3 Undervalued Large Caps With Large Upside

The faster they fall, the faster they rise.

Global equity markets are staging an impressive rally this week even as the Russia-Ukraine situation worsens. The rally in U.S. stocks is especially surprising with the Fed set to hike rates for the first time since 2018. 

Among the biggest winners of the last few days are technology and consumer discretionary names that have been hit hardest since the start of the year. Nvidia, Starbucks, and Moderna are examples. At least for one day, Chinese ADRs have also gone from stone cold to red hot.

The sudden surge in beaten-down equities complicates things for investors that may have been looking to ease back in the market. However, with plenty of geopolitical and inflationary risks ahead, we are far from out of the woods.

That means volatility will probably remain high and that there will still be plenty of bargains to be had in a stock market experiencing its own version of March Madness. In the large-cap space, these three companies have the return potential to make investors go dancing.

Is Onsemi Stock a Good Semiconductor Play? 

After climbing as high as $71.25 in January, Onsemi (NASDAQ: ON) is back to around $60, a more favorable entry point. The semiconductor company is trading at 14x this year’s earnings forecast which makes it an inexpensive way to play what is expected to be a rebound year for the chip-making industry.

Onsemi makes a wide range of semiconductor components, a product set that has expanded over the years due to a flurry of acquisitions. The former Motorola business now calls its former parent a key customer in addition to Apple, Hewlett-Packard, Intel, Samsung, and a variety of other original equipment manufacturers (OEMs). 

With 86% of revenue derived outside of the U.S., Phoenix-based Onsemi is an international stock in a domestic wrapper. After recording $6.7 billion in sales last year, its top line is expected to grow 14% this year. Profit growth is forecast to be upwards of 40% thanks to better availability of supplies and higher pricing across its end markets. Power and sensing products are expected to be in especially high demand as the global auto and industrial sectors stage rebounds of their own.

Will Henry Schein Stock Keep Going Up?

Medical products distributor Henry Schein, Inc. (NASDAQ:HSIC) has outperformed year-to-date and is trading near an all-time high. Yet it still has good upside. That’s because at 19x trailing earnings there is room for the stock to grow into its five-year historical average P/E of roughly 23x. 

It can even be argued that Henry Schein deserves a more premium multiple given its recent growth and fundamentals. Last year profits were up 52% amid broad-based strength across its three businesses— dental, medical, and technology. Growth is expected to moderate from the post-Covid boost of 2021, but should remain steady.

As patients make their way back to dental offices, Henry Schein’s vast assortment of branded and private label products will be in demand. And with its dental unit accounting for around 60% of revenue, this is good news for the company—even if increased dentist appointments to make up for treatment lapses are bad news for patients.

According to MarketBeat, the global dental services market is expected to grow about 8% annually over the next five years. This bodes well for Henry Schein’s focus on expanding its presence overseas. 

Management has a history of underpromising and over-delivering. Earnings consistently top the consensus estimate and the company’s own guidance. Henry Schein’s projection for 7% EPS growth this year could again prove conservative. At the current valuation, this is a stock growth at a reasonable price (GARP) investors should sink their teeth into. 

Is Petrobras Stock Undervalued?

Looking south of the border, Brazilian ADR Petróleo Brasileiro SA (NYSE:PBR) is looking attractive. Better known as Petrobras, the state-owned energy company has momentum on its side and a long road back to its days of trading in the $70’s. 

In the intermediate-term, Petrobras is expected to reap the rewards of elevated oil prices as it continues to ramp production from its core Campos Basin assets. Improvements being made on the expense side of the ledger are expected to help drive a 56% jump in EPS this year after a strong rebound in 2021.

This means that Petrobras shares can be had for a mere 4x this year’s earnings. It is a compelling valuation for a dual-threat stock that provides exposure both to the oil and gas industry and an emerging market economy with a bright long-term outlook.

Petrobras doesn’t come without its caveats, however. The company’s $47.6 billion debt burden is being reduced but represents a significant leverage risk. Brazil’s recent issues with corruption and economic strife are also concerns. 

But with the country recovering well from the pandemic and much of its economic fortunes tied to the energy and materials markets, the risk-return looks favorable. The recent pullback from $15 to $13 appears to be an opportunity to pounce on some long-term return potential.