Published on: 2026-02-19
When the S&P 500 approaches a 30x trailing price-to-earnings ratio, and the federal funds target range remains between 3.5% and 3.75%, the importance of inexpensive cash flows increases. In this environment, investors become less willing to pay any price for growth and instead require a visible earnings yield, credible free cash flow, and dividends that exceed the returns offered by bonds.
A precise definition of “cheap” is necessary. The best undervalued stocks are not simply those with low share prices. Instead, they are high-quality businesses trading at below-market multiples due to temporary earnings volatility, investor fatigue, sector rotations, or short-term uncertainty. When executed properly, purchasing undervalued stocks is an exercise in margin of safety rather than an attempt to acquire distressed assets.
The following companies are large, liquid entities trading at significant valuation discounts and possess cash-generation profiles capable of withstanding a typical recessionary period.
Stock (Ticker) |
Sector |
Price (18/02/2026) |
Market Cap (18/02/2026) |
Forward P/E |
Dividend Yield |
Why It Looks Undervalued In 2026 |
| Verizon (VZ) | Telecom | $48.04 | $202.66B | 9.78 | 5.89% | Durable subscription cash flows priced like a melting-ice-cube |
| Pfizer (PFE) | Pharma | $27.37 | $155.62B | 9.23 | 6.28% | Post-pandemic earnings reset still compressing sentiment |
| CVS Health (CVS) | Health Care | $77.50 | $98.99B | 10.85 | 3.42% | Low revenue multiple for an integrated payer-provider model |
| Bristol Myers Squibb (BMY) | Pharma | $59.72 | $121.64B | 9.58 | 4.22% | High cash generation with a valuation that prices in a harsh patent cliff |
| Comcast (CMCSA) | Media/Telecom | $31.30 | $113.69B | 8.59 | 4.18% | Enormous free cash flow and buybacks priced for secular decline |
| Bank Of America (BAC) | Financials | $53.36 | $384.86B | 12.31 | 2.10% | Scale winner if rates normalize without a deep credit event |
| Citigroup © | Financials | $116.27 | $203.18B | 11.40 | 2.06% | Restructuring discount persists despite buybacks and capital return |
Verizon is a stable cash-generating company that can become mispriced when market participants seek more dynamic opportunities. The stock trades at less than 10x forward earnings, offers a 5.89% dividend yield, and demonstrates a 9.93% free cash flow yield, which is notably high for a national wireless franchise.
One hard fact that matters: Verizon has raised its dividend for 21 consecutive years, and the current annual payout is $2.83 per share.
What to watch: leverage and competitive intensity. The bull case strengthens if capital expenditures peak and service revenue growth holds steady.
Pfizer is currently valued as though its earnings base has sustained permanent impairment. A 9.23x forward price-to-earnings ratio and a 6.28% dividend yield indicate market skepticism regarding the post-pandemic revenue composition, despite the company maintaining pharmaceutical-level margins and a robust product portfolio.
A key fact: Pfizer pays $1.72 per share annually and has 15 years of dividend growth, but the payout ratio is elevated, which keeps pressure on the narrative.
What to watch: dividend coverage as earnings normalize and the pipeline replaces declining legacy cash flows.
CVS exemplifies a situation in which headline financial metrics may be misleading. While the trailing price-to-earnings ratio appears distorted, the forward multiple of 10.85x more accurately reflects normalized earnings expectations.
Here is the anchor: CVS generated $7.81B in free cash flow over the last 12 months while paying a $2.66 dividend (3.42% yield). That combination is hard to find at this valuation.
What to watch: medical cost trends and debt management. CVS carries large net debt, so execution matters.
Bristol Myers is valued as if it were a company in decline, even though its cash flow fundamentals remain robust. The stock trades at 9.58x forward earnings and approximately 9.47x price-to-free-cash-flow, supported by $12.85 billion in free cash flow over the past 12 months.
One fact that supports “quality value”: BMY has 19 years of dividend growth and pays $2.52 per share (4.22% yield).
What to watch: the patent cliff is real. The opportunity is that the market often over-discounts cliffs and underprices the replacement cycle.
Comcast is cheap for a reason, and that is precisely why it can be mispriced. The market is focused on cord-cutting and broadband competition, yet the company generated $21.88B in free cash flow over the past 12 months and trades at 8.59x forward earnings.
A concrete shareholder-return signal: Comcast’s buyback yield is 5.09%, and the dividend yield is 4.18%, creating a 9.27% shareholder yield.
What to watch: broadband net adds and pricing power. If broadband stabilizes, the multiple can rerate quickly.
Bank of America represents a large-scale investment in U.S. credit, deposits, and payments and is currently valued below peak-cycle expectations. With a 12.31x forward earnings multiple and a 1.39x book value, the valuation is relatively undemanding for a major US bank.
A fact that signals capital return discipline: shares outstanding fell 3.21% year over year, alongside a $1.12 dividend (2.10% yield).
What to watch: credit costs and net interest income sensitivity if rates fall faster than expected.
Citigroup frequently trades at a so-called 'complexity discount,' a trend that persists in 2026. The stock is valued at 11.40x forward earnings and approximately 1.06x book value, while the company continues to reduce its share count by 3.45% year over year.
A hard fact: the dividend is $2.40 per share (2.06% yield) and buybacks contribute a 3.45% buyback yield.
What to watch: execution on simplification and returns on equity. Citi is the most cyclical pick on this list, so sizing matters.
Investing in undervalued stocks is most effective when low valuations result from temporary uncertainty rather than permanent deterioration of the business.
Prioritize free cash flow yield over headline metrics such as low price-to-earnings ratios. Strong cash flow supports dividends, share repurchases, and debt reduction.
Forward price-to-earnings multiples are only meaningful if the projected earnings are credible. These should be evaluated alongside balance-sheet strength and industry conditions.
Demand A Real Margin of Safety: In 2026, the S&P 500 forward P/E sits around 21.5. A stock at 9x to 12x needs less perfection to work.
Shareholder return mechanisms, such as dividends and share buybacks, represent an undervalued form of compounding, particularly when valuation multiples are already low.
Prioritize companies facing challenges that are addressable, such as cost structure adjustments, post-cycle normalization, or temporary demand shocks. In contrast, fundamentally flawed business models are unlikely to recover.
Most value traps exhibit common characteristics, including weak cash flow, excessive leverage, and reliance on overly optimistic turnaround narratives.
Equity stories driven primarily by debt are problematic; if refinancing risk is central to the investment case, it does not constitute a sound investment thesis.
Dividend yields are only attractive when coverage is well-supported, and management retains sufficient flexibility to adjust payouts as needed.
Low price-to-earnings ratios at peak profit margins can be misleadingly expensive. It is important to evaluate earnings sustainability under less favorable conditions.
Businesses experiencing secular decline require a disciplined approach to share repurchases, debt reduction, or reinvestment to avoid gradual deterioration.
Overconcentration in undervalued stocks can be risky, as such stocks may remain undervalued for extended periods. Diversification across sectors and staggered entry points are recommended.
A cheap stock is one that trades at a discount to the market's earnings and cash-flow multiples without necessitating flawless business performance. In 2026, this generally corresponds to a forward price-to-earnings ratio in the low teens or below, supported by stable cash flow and manageable balance-sheet risk.
No. Penny stocks are typically small, illiquid, and operationally fragile. In contrast, the best undervalued stocks are often large, profitable companies that are temporarily out of favor. The term “cheap” refers to valuation relative to earnings and cash flow, rather than the nominal share price.
Markets can ignore a stock when near-term uncertainty dominates the narrative. Reratings usually need an earnings inflection, credible guidance, or visible capital return. Without a catalyst, a low multiple can persist even when fundamentals are stable.
Yield is useful, but only if it is covered by cash flow and the balance sheet can absorb stress. A high yield can signal a bargain, or it can signal distress. Always pair yield with payout ratio, debt load, and free cash flow.
Most investors achieve better outcomes with a concentrated portfolio of undervalued stocks rather than relying on a single selection. Holding seven to fifteen positions can diversify sector risk without diluting conviction. More cyclical holdings should be allocated a smaller portfolio weight compared to defensive, cash-generating companies.
In 2026, maintaining valuation discipline is essential. With interest rates remaining restrictive and the broader market trading at elevated valuation multiples, the most reliable advantage is achieved by acquiring genuine earnings and cash flow at lower prices.
The seven companies discussed are not undervalued due to their size, but rather because investors are discounting specific, identifiable challenges. Such situations present opportunities for asymmetric returns, provided the underlying business is resilient, the balance sheet remains strong, and the purchase price allows for early entry without excessive risk.
Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
