Identifying True Bargains: A Value Investor's Guide to Stocks Trading at Significant Discounts

The current valuation landscape presents a classic value investor's dilemma. The broad U.S. stock market, having rallied more than 17% last year, now trades 4% below Morningstar's fair value estimate. This suggests a modest level of skepticism among professional analysts about near-term prospects. Yet, within this aggregate picture, a stark divergence emerges. By investment style, small-value stocks are the most undervalued, trading 23% below our fair value estimate. This gap is not a new anomaly but the culmination of a powerful, long-running trend. For the past 17 years, growth stocks have significantly outperformed their value counterparts, a gap largely explained by a widening valuation spread. As one analysis notes, the Russell 3000 Growth Index returned 13.0% per annum versus the 7.6% per annum return of the Russell 3000 Value Index over that period, with the discount at which value stocks trade relative to growth stocks widening dramatically.

This sets up the core investment question. A market discount is not an automatic invitation to buy. The thesis of true value investing requires looking past simple metrics like a low P/E ratio. It demands identifying companies with durable competitive advantages-what we might call a "wide moat"-that are trading at a meaningful discount to their intrinsic value. The current environment, where small-value stocks are deeply discounted, provides fertile ground for this search. But it also carries a risk: the market's recent outperformance, particularly in AI-driven growth names, has been supported by lofty expectations. As Morningstar notes, artificial intelligence stocks require even stronger growth to support lofty valuations. This creates a tension. The undervalued stocks may be cheap for good reasons, but the sheer magnitude of the discount in small-value names hints at a potential mispricing that disciplined investors can exploit-if they can separate a genuine value opportunity from a value trap.

Case Studies: Stocks Trading at Significant Discounts

The search for intrinsic value leads us to specific names where the market's discount appears particularly wide. Three stocks stand out from recent analysis, each trading at a substantial gap to their estimated fair value: Palo Alto Networks at a 28.5% discount, Sandisk at 33.8%, and Reddit at 31.5%. These figures represent a classic value opportunity, but the investor's task is to determine if the discount is a sign of mispricing or a reflection of genuine business challenges.

Palo Alto Networks exemplifies a high-quality business facing a cyclical valuation reset. The cybersecurity leader is trading at a 28.5% discount to its estimated fair value, a notable gap for a company with a dominant market position. Its recent financials show pressure, with profit margins dropping from last year. Yet, the core moat remains intact. The company's strategic product announcements, like its Cortex Cloud ASPM platform, aim to extend its technological lead. More importantly, its earnings are projected to grow at an annual rate of 18.9%, which still outpaces the broader market. For a value investor, the question is whether the current discount fully accounts for the temporary margin compression and the long-term growth trajectory of a company that is a foundational player in enterprise security.

Sandisk presents a different dynamic, a mature technology business in a capital-intensive industry. The data storage giant is estimated to be trading at a 33.8% discount to its fair value. Its recent results show a decline in net income, though revenue grew. The key here is to look beyond the headline earnings. The company's future revenue growth is expected to outpace the broader market, a critical point for a business whose value is tied to its ability to scale production and maintain pricing power in a competitive landscape. The wide discount may reflect investor skepticism about the sustainability of NAND flash pricing cycles, but it also creates a potential margin of safety if the company can navigate the next cycle successfully.

Then there is Reddit, a company where traditional valuation metrics like the price-to-earnings ratio are less meaningful. The social media platform is estimated to trade at a 31.5% discount to its fair value. For an unprofitable or early-stage company, the price-to-sales ratio offers a clearer picture of value than the price-to-earnings ratio. Reddit's business model is shifting from a pure content platform to a monetized community hub, and its valuation must reflect that transition. The significant discount suggests the market is pricing in uncertainty about its path to sustained profitability. A value investor would need to assess whether the company's unique user engagement and advertising potential justify a higher multiple, or if the discount is a rational assessment of execution risk.

The bottom line is that a large discount is not an automatic buy signal. It is a starting point for deeper analysis. For each of these stocks, the investor must weigh the strength of the competitive moat against the specific headwinds that may be causing the market to discount the shares. The wide gaps in these cases-28.5%, 33.8%, and 31.5%-represent a potential opportunity, but only if the intrinsic value is indeed mispriced by the market.

Assessing the Quality of the Discount: Moats and Compounding

A wide discount is merely the entry ticket. The true test for a value investor is the quality of the business behind the price. A low P/E ratio can be a trap if it reflects a deteriorating moat or poor earnings quality. The focus must shift to the durability of the competitive advantage and the sustainability of the earnings stream-a core tenet of the Buffett/Munger philosophy. A company's ability to compound earnings over long cycles is what ultimately determines intrinsic value.

This requires looking past the headline valuation. For instance, the significant discount to fair value seen in small-value stocks is not a new phenomenon but the result of a 17-year trend where growth stocks have far outperformed value stocks. This persistent gap suggests the market has been systematically undervaluing certain business models, often those perceived as slower-growing or more cyclical. The challenge is to distinguish between a rational, long-term discount and a temporary mispricing.

Take Palo Alto Networks, for example. Its 28.5% discount coincides with a reported drop in profit margins. The quality of the earnings here is paramount. Are these margin pressures a cyclical reset in a high-growth sector, or a sign of a widening competitive moat? The company's strategic product announcements aim to extend its technological lead, which is a positive signal for long-term compounding. The projected 18.9% annual earnings growth rate provides a tangible metric for future value creation. The discount, therefore, must be evaluated against this growth trajectory and the strength of its cybersecurity moat.

Similarly, Sandisk's 33.8% discount must be weighed against the capital-intensive nature of its business and the cyclical volatility of NAND flash pricing. The company's ability to compound depends on its execution in navigating these cycles and maintaining pricing power. The fact that its future revenue growth is expected to outpace the broader market is a critical point for a business whose value is tied to scaling production. The wide discount may reflect investor skepticism about this sustainability, but it also creates a potential margin of safety if the company can deliver.

The bottom line is that the "discount" is not a static number. It is a dynamic measure that must be assessed against the quality of the earnings and the width of the moat. A value investor seeks a business that can compound earnings reliably, regardless of short-term market sentiment. The current environment, with its deep discounts in small-value stocks, provides a fertile field for this search. Yet, the historical outperformance of growth stocks over the past decade-and-a-half serves as a reminder that the market's patience for slower, more predictable compounding is often thin. The opportunity lies in identifying those rare businesses where the market's discount is a temporary oversight, not a rational assessment of a fading advantage.

Catalysts, Risks, and What to Watch

The search for intrinsic value is only half the battle. The other half is monitoring the forces that will determine whether the gap between price and that value closes or widens. For investors, this means establishing a clear framework for watching both macro trends and company-specific developments.

On the macro front, several catalysts are poised to drive volatility in 2026. The appointment of a new Federal Reserve chair in May is a major event that could shift monetary policy expectations. This, combined with ongoing trade and tariff negotiations and the midterm elections, creates a backdrop of uncertainty that tests market sentiment. These factors are likely to amplify swings in stock prices, potentially creating both risks and opportunities for value investors. The key is to view this turbulence as noise against a long-term investment horizon.

For individual stocks, the watchlist shifts to execution and capital allocation. Take Novo Nordisk, for example. The company's recent plunge and guidance cut have created a deep discount. The primary catalyst for a re-rating is the successful launch of its new GLP-1 pill for obesity. If this oral weight-loss medication gains traction, it could be the catalyst that drives a comeback, as the article suggests. Similarly, management actions are a critical signal. The Tweedy, Browne Insider + Value ETF actively seeks companies with insider buying and opportunistic share repurchases. These are tangible actions that align management's interests with shareholders and can indicate a belief in intrinsic value. Monitoring for such moves provides a real-time gauge of confidence.

The overarching risk, however, is mistaking a value trap for a genuine bargain. A low valuation can be a rational assessment of a deteriorating business model, not a temporary mispricing. This is where the quality of the moat and the sustainability of earnings become paramount. The wide discounts seen in small-value stocks are a reminder that the market has been systematically undervaluing certain business models for years. The investor's task is to separate the companies with durable advantages that are simply out of favor from those whose competitive positions are eroding. The framework for this is clear: watch for catalysts that can unlock value, but remain disciplined about the quality of the business behind the price.