SFM: 3 UNDERVALUED Nasdaq Stocks

Last Thursday, the Nasdaq Composite closed above 11,000 for the first time. It was the index’s seventh straight day of gains. While the index fell below 11,000 this Friday, and again this morning, it doesn’t take away from the fact that technology stocks have been on a tear. The Invesco QQQ ETF (QQQ), which tracks the Nasdaq 100 index, a basket of the largest and most actively traded stocks, is up over 59% since March 23. This has easily outpaced the SPDR 500 ETF (SPY), which is up 46% over the same period.

The performance of the QQQ has been driven by technology stocks benefitting from a work-from-home investing theme. The Nasdaq Composite is now worth more than three times the S&P 500 index. This is the first time this has happened since March 2000, at the end of the tech boom of the 1990s. I am not saying history is going to repeat itself, but I want to highlight that the Nasdaq is trading at a very high valuation.

While many of the Nasdaq components are considered overvalued, there are still a few companies trading at low valuations based on the trailing twelve-month (TTM) price to earnings ratio (P/E).

Here are 3 stocks on the Nasdaq composite with P/E (TTM) ratios of 15 or below: Sprouts Farmers Market (SFM), United Therapeutics (UTHR), and Virtu Financial (VIRT).

Sprouts Farmers Market (SFM)

SFM is an American specialty grocer, offering health-oriented products that are fresh and naturally derived. The company offerings are focused on produce but feature a large bulk foods section and a vitamin department. SFM has also been expanding its offerings to meet the demand for plant-based, gluten-free, keto-friendly, and grass-fed products. The company currently sells more than 20,000 products, of which 90% are natural or organic.

SFM’s stock is up over 65% in the last six months, yet still undervalued with a P/E of 13.47. The company had a great second quarter. SFM reported earnings per share (EPS) of $0.61, which beat analysts’ estimates of $0.57. The firm also beat revenue estimates for the quarter with $1.64 billion compared with a consensus estimate of $1.6 billion. Both these figures were an improvement from the previous year.

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The demand for groceries increased rapidly as the coronavirus pandemic took hold. That demand is here to stay as long as the pandemic carries on. SFM has benefited from this increased demand and has also undertaken changes such as increasing e-commerce capabilities. The firm launched the Sprouts.com website and app to help customers with shopping.

SFM has also started several initiatives to increase sales and expand its customer base. It partnered with Instacart to offer same-day delivery to customers. It has also rolled out pickup service at all locations, and home delivery is now available at all stores. The company has been testing self-checkout at a few locations and will soon extend to others, and it is looking to expand private label products at its sites. SFM is also looking into providing ready-to-eat meals for customers.

The company is rated a Buy in our exclusive POWR Ratings service. The stock has grades of A in Trade Grade and Industry Rank, two components that make up the POWR Ratings. SFM is also the #10 Ranked stock in the Grocery/Big Box Retailers industry.

United Therapeutics (UTHR)

UTHR specializes in drug development for pulmonary arterial hypertension, a rare and progressive disease marked by very high blood pressure in the arteries of the lungs. The company’s pulmonary arterial hypertension solutions focus on the prostacyclin pathway, and many treatments are based on the same molecule, treprostinil.

It’s four main medications include Remodulin, an injectable formulation of treprostinil, Orenitram, an oral version, Tyvaso, an inhaled version, and Adcirca, a tablet that treats both pulmonary arterial hypertension and erectile dysfunction. Adcirca is also sold as Cialis by Eli Lilly (LLY). Almost all of the company’s sales are in the U.S.

UTHR’s stock is up 26% for the year, yet sports a P/E of 11.45, reflecting its low valuation. The company has benefited from a firm hold on the treatment of pulmonary arterial hypertension. The incidence of this condition is growing rapidly and currently has an unmet medical need. UTHR is working on bringing second-generation delivery systems to market for the drug Remodulin. This should widen the drug’s market. One delivery system is an implantable pump that should reduce pain and sepsis risk.

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UTHR is also looking to expand indications for Orenitram and Tyvaso, which could bring in more patients. The company also has four different types of organ manufacturing products in development. One of which is xenotransplantation, which is the process of grafting or transplanting organs or tissues between members of different species. The others include ex-vivo lung perfusion, three-dimensional organ printing, and regenerative medicine. The company reported earnings and revenue on July 29 and outperformed expectations in revenue with $362 million.

The company is rated a Buy by our POWR Ratings system. It holds grades of B in all POWR Ratings scores. It is the #49 ranked stock in the large Medical-Pharmaceuticals industry.

Virtu Financial (VIRT)

VIRT is a leading technology-enabled market maker and liquidity provider for the global financial markets. The company operates in three segments, including Market Making, Execution Services, and Corporate. Most revenue is generated through Market Making, though. A Market Maker is a firm that actively quotes two-sided markets of a security such as a stock, providing bids and offers. The Market Making unit for VIRT consists of market-making in cash, futures, and options markets across global equities, options, fixed income, currencies, and commodities.

VIRT has seen steady growth in its non-customer Market Making business due to recently launched Marketing Making strategies in Europe. It has also seen an improvement in its exchange-traded products block desk and has developed better options capabilities. In March of last year, the company bought out ITG, a company that helps brokers reduce the cost of implementing investments via technology-enabled analytics, execution, liquidity, and workflow solutions. This segment grew by 104% in the first quarter.

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Since VIRT serves as a high-frequency trader, it has benefitted from the volatility in the market due to the uncertainties from the pandemic. When markets are volatile, there is a more significant need for liquidity, which provides the company with more trading opportunities.

The company reported earnings yesterday outperforming expectations with EPS of $1.73 compared with the consensus estimate of $1.53. Revenues were also significantly higher than expectations with $905.9 million compared to the average estimate of $649.12 million. The company, which has a low P/E of 6.81, is up 37% for the year.

VIRT has provided shareholders with dividends for 20 straight quarters. It currently has a dividend yield of 4.4%, with a payout ratio of 72.2%. The company is also rated a Buy by our POWR Ratings system. It holds grades of B in Trade Grade, Buy & Hold Grade, and Peer Grade. It is also the #7 ranked stock in the Investment Brokerage industry.

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SFM shares were unchanged in after-hours trading Monday. Year-to-date, SFM has gained 28.01%, versus a 5.33% 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. He is the Chief Value Strategist for StockNews.com and the editor of POWR Value newsletter. 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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