- Following the latest market sell-off, many names have gone on sale, including these seven undervalued growth stocks.
- Adobe (ADBE): High-quality tech stock, now at a much more reasonable price.
- Meta Platforms (FB): Trading for 17.1x earnings, the market’s underestimating its future growth potential.
- Alphabet (GOOG,GOOGL): Like with Meta Platforms, investors are too skeptical about its prospects.
- Netflix (NFLX): While a possible value trap, it may not take much to put it in recovery mode.
- Penn National Gaming (PENN): Surging profits from its land-based casinos could help this hard-hit gaming stock make a comeback.
- PayPal (PYPL): Bad news may already be priced-in with shares in this leading fintech firm.
- UnitedHealth Group (UNH): A defensive growth stock, what more could you ask for?
Given so much uncertainty continues to loom over the market, it may seem too early to go bottom-fishing. The latest rebound in stocks, following the sell-off earlier this month, could be a bear market rally rather than a sign things have bottomed out. Even so, assuming you have a long investment time horizon, you may want to take a look at undervalued growth stocks.
For many stocks, discounting them on inflation and interest rate fears is fully justified. During 2020 and 2021, scores of names became extremely overvalued. Such plays have more room to fall before one can consider them “reasonably priced.”
But for names that weren’t terribly overvalued before the market’s latest plunge? Right now, plenty of them are trading at more-than-reasonable valuations. For example, these seven undervalued growth stocks. In time, thanks to earnings growth, each of them could make a recovery, and then some.
|FB||Meta Platforms, Inc.||$191.29|
|PENN||Penn National Gaming, Inc.||$30.67|
|PYPL||PayPal Holdings, Inc.||$81.28|
|UNH||UnitedHealth Group Incorporated||$478.55|
Undervalued Growth Stocks: Adobe (ADBE)
One of many high-quality tech stocks that zoomed in price during the pandemic era, the past six months have been painful for Adobe (NASDAQ:ADBE) investors. Since mid-November, shares in the software giant have plunged around 39%.
It’s too early to say ADBE stock has bottomed out, yet today’s price may be a great long-term entry point. Right now, it trades for around 30x estimated earnings for this fiscal year (ending November 2022), and 25.4x estimated earnings for its next fiscal year.
At first glance, this may not look like an undervalued stock. But if it maintains its current pace of growth, Adobe should be able to sustain its current valuation. From there, it could gradually climb back in price, in line with increased earnings. Although 2020/2021 may not repeat itself, it could continue to deliver solid results in the years ahead.
Meta Platforms (FB)
Yes, the company is maturing. Its also facing numerous headwinds right now. To some extent, it makes sense that FB stock is cheaper now than it was at the start of 2022. Perhaps a double-digit drop was justified. However, a 40% decline (what it’s experienced since January) may have been a case of overdoing it.
Although analysts expect Meta to see an earnings decline this year, the forecast for 2023 and 2024 appears very promising. Earnings are expected to bounce back from $11.81 per share this year to $14.12 per share in 2023. Then to $16.21 per share in 2024. If FB stock gets over its current troubles, a rerating to a higher valuation seems likely.
Alphabet (GOOG, GOOGL)
Similar to Meta Platforms, Google parent Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) is another FAANG stock that the market has overly discounted. Even as its 19.5% year-to-date decline may look modest by comparison, with this drop it too has dropped to a very reasonable valuation.
At today’s prices, this tech behemoth trades for just 20.7x estimated 2022 earnings. Again, like FB stock, GOOG stock has fallen to this relatively low forward multiple due to the prospect of flat earnings growth this year.
However, as my InvestorPlace colleague Bret Kenwell argued earlier this month, Alphabet’s earnings growth is expected to re-accelerate, moving back to double-digit levels in 2023 (20%), 2024 (15%), and 2025 (20%). This points to the stock, over several years, moving steadily higher through both earnings growth, plus possible multiple expansion. Put simply, this a high-quality stock at a fantastic price. For now out of favor, consider it a buy.
Undervalued Growth Stocks: Netflix (NFLX)
As I put on May 6, value trap concerns with Netflix (NASDAQ:NFLX) stock are warranted. Customers have started to go from cutting the cord to cutting the subscription, by opting for rival offerings to this streaming giant’s namesake platform.
Given the company is preparing for more subscriber losses, it makes sense the market has priced-in more pessimism into NFLX stock. That said, investors may be too skeptical about its ability to do more with less. For instance, launching a cheaper, ad-supported version of its service.
Netflix could also figure out a way to cut its high programming budget ($17 billion), in a way that minimizes future subscriber losses. Just a bit of improvement could spark a recovery for this undervalued growth stock, trading for just 17.4x earnings. Tread carefully, as it has more headwinds than other FAANG names, but keep an eye on it.
Penn National Gaming (PENN)
Penn National Gaming (NASDAQ:PENN) is a good example of a stock where investors have gone from overly optimistic, to overly pessimistic. Looking back, it’s clear the market overestimated this gaming company’s ability to gain a large share of the igaming/sportsbook market.
So far, its Barstool Sportsbook has only captured a moderate share (12%) of the retail sports betting market. Yet with its more than 77% drop from its all-time high, this disappointment is more than accounted for. More importantly, today’s valuation too heavily discounts future earnings growth.
That growth should come not just from its online offerings, but also the recovery of its land-based casino operations, as a Seeking Alpha commentator argued in April. If earnings can climb as expected in 2023 and 2024, PENN stock could wind up being a winning wager. In short, consider fading the public by making it a buy today.
There’s little love for fintech stocks today. Recession fears are playing a role in this. So too, are fears of a further collapse in crypto prices. Fintech firms like have high crypto exposure. Considering all this, it’s no shock that PayPal (NASDAQ:PYPL) shares have cratered in price.
However, it’s possible PYPL stock already has future challenges priced into it. At least, that was the view of one sell side analyst (CFRA’s David Holt), who last month argued that “negative sentiment could be bottoming.”
With its further drop in May, negativity with PayPal shares may have finally peaked. With expectations reset, the stock could begin to recover in the quarters ahead. Shares today trade for 20.3x earnings. It may take some time, but once uncertainties clear up, multiple expansion could return. Coupled with earnings growth, PYPL stock may have a path toward a partial recovery.
Undervalued Growth Stocks: UnitedHealth Group (UNH)
In contrast to the undervalued growth stocks listed above, UnitedHealth Group (NYSE:UNH) isn’t down big. In fact, until last month’s sell-off, it was actually up for the year. Once-hot sectors like tech and gaming have become not so hot.
That’s not the same story with defense healthcare plays like UNH stock. Compared to the market overall, such names have seen fewer declines. Yet while it hasn’t plunged, at today’s prices it’s undervalued. You are getting growth at a very reasonable price.
Right now, shares trade for around 22.7x earnings. With this diversified healthcare company expected to deliver double-digit earnings growth over the next few years, it can hold onto this valuation. UnitedHealth has been a winner for investors who have made it a long-term buy-and-hold position. This stands to be the case in the years ahead as well. With this, consider it a buy.
On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions 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.