Undervalued Dividend Growth Stocks to Research This Week (05/09/2022)

Welcome back to this series on the market and finding undervalued dividend growth stocks to research.

This week was quite the rollercoaster, with the largest daily increase and largest daily decrease in the indexes this year.  Additionally this year has seen the markets tumble, with the Nasdaq falling for 5 straight weeks.  This volatility has caused a lot of uncertainty with investors, as shown on the Volatility Index (Vix).  The Vix has risen over 40% in the last month.  Uncertainty over rates, inflation, global conflict, recession, elections, housing.  You name it, there is uncertainty.  As I have said many times here, the market likes certainty and when it doesn’t have it is when we see these drastic swings like we have seen this week.  

The biggest driver this week was the Federal Reserve’s decision to raise the interest rates 0.50%.  This rate increase was very well covered by the media and most investors were expecting it, but it still represents the largest increase in rates in years.  The immediate response from the market was a huge jump on Wednesday after the announcement.  That positive sentiment quickly changed by Thursday, where we saw the market drop significantly, with the Nasdaq down nearly 5% in one day.  The Fed’s decision to raise rates and sell off some of its balance sheets reduces the accommodative policies that we have had for the past two years.  

As David Bahnsen stated on Friday in his Dividend Cafe newsletter, the Fed has taken away the “punch bowl” from the party.  The market now has to determine the appropriate level of price multiples to assign companies and forecast the economic realities now that some of the easy monetary policy has been removed.  This might take time and will cause continued volatility until a consensus has been made.

Even with all this volatility, the indexes ended pretty close to where they started the week.  The Dow was down only 0.24%, the S&P 500 down 0.21%, and the Nasdaq down 1.54%.  If you were watching each day it didn’t feel like this was going to be the outcome but this is just another reason to not be too concerned over the day to day fluctuations.

Year to date the markets continue to drop, with -9.46%, -13.49%, and -22.37% drops respectively in the indexes, with the Nasdaq in an official bear market.  As long term investors this is actually a good thing as it allows us to buy shares at a discount to what we could just a few months ago.  Morningstar recently came out with an article stating that they believe that the market is now 12% undervalued. 

There is no way to know whether the selling will continue but for long term investors this market appears to finally provide some attractive valuations and opportunities to collect higher yields on top quality companies.  Just look at a few of the declines in some top quality dividend names:

BLK – down 31.34% YTD

HD – down 29.08%

NKE – down 31.31%

JPM – down 21.87%

Are these companies’ financials and future prospects 20-30% lower now?  Of course not.  We should be looking for opportunities to buy into great businesses at lower valuations.  Dollar cost averaging is the method I employ, adding money each week to take advantage of the lower pricing.

This week’s results of the valuation screening shows 23 companies on my tracker are now undervalued based on my 5 criteria.  

Here are the quality dividend growth stocks that are appearing undervalued based on all 5 of my valuation methods:

1. Discount to Analyst Price Target
2. 10% or more off the 52-week high
3. Discounted Cash Flow (DCF)
4. P/E Mean Reversion
5. Dividend Yield Theory (DYT)

Note: I have increased the percent off of the 52-week highs to 10% or more to reflect the current market conditions.

Stocks Listed: AOS, APD, BAC, BLK, BR, CMI, DLR, FNF, HBI, HD, IIPR, JPM, LEG, LOW, MDT, MMM, MS, MSM, PRU, SMG, SWK, TD, V

This list should be used to begin your research to determine if the stock meets all of your investment goals and criteria. Valuation should only be one of many aspects you look at when deciding to make an investment.

Best of luck, happy investing, and check back next week for more undervalued stock ideas!