2 extremely undervalued stocks to buy for 2022

The U.S. stock market posted another big gain in 2021, despite the continued toll of the COVID-19 pandemic — not to mention other potential pitfalls like supply chain grunts and rising inflation. the S&P500 jumped 27%, on top of a 16% increase in 2020 and a 29% gain in 2019. During this three-year period, the closely watched index nearly doubled.

While strong fundamentals have driven some of these gains, many stocks are showing lofty valuations heading into 2022. The S&P 500 is currently trading at more than 21 times forward earnings. That said, there are still some great deals available. Shares of General Engines (NYSE:GM) and SkyWest (NASDAQ: SKYW) appear particularly undervalued, offering investors substantial upside potential in 2022 and beyond.

General Motors poised to ramp up

GM stock jumped 41% in 2021, beating the broader market. However, it racked up its entire gain in the first half of the year before losing steam due to production cuts caused by the global shortage of semiconductors and longer-term concerns about whether it will successfully transition to electric vehicles (EVs).

General Motors stock versus S&P 500 performance for 2021, data from YCharts.

As a result, General Motors shares continue to trade at a rock bottom valuation. In early December, GM raised its full-year 2021 forecast for adjusted operating profit from $11.5 billion to $13.5 billion to $14 billion. Analysts now expect the company to post adjusted earnings per share (EPS) of $6.78 for the full year. GM shares are trading at less than 10 times the EPS projection (which may still be too conservative).

GM posts strong profits despite reduced production (particularly in the second half) due to global chip shortages. The company expects semiconductor supply to improve during 2022, enabling higher production. GM also recently increased its production capacity for full-size trucks by commissioning a new assembly plant.

Meanwhile, the combination of pent-up demand and low dealer inventories at the start of the year should keep prices high, which will benefit general margins. Increased production levels and dealer inventory will also boost free cash flow, thanks to improved working capital. This bright near-term outlook could help GM shares rebound again in 2022.

A dark colored Chevy Silverado driving down a rural road.

Image source: General Motors.

Equally important, GM’s investments in the future of the auto industry are about to pay off. New models built on GM’s Ultium EV platform will arrive at a rapid pace starting this year. Its subsidiary Cruise has obtained almost all the necessary permits to launch a robotaxi service in California. And its BrightDrop electric delivery van business is taking off fast.

Last year, GM set long-term revenue growth goals of $275 billion to $315 billion by 2030, with an operating margin of 12 to 14 percent. At the high end, that means an annual operating profit of $44 billion. For comparison, GM’s current market capitalization is just $91 billion. As investors gain confidence in those targets, GM shares could well hit triple-digit territory.

SkyWest: The recovery will continue

Regional airline SkyWest also looks massively undervalued heading into 2022. While most airlines posted huge losses in 2020, SkyWest has essentially broken even, thanks to its fee-based business model. fixed. The company is also on track to post a strong profit for 2021.

That said, analysts expect SkyWest to earn just over half of its 2019 adjusted EPS of $6.25 in both 2021 and 2022. In the near term, the company faces significant headwinds from staffing shortages that have been amplified by the rapid spread of the omicron COVID-19 variant. SkyWest has made deep schedule reductions since Christmas in response. This may explain why its stock gave up all of its gains from the start of 2021 until the end of last year.

SKYW Chart

SkyWest 2021 stock performance, data by YCharts.

However, SkyWest’s fortunes will likely change for the better as 2022 progresses. First, the company overcame regional airline pilot shortages more successfully than most of its peers. This puts it in a prime position to land high-margin flight contracts with its major airline partners in the future.

Second, demand for air travel will likely increase this spring after the current wave of the pandemic passes. Third, SkyWest has several new flight contracts online in 2022 and early 2023, which will drive revenue growth.

These factors will likely drive further earnings growth by the second half of 2022. By 2024, when all of its new contracts have fully increased, SkyWest’s earnings capacity is expected to return to pre-pandemic levels.

Today, SkyWest shares are trading at less than seven times the company’s 2019 earnings. This indicates more than 50% upside potential for investors in 2022 if profitability returns to 2019 levels by the end of the year.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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