing in customers. The company launched its Walmart+ subscription delivery service in September, which provides free next-day and two-day shipping with no order minimum. It also offers free delivery from your store. Plus, WMT now also provides healthcare & financial services, including insurance.

The stock is expected to benefit from an increase in global e-commerce spending, a growing digital ad business with the Walmart Connect platform, and an increase in international revenue. WMT has an overall grade of B, which translates into a Buy rating in our POWR Ratings service. The company has a Value Grade of B, which isn’t surprising, with a price-to-sales ratio of only 0.7. Plus, the stock is trading 22% below its average target price.

The company also has a Quality Grade of B, which means it has a healthy balance sheet. As of the most recent quarter, WMT had $17.7 billion in cash on hand, compared with only $3.3 billion in short-term debt. We also grade WMT based on Growth, Momentum, Stability, and Sentiment. You can find those grades here. WMT is ranked #7 in the A-rated Grocery/Big Box Retailers industry. You can find other top stocks in that industry by clicking here.

Click here to check out our Retail Industry Report for 2021

Novartis AG (NVS) 

NVS develops and manufactures healthcare products through two segments: Pharmaceuticals, including primary care and specialty medicines, and Sandoz, which includes generic pharmaceuticals. The majority of its revenue, though, is driven through the Pharmaceuticals segment. The company has shown strong near-term growth driven by new products.

The company has strong positions in multiple critical therapeutic areas, which bodes well for its long-term growth. Its strategy is to focus on areas of unmet medical needs. This helps strengthen NVS’s pricing power. NVS has a large number of blockbuster drugs such as Entresto for heart failure, Cosentyx for immunology, and Tasigna for cancer. NVS also has a robust late-stage pipeline of new drugs expected to launch during the next several years.

NVS is rated a Buy with a grade of B in our POWR Ratings system. It has a Stability Grade of A, which means the company has a stable price performance and growth history. For instance, its beta is low at 0.47. The company has a stable history of earnings and EBITDA growth. It has a Value Grade of B, which makes sense due to its low valuations. The stock has a forward P/E of 13.85 and is trading 20% below its average target price.

To get access to NVS’s other grades (Growth, Momentum, Sentiment, and Quality), make sure to click here. NVS is ranked #8 in the Medical – Pharmaceuticals industry. For more top stocks in this industry, click here. 

Click here to checkout our Healthcare Sector Report for 2021

Merck & Company, Inc. (MRK)

MRK is one of the most well-known pharmaceutical companies in the world. Its products treat several conditions in several therapeutic areas, including cardiometabolic disease, cancer, and infections. The company also has a substantial vaccine business, with treatments to prevent hepatitis B and pediatric diseases and HPV and shingles.

Key drugs like Keytruda, Lynparza, and Bridion have been driving sales. 

Cancer drug Keytruda, especially, has been adding high margin sales and expanding profit margins. The drug has been a blockbuster for the company with multi-billion-dollar potential. It holds a first-mover advantage in non-small cell lung cancer and is increasingly being used in other cancer indications. MRK’s strong pipeline of new drugs and animal health and vaccine products remains strong growth drivers.

The company has an overall grade of B or a Buy rating in our POWR Ratings system. MRK has a Value Grade of B, which makes sense with a low forward P/E of only 11.65. Plus, the stock is trading almost 35% below its average analyst target price. MRK also has a Quality Grade of B due to a strong balance sheet. As of the end of the year, MRK had $8.1 billion in cash, compared to $6.4 billion in short-term debt.

You can access all of MRK’s grades (including Growth, Momentum, Stability, and Sentiment) by clicking here. MRK is rated #10 in the Medical – Pharmaceuticals industry.

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WMT shares . Year-to-date, WMT has declined -5.52%, versus a 7.50% rise in the benchmark S&P 500 index during the same period.

About the Author: David Cohne

David Cohne has 20 years of experience as an investment analyst and writer. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers. More...

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