Value stocks have been the most overlooked area of the stock market in today’s cycle, replaced by the popular growth stories that have captured investor attention (and capital) over the past year or so. However, a few key factors in market fundamentals may trigger a rotation back into value, or specifically undervalued stocks, over the coming months and quarters.
With this in mind, investors can run a screening process to land their portfolios on the right side of the market, a screener that looks for high returns on capital (for future compounding benefits) and strong business models that can sustain economic cycles better than others. Finding this criterion, all investors need is a reasonable discount, whether in terms of price action or valuation multiples, to deliver the sort of upside everyone is looking for.
Fitting this filtering process, names like Ulta Beauty Inc. (NASDAQ: ULTA), Adobe Inc. (NASDAQ: ADBE), and even Sprouts Farmers Market Inc. (NASDAQ: SFM) return the best profile. Not only are these names positioned in a low-cyclical space within their industry, which is reflected in their high profit metrics, but they also trade at valuations that create an asymmetric upside opportunity for investors today.
Ulta Stock’s Discount Won’t Last Long
Even though Ulta stock now trades near its 52-week high, other traditional valuation methods indicate how cheap this stock is today. Looking at the forward price-to-earnings (P/E) ratio for Ulta, which is currently 19.7x, investors can notice a significant discrepancy compared to historical levels.
Ulta, as a business, hasn’t been this undervalued since the onset of the 2020 COVID-19 pandemic, despite today’s world being significantly different and better than it was back then. There are no lockdowns keeping customers from buying skincare and makeup products, and the company’s fundamentals have done nothing but keep pushing on.
As one of the largest players in the consumer discretionary space, Ulta commands favorable pricing power dynamics, enabling its gross profit margins to reach as high as 42.7%. High margins are the building blocks of profitable businesses, the ones that compound investor capital year after year.
One metric that can solidify this theme is the return on invested capital (ROIC) rate for Ulta’s business, which came in at an impressive 26.8% over the past 12 months. ROIC matters because, eventually, annual stock price performance tends to align with the long-term ROIC rate, and for Ulta, this has consistently been between 24% and 27%.
This setup might explain why Michael Baker, an analyst at DA Davidson, decided to reiterate his Buy rating on Ulta stock. This time, he also placed a $550 per share price target on the company to call for an additional 16% upside from today’s price. Given where the forward P/E is today, chances are Ulta might not only meet but exceed this valuation target.
Adobe Clocks in Lowest Valuation on Record
Following in the same theme as Ulta, Adobe’s forward P/E of 17.1x is now the lowest it has been on record, and that simply cannot sit well with logical investors who understand that today’s economic landscape is nowhere near where it could be to justify such a low price on a company like Adobe.
What makes Adobe great is that most of its revenue comes from subscription services, which provide a steady and predictable stream of cash flows. This allows management and analysts to manage and forecast financials accurately into the future; it also inherently reduces the volatility that investors might see in the stock price.
Now that Adobe's price has fallen to only 64% of its 52-week high, the asymmetric nature of the company’s potential upside stands out, as it should. This will allow investors to enjoy a relatively smooth ride higher in the coming months and quarters. With this setup in mind, it shouldn’t be a surprise to see sentiment change for Adobe soon enough.
In fact, Gil Luria from DA Davidson has placed a Buy rating on Adobe as of late June 2025, alongside a price target of up to $500 per share, which would command an upside potential of 34% from today’s price. Adobe’s ability to generate an ROIC of up to 36% should be enough to keep the stock compounding higher into the future.
A Special Case for Sprouts Farmers Market
Although this stock has already delivered a massive rally of up to 100% over the past 12 months, it still has considerable potential to continue pushing higher. The reason for the additional upside lies in the company’s business itself, as part of the defensive and non-cyclical space that might become more attractive during a broader rotation into value.
Sprouts Farmers Market sports a 15% ROIC, which puts it at the top of the peer group in terms of profitability, so the discounted multiples don’t, and shouldn’t, apply in this case. While the other names on this list operate in a space that could be a breeding ground for competition or diminishing returns, Sprouts has one of the oldest business models in place.
Supermarket chains differ from technology stocks or retail because those that can lead in profitability tend to remain leaders for a long period. This is why this stock commands a premium valuation of 30.8x forward P/E over the rest of the peer group and even the S&P 500 index. It's all for good reason, and its recent price action justifies that view.