Ready for a May makeover? Invest in these 2 undervalued stocks

1. Walt Disney

Shares of Walt Disney ($DIS 3.15%) are down 50% from previous highs. Everyone is familiar with the timeless brands that have made Disney a global media giant, but the stock has fallen on recent obstacles that are surmountable, and that makes the stock a screaming buy right now.

The primary reason for the weak stock performance has been weakening profitability. Disney's revenue grew 8% year over year in the quarter ending in December, but its operating profit went in the opposite direction, down 7%.

Disney+ scaled up faster than any other streaming service, reaching 104 million subscribers (excluding Disney+ Hotstar) within its first three years. That's a tremendous achievement and reflects the worldwide demand for everything Star Wars, Marvel, and Disney's legacy characters and films. But making Star Wars and Marvel shows is very expensive.

With former CEO Bob Iger back at the helm, Disney is moving quickly to firm up its bottom line. Management is reorganizing its operations and streamlining content production, which is expected to save $5.5 billion, with $1 billion in cost savings already under way.

Warren Buffett has always taught the importance of buying stocks trading below their intrinsic worth. While there is no magic formula to pin that number down, there are big clues that Disney is one of the most undervalued blue-chip stocks available right now.

Considering Disney's century-deep library of content, Iger's focus on improving profitability, and the fact the stock hasn't budged over the last five years, it doesn't take a stock market genius to see that the stock's 50% haircut is underpricing the value that Disney's brands bring to families worldwide.

Investors who focus on the value of Disney's franchises are in the best position to profit from the market's mistake. On that note, analysts currently expect Disney to grow earnings by over 21% per year over the next five years as the company lowers costs. The stock looks like a bargain next to those expectations.

2. Imax

Imax ($IMAX -0.47%) entered 2023 with lots of momentum. Theater demand has shown healthy gains coming out of the pandemic. Over the last three years, the stock has outperformed the broader market, up 69% compared to just 44% for the S&P 500 index. With Imax looking to expand internationally and sign more theater locations, there could be more gains in store.

The company's recent earnings report speaks to a great investment opportunity. Revenue climbed an impressive 45% year over year, driven by strong box office performance. Imax still hasn't reached its pre-pandemic peak in revenue, but not only should it get there soon, it should significantly exceed it over the next several years.

Imax doesn't own the theaters that showcase its technology, but instead, the company sells or leases the Imax System to exhibitors. There were 1,716 Imax Systems worldwide at the end of 2022, but management believes its commercial multiplex network can grow to over 3,300 over the long term.

Most of its future growth will come from international markets, and there's good reason to believe this could be a huge opportunity. In the first-quarter earnings report, management highlighted record growth for local language films. Imax has historically benefited from demand for blockbuster releases, but nearly a third of its global box office last quarter was driven by non-Hollywood films. Management expects a strong year of operating results as it continues down this path.

A key competitive advantage for Imax is its patented technology. This includes image, audio, and other technology the company has been developing since 1967. Filmmakers want to make their films available for Imax theaters because it helps drive up demand at the box office. Imax films are specially converted for higher image resolution and sound quality, which is all proprietary to the Imax brand.

Imax reported huge losses on the bottom line, and understandably so, during the pandemic. But its strong top-line growth has brought profitability closer to breakeven on a trailing-12-month basis. From here, analysts expect the company's earnings per share to grow at an annualized rate of 20% over the next years.

The stock is not expensive next to those expectations, trading at a forward price-to-earnings ratio of 24. Growth in the company's earnings should send it higher over the next few years.