It may sound trivial but the golden rule of investments is to buy low and to sell high. Many, including institutional investors, tend to be overly reactive to bull and bear markets and end up adjusting their portfolios based on after-the-fact research. Due to an array of unforeseen events, Paysafe (NYSE:PSFE) stock has lost nearly half of its market value during the past twelve months, which has prompted many big hedge funds to dump their positions.
I think they’ve made the wrong call and that it’s the perfect opportunity to snap up a stock that’s been oversold and mistreated by the market.
Hedge Fund Selling
The fourth quarter’s 13-F filings revealed that a few of the big hitters sold their stake in Paysafe; among those were Daniel Loeb’s Third Point, Leon Copperman, and David Tepper.
All in all, hedge funds reduced their Paysafe holdings by 15.1 million shares during the past quarter, which is a significant change in sentiment, considering we’re looking at a company that only has 723.71 million shares outstanding.
I find the magnitude of the hedge fund sell-off exceptionally obscure because we’re looking at a stock that fits into a barbell strategy in which funds will usually buy a risky asset such as PSFE stock and hold it in the long run.
The integration of digital payment systems and affiliated businesses has been consolidated during the pandemic lockdowns, consequently turning into a market that’s expected to grow at an annual rate of 20.23% up to the year 2026.
Although Paysafe’s success has occurred in ebbs and flows, the company still provides a positive Return On Invested Capital (1.92%), suggesting that it holds a firm industry position. Furthermore, the company’s capital expenditure has increased by 33.32% over the past year, conveying that the firm is investing aggressively to enhance growth prospects.
Paysafe keeps expanding into critical areas. For example, the firm recently confirmed its expansion into Louisiana and Oregon as a facilitator for mobile sportsbooks and various affiliates.
If Paysafe can continue to enlarge its footprint across multiple industries, we’re likely to see a stock with a better Risk Vs. Return profile overall, meaning that its returns will likely be more positively skewed than before.
Valuation & Momentum
PSFE stock faced a significant headwind towards the end of last year when its Digital Wallet business’s performance didn’t live up to the market’s expectation. However, Paysafe needs to be considered as a sum of the parts business, and its attractive valuation multiples suggest just that.
It’s empirical to look at the price to sales and enterprise value/sales ratios when analyzing a growth stock as they account for volatility and ignore transitory costs.
When compared to industry peers, PSFE stock’s price to sales and enterprise value to sales ratios are undervalued by 62.85% and 19.36%, respectively.
These indicators suggest that PSFE is an excellent buying opportunity, especially when considered in tandem with the factors such as the stock trading above its 10-day moving average with an RSI of 47.00, which has just broken through its oversold threshold.
The Bottom Line
In my opinion, PSFE stock will strike an inflection point soon. Investors tend to overreact to events in the short run, and we’ve seen this happen firsthand with PSFE stock after the company’s digital wallet business underperformed towards the end of last year.
The stock is currently undervalued and potentially set for phenomenal growth when considering the industry’s potential and the company’s market positioning.
Investors should consider a long-term horizon when determining whether to invest in the stock or not to get rid of the short term volatility risk that the stock presents.
On the date of publication, Steve Booyens did not hold any position (either directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Steve Booyens co-founded Pearl Gray Equity and Research in 2020 and has been responsible for equity research and PR ever since. Before founding the firm, Steve spent time working in various finance roles in London and South Africa, and his articles are published on various reputable web pages such as Seeking Alpha, Benzinga, Gurufocus, and Yahoo Finance. Steve’s content for InvestorPlace includes stock recommendations, with occasional articles on crowdfunding, cryptocurrency, and ESG.