Look, I’ve been hunting for undervalued stocks since before it was fashionable. While everyone else chases the latest AI darling or meme stock, I’m digging through the wreckage looking for companies trading below their true worth. September 2025 feels like one of those moments when the market’s throwing babies out with the bathwater.
The Morningstar US Value Index rose 5.05% in August while growth stocks crawled at 0.40%. That’s not a coincidence. After months of AI hype and mega-cap madness, money is finally rotating back to value. I’ve been waiting for this.
Why Value Stocks Are Having Their Day
Here’s what most people don’t get: when mega-cap growth stocks get overextended, smart money looks for what’s been left behind. Right now, small-cap stocks are trading at a 16% discount to fair value while large caps are at a 1% premium. That’s a spread I can work with.
The market’s been acting like a pendulum, swinging from overvalued to undervalued and back again. We started 2025 at a rare premium to fair value, got hammered by DeepSeek and tariff fears in early spring, and now we’re sitting on some genuinely cheap stocks.
Communications and real estate are currently tied as the most undervalued sectors at a 7% discount to fair value. Healthcare ties with communications as most undervalued after stocks have been beaten down by policy uncertainty.
My Current Undervalued Holdings
Bank of America (BAC) – The Beaten Down Giant
This is my biggest contrarian bet right now. BAC is trading at around $50, which multiple analyses show is undervalued by about 5% compared to intrinsic value of roughly $49.37. Some forecasts suggest potential upside to $54-59 range.
I started buying when it cratered to the low $30s in spring 2025 and have been averaging up. The stock has gained 45.86% since hitting its 2025 low on April 4, but I think there’s more juice left.
Management just announced a historic $40 billion buyback and raised the dividend 8%. When banks start buying back stock aggressively, they’re telling you something about valuation.
Kraft Heinz (KHC) – The Ignored Food Giant
Morningstar gives this thing 5 stars and says it’s trading at half of fair value. Half! I picked up shares in the low $30s because sometimes boring consumer staples get stupid cheap.
Food companies aren’t sexy, but people still need to eat. KHC has been working through years of problems, but the worst seems behind them. The dividend yield is solid and the valuation is ridiculous.
Alphabet (GOOGL) – The Antitrust Discount
Trading at a 10% discount to fair value according to Morningstar, mostly due to antitrust fears around potentially divesting Chrome and/or Android. I think the market’s overreacting to regulatory risk.
This is one of the few mega-cap tech names that’s actually undervalued. The advertising business prints money, YouTube is a monster, and cloud is growing. The government might make them split up, but they’ll still be profitable pieces.
Merck (MRK) – The Pharma Bargain
Down 21.7% since the start of the year but Investing.com analysis shows +45.5% estimated upside potential. That’s the highest upside in their undervalued picks.
Big pharma has been out of favor, but Merck’s pipeline is solid and they’re trading at a massive discount. Healthcare stocks have fallen out of favor due to policy uncertainty, but that’s creating opportunity.
Coterra Energy (COTE) – The Energy Play
Pure value stock with P/E forward below 10x and EPS growth estimated at +81.5%. The 27.5% upside makes it attractive for those seeking yield and stability in energy.
I’ve got a small position because energy can be volatile, but when something’s this cheap with decent fundamentals, it’s worth a shot.
The Ones I’m Watching
Advanced Micro Devices (AMD) – The AI Chip Discount
Down 5.0% year-to-date despite EPS growth estimates of +293.4%. The stock’s been beaten up but has excellent AI outlook. Guidance between $7-9B in 2025 suggests this discount won’t last.
First Solar (FSLR) – The Green Energy Contrarian
The green sector has lost momentum, but First Solar has solid fundamentals and Goldman Sachs lists it among top picks. Price around $165.80, down 6.4% YTD but with +30% upside potential.
Micron Technology (MU) – The Memory Monster
Estimated +912% EPS growth in 2025, riding the AI boom and demand for HBM (High Bandwidth Memory). The market doesn’t always price growth right away, and this could be one of those cases.
The International Angles
British American Tobacco (BTI) – The Sin Stock Special
Yeah, tobacco is a declining industry, but BTI trades at an exceptionally high dividend yield and they’re aggressively investing in alternative nicotine products like vaping and nicotine pouches.
Sometimes you make money on companies managing decline better than expected. The dividend alone makes this interesting for income investors.
Vivendi (VIV) – The Hidden Media Gem
French media conglomerate that owns Universal Music Group, Canal+ Group, and Gameloft. Stock price might not fully reflect the value of its individual holdings.
It’s a complex situation, but sometimes complexity creates opportunity when the market can’t properly value the pieces.
What Could Go Wrong
Let me be real about the risks. Value investing requires patience, and there’s no guarantee these “undervalued” stocks will ever close the gap to fair value. I could be wrong about intrinsic values, market sentiment could stay negative longer than I can stay solvent, or these companies could actually deserve their low valuations.
Economic recession could hammer cyclical names like banks and energy. Rising interest rates could pressure REITs and utilities. Regulatory crackdowns could hurt big tech names further.
The biggest risk? Being early. Value investors are often early, and early looks a lot like wrong in the short term.
My Strategy
I’ve got 40% in large-cap value (BAC, GOOGL, MRK), 30% in defensive value (KHC, BTI), 20% in small-cap value plays, and 10% in international opportunities (VIV).
The beauty of value investing is that you’re buying dollar bills for 80 cents. Even if I’m wrong about timing, the margin of safety should protect me. And when sentiment eventually turns, these names should snap back hard.
The Bottom Line
Small-cap stocks remain very attractively valued, trading at a 16% discount to fair value. Value stocks outperformed growth by a massive margin in August, and I think this rotation has legs.
Will every pick work out? Hell no. But when you’re buying quality companies at discounted prices, the odds are in your favor. The key is having patience and not panicking when the market takes its sweet time recognizing value.
I’ve been through enough cycles to know that value works, but it works on its own timeline, not yours.
The Fine Print
I’m a financial advisor, but I’m not YOUR financial advisor – there’s a difference. Undervalued stocks can stay undervalued longer than you think, and some might actually deserve their low valuations. Do your own research, talk to people smarter than me, and never bet money you need for rent.
But if you’re gonna invest anyway, at least invest in companies trading below their intrinsic worth.
