When it comes to investing in stocks, investors have their preferences. Some, for instance, prefer dividend-paying stocks. Others may focus their stock-picking on sectors they feel they know well. Still other investors may favor large-company stocks over small-company stocks.
Regardless of their preferences, however, most investors would agree on one thing: They like undervalued stocks.

After all, who wants to pay more for a stock than you need to?

Today, we’re looking at stocks that aren’t just undervalued by a little bit. No, these stocks are ultracheap based on Morningstar’s metrics. Specifically, these ultracheap stocks are trading for less than half of what our analysts think they’re worth.

Such deeply undervalued stocks come with a few warnings, though. For one, ultracheap stocks are usually significantly undervalued for a reason and therefore carry sizable risks; in fact, the five ultracheap stocks on our list carry High or Very High Morningstar Uncertainty Ratings. Cheap stocks also often require patience, as the yawning gap between the stock’s current price and Morningstar’s fair value estimate can take years to narrow—if it narrows. But for risk-takers with patience, these cheap stocks may hold appeal.

5 ultracheap shares

The stocks of these companies with economic moats were trading more than 50% below Morningstar’s fair value estimates as of Nov. 16, 2023.

1. PayPal PYPL
2. Albemarle ALB
3. Match Group MTCH
4. Kogan KGN
5. Lendlease Group LLC

Here are some key Morningstar metrics about these cheap stocks, as well as commentary after earnings from the analysts who cover these companies. All data is as of Nov. 16, 2023.

PayPal

• Price/Fair Value: 0.43
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow
• Morningstar Style Box: Large Core
• Industry: Credit Services

The only large company on our list of ultracheap stocks to buy, PayPal built an enviable network of merchants and consumers in the early days of e-commerce. But a worsening macroeconomic climate is pressuring top-line growth, leading management to focus on margin improvement. PayPal’s undervalued stock trades 57% below our fair value estimate of $135 per share.

We think PayPal’s third-quarter results were mixed, and management’s guidance suggests that the fourth quarter will be a little softer than expected. However, we are encouraged by comments from new CEO Alex Chriss and see his thoughts on PayPal’s long-term prospects as being roughly in line with our own. We will maintain our $135 per share fair value estimate for the narrow-moat company and view the shares as deeply undervalued.

Net revenue grew 9% year over year on a constant-currency basis. Volume for PayPal branded grew 6% in constant currencies, and unbranded (which is primarily Braintree) saw 32% volume growth. In both instances, the growth rate accelerated modestly from the second quarter. PayPal branded growth could be seen as disappointing, though, given that management previously communicated that this area had seen growth accelerate significantly in July. This appeared to have moderated, and management expects the trend to continue into the fourth quarter. Active accounts continued to decline modestly on a sequential basis, but year-over-year growth in transactions per active account held strong at 13%.

PayPal continues to see pressure on transaction margins, although the rate of sequential decline slowed in the third quarter. A 12% year-over-year decline in nontransaction costs created a partial offset, but adjusted operating margins declined modestly to 22.2%, compared with 22.4% last year. Management lowered its full-year adjusted margin improvement guidance to 75 basis points from 100 basis points, pointing to some additional margin pressure as the company sees a bigger volume shift to the lower-margin Braintree business. We think some margin pressure is understandable in the current situation but would like to see PayPal maintain operating margins as it moves into 2024.

Brett Horn, Morningstar senior analyst

Albemarle

• Price/Fair Value: 0.43
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow
• Morningstar Style Box: Mid-Value
• Industry: Specialty Chemicals

The stock of the world’s largest lithium producer makes our list of ultracheap stocks to buy, as it trades 57% below our $300 fair value estimate. As the adoption of electric vehicles increases, we’re forecasting high-double-digit annual growth in global lithium demand. However, declining lithium prices have hurt Albermarle’s results this year.

Albemarle’s third-quarter results and management’s updated guidance reflected the decline in lithium spot prices that will weigh on near-term profits. In response, management said it will review the company’s lithium growth investments with the goal of preserving financial flexibility. We think the likely outcome will be Albemarle slowing its lithium capacity investment, which is in line with how the company has historically operated during a lithium price downturn.

We updated our model to assume lower volumes and reduced capital expenditures throughout our 10-year forecast period. We also updated our model for lower profits in the nonlithium battery segments and lower near-term lithium prices. As a result, we reduced our fair value estimate to $300 per share from $350. Of the $50 reduction, $30 comes from our outlook for lower volumes, $15 is from our reduced forecasts for specialties and profits in the Ketjen segment, and $5 is due to lower near-term lithium prices. Our narrow moat rating is unchanged.

We view Albemarle shares as materially undervalued, trading in 5-star territory and at roughly 40% of our updated fair value estimate. We think the market is concerned that lithium spot prices will fall further to the end of 2023 and into 2024 because of oversupply concerns. We disagree and expect prices will rise in 2024 as battery producer inventory destocking runs its course. In recent days, multiple top-seven lithium producers have announced supply delays or production cuts or signaled a review of growth plans in response to lower lithium prices. Further, recent announcements from marginal-cost producers in China indicate supply is beginning to shut down in response to lower prices. We think this will result in the market balancing over the next couple of quarters. As demand grows, we see lithium returning to structural undersupply in 2024, leading to higher prices.

Seth Goldstein, Morningstar strategist

Sabre

• Price/Fair Value: 0.44
• Morningstar Uncertainty Rating: Very High
• Morningstar Economic Moat Rating: Narrow
• Morningstar Style Box: Small Core
• Industry: Travel Services

Sabre stock looks cheap, trading 56% below our fair value estimate of $9 per share. Sabre is a top player in the travel industry and has built a narrow economic moat; we expect Sabre to remain a key distribution channel valued by airline suppliers, travel agents, and travelers for the next decade. However, ongoing economic and credit uncertainty may keep sentiment around the stock negative in the near term.

Like last quarter, Sabre shares rose around 20% from oversold conditions, as it once again surpassed sales and EBITDA guidance and as free cash flow inflected positive, which we have noted could serve as a catalyst. Despite management execution, shares are still down about 35% this year, which we think is driven by investors’ distaste for debt-leverage companies amid a still uncertain economic environment and higher costs of capital. We think this concern is misguided, especially given Sabre’s improved liquidity profile. We don’t plan to materially change our $9 fair value estimate and see shares of this narrow-moat company as meaningfully undervalued, although action is likely to remain volatile.

Revenue and EBITDA came in at $740 million and $110 million, respectively, compared with guidance of $725 million and $100 million. Nearly 100% of incremental sales growth flowed to EBITDA, which was up nicely from $73 million last quarter and $34 million a year ago as labor and technology efficiencies took hold. Free cash flow was $39 million versus the $20 million guidance and represented the highest result in four years.

Sabre maintained 2023 sales guidance at $2.9 billion to $3.0 billion, which is above the initial guidance in February of $2.8 billion to $3.0 billion. The firm once again increased 2023 EBITDA targets to $345 million from $340 million, well above the initial guidance in February of $300 million to $320 million. We plan to keep our $2.9 billion and $346 million respective forecasts for the full year largely unchanged.

While Sabre’s debt/EBITDA should finish around 14 times this year, it has improved its liquidity profile. At year-end 2022, it had $1.8 billion due in February 2024 at Libor plus 2% and another $2 billion maturing in 2025 at a fixed rate of 7.5%. Now it has just $435 million in debt due in 2025, $130 million in 2026, and $2.4 billion in 2027 at a blended rate of 8.6%.

Dan Wasiolek, Morningstar senior analyst

Kogan

• Price/Fair Value: 0.44
• Morningstar Uncertainty Rating: Very High
• Morningstar Economic Moat Rating: None
• Morningstar Style Box: Mid-Growth
• Industry: Internet Retail

We ascribe share price weakness to a material decline in sales and earnings from boom-time levels. The market appears more cautious than us on Kogan's ability to expand margins, or its long-term growth, which we expect to be underpinned by a structural shift to e-commerce. We expect revenue growth to reignite as consumer spending moves to online and for margins to expand, as operating expenses normalize. Despite a challenging macroeconomic environment, recent trading is encouraging. For the month of July 2023, adjusted EBITDA increased over 130% on the previous corresponding period. We expect further cost efficiencies to drive margin expansion, with revenue supported by growing Kogan First subscriptions.

Shares screen as significantly undervalued. The market appears cautious over Kogan’s ability to expand profit margins, or its long-term growth potential, which we expect to be underpinned by a structural shift to e-commerce. We expect macroeconomic challenges to ease from fiscal 2025, and discretionary spending to recover. We forecast improved consumer sentiment and operating leverage to drive EBITDA margins to midcycle levels of 11%. We forecast marketing costs as a percentage of gross sales to decline as marketing spending within the e-commerce industry normalizes, and Kogan First memberships gradually increase. Also, we expect gross margins to remain structurally higher than before the pandemic, after the exit of lower-margin product lines and due to contributions from Kogan First. In the first quarter, adjusted EBITDA margin, as a percentage of gross sales, was 4.2%. Our fiscal 2024 EBITDA margin estimate is unchanged at 4.7%, including the seasonally stronger margins over the Christmas trading period.

Given low switching costs for customers to comparison shop and increasing online competition from both Amazon and omnichannel retailers, we don’t believe Kogan is differentiated enough from a product, shopping experience, or process standpoint to award an economic moat. However, we still expect Kogan to boast high returns on capital, and attribute this to structural industry tailwinds of online migration, the ramp up of its marketplace, and being a capital light business by nature.

Johannes Faul, Director of Equity Research

Lendlease Group

• Price/Fair Value: 0.45
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: None
• Morningstar Style Box: Mid-Value
• Industry: Real Estate - Diversified

Lendlease is a diversified global property developer, landlord, property manager, fund manager, and builder on a range of development projects, funds, and completed properties around the world. Interests have included include apartments, offices, retail property, aged care facilities, retirement and military accommodation, roads, and rail tunnels.

The group is evolving on numerous fronts: exiting noncore businesses; seeking better returns on capital; accelerating its development pipeline; and advancing projects outside its homebase of Australia. Lendlease sold its risky engineering business in calendar 2020, though it retained liability for engineering/construction projects with several years to run. Lendlease found a buyer for its engineering services business after two years of marketing, and the price was respectable. Lendlease is also gradually reducing its exposure to retirement living and military housing. Lendlease’s project mix will then predominantly comprise residential and commercial property.

The group’s ongoing business comprises three segments: development, investments, and construction. We don’t expect much growth in construction earnings, that business is primarily to preserve scale and construction expertise in support of Lendlease’s development business. The investments division houses a wide range of businesses including, military housing, property asset management and funds management. We expect the latter two business lines to grow substantially as Lendlease sells stakes in its development projects.

This is a trade-off, relinquishing potential development profits in return for lower risk management fees, performance fees, and capital to accelerate its development pipeline.

We do not ascribe a moat to Lendlease due to the competitive industries in which it operates. Development accounted for more than half of EBITDA in 2019 and 2020 and we estimate it will grow to more than two thirds of EBITDA over the next decade, based on a large pipeline of work. We assume attractive margins on this pipeline, but there are risks that are largely outside of Lendlease’s control, including market demand, rival developments, construction costs and potential delays, and political risk.

That said, we think the projects in its pipeline look attractive for Lendlease, and give it some moat-like characteristics. The planning approvals, development contracts and preferred developer agreements Lendlease has with municipalities, landowners and planning bodies are valuable intangible assets.

Alexander Prineas, Equity Analyst

What Are Undervalued Stocks?

Undervalued stocks are stocks that are trading below some estimate of their worth. Cheap stocks often carry low price/earnings, price/book, or price/sales multiples.

From Morningstar’s perspective, undervalued stocks are those that trade below Morningstar’s fair value estimates.

The Morningstar fair value estimate represents what Morningstar analysts think a particular stock is worth. Fair value estimates are rooted in the fundamentals and based on how much cash we think a company can generate in the future, not on fleeting metrics such as recent earnings or current stock price momentum.

Morningstar also assigns stocks Uncertainty Ratings, which reflect our analysts’ confidence around their fair value estimate for a given stock. Our analysts can foresee a wider range of outcomes for some companies than others; in those instances, companies are assigned Very High or High Uncertainty Ratings. Companies with more certain cash flows and therefore a narrower range of business outcomes earn Medium or Low Uncertainty Ratings.