The stock market has been on a tear lately, despite investors grappling with multiple headwinds, such as possible recession. Moreover, the Federal Reserve just paused its rate hikes for June, which may seem like good news. However, the Fed still signaled that two more are likely this year. Thus, while the economy is expected to avoid a recession this year, the outlook for next year is clouded by various headwinds as the economy digests rate hikes. In this uncertain and volatile environment, some hidden gems in the market offer attractive value and impressive growth potential with limited downside risk due to their low valuation. In fact, here are seven such low-risk high-reward stocks that are being misjudged by the market, but have solid fundamentals and promising growth prospects:
PayPal (PYPL)
PayPal (NASDAQ:PYPL) needs no introduction. The payments giant has consistently grown its top and bottom lines, with revenue reaching $7 billion in Q1 with 8.6% year-over-year growth. That’s not far off from the growth in the first half of 2019, and $800 million in quarterly profits. Yet, PYPL trades at a massive discount, down almost 80% from its peak.
To understand this decline, we need to look at its growth rate regarding user accounts. It had 433 million active accounts in the first quarter of 2023. This metric is a lot higher than it was in Q4 2019, where it had 305 million users. However, the valuation decline is connected to the growth rate of active accounts, which fell to just 0.9% YOY compared to 23.6% at its peak in Q4 2020. In fact, PayPal’s active users dropped by 2 million quarter-over-quarter.
However, I believe that this is just a readjustment in growth as the company benefited from the accelerated shift to e-commerce and digital payments amid the pandemic, as more people shopped online and used contactless payment methods. We are mostly seeing a cooldown now, and PayPal will see more customer acquisition once growth returns to these segments.
Regardless, its cons regarding user growth and competition are already priced in. The average analyst price target for PayPal is $91.67, which implies a 38% upside potential from the current level of $66.43. Not too shabby as a low-risk, high-reward stock since the lowest price target is $60.
Sea Limited (SE)
Sea Limited (NYSE:SE) is a leading Internet platform that operates three core businesses: digital entertainment, e-commerce, and digital financial services. The company mainly operates in Southeast Asia, Latin America, and other emerging markets.
Sea’s digital entertainment segment consists of Garena, a leading online game developer, and publisher that offers popular titles such as Free Fire. Meanwhile, its e-commerce segment consists of Shopee, an online marketplace like Amazon (NASDAQ:AMZN), which is dominant in Southeast Asia and Taiwan. It tried to expand into Latin America, though it has faced several setbacks in that region.
Sea grew its revenue remarkably during 2018-21, with top-line growth averaging around a 130% clip YOY. It has since flatlined, and YOY growth has slowed to a meager 4.9%. However, as I’ve mentioned before, segments that received a substantial boost from the pandemic are cooling down, and analysts expect this growth to re-accelerate and reach 14% next year. Sea has huge growth potential in the long term, as it operates in some of the fastest-growing internet markets in the world and touts a massive addressable revenue. Grabbing it at the current range (where the growth slowdown is already discounted from the price) can return substantial returns from here.
The average analyst puts a $100 price target on this stock, with a 61.5% upside potential. Even the lowest price target here is $82. These estimates indicate that SE is a great low-risk, high-reward bet.
Hello Group (MOMO)
Hello Group (NASDAQ:MOMO) is a leading mobile social and entertainment platform in China. It offers live video streaming, short-form video, social networking, and online dating services. On the surface, this would look like a terrible bet with many caveats. The company’s user base declined to 106.5 million monthly active users, down from 111 million a year ago. The two top apps, “Momo” and “Tantan,” had 9.4 million in Q1, down from 11 million from the year-ago period. On top of that, sales have been declining steadily, reaching $410 million in Q1 compared to $693 million at its peak.
Indeed, that’s not the best news. But let’s get into the pros here. The company is drastically improving its profitability. Hello Group’s net income increased by 24% YOY to $227 million (TTM) and is expected to continue its strong growth. The forward price-to-earnings ratio here is just 6.7 times. Moreover, this company’s dating apps are used mostly in China. The pandemic restrictions were much stricter, putting a damper on dating. One should also note that the dating culture in China primarily focuses on marriage (planning any event during a pandemic is not an easy task), and the pandemic’s impact on Hello Group’s dating apps was exacerbated due to this. But as China opens up, sales are expected to continue growing.
The average analyst price target for Hello Group is $15.80, which implies a 61.7% upside potential from the current level of $9.80. The lowest price target is still $12.
StoneCo (STNE)
StoneCo (NASDAQ:STNE) is a fintech company that provides payment solutions to merchants and integrated partners in Brazil. It offers end-to-end solutions that include point-of-sale devices, software platforms, banking services, credit products, and other value-added services.
Much like other fintech companies, growth has slowed down considerably since the pandemic. StoneCo is still a standout as it has been growing its revenue nonetheless, reaching $1.98 billion TTM, up 32% YOY. The company also achieved a positive net income for the past three quarters, and its 12-month net income is $3.95 million. This is a great achievement compared to a net loss of $540 million in Q2 2022. It is trading at a hefty 85% discount from its 2021 peak, but the stock has been resilient lately as investors recognized the company’s growth prospects and competitive position in Brazil. It is up almost 60% year-to-date.
The average analyst price target for StoneCo is $15, which implies a 13% upside potential. Mixed feelings about the company mostly drive this low average. Gurufocus estimates the fair value of StoneCo at $85. It does note that this could be a value trap, but I believe there is little downside risk from here. The lowest price target is $11.
PagSeguro (PAGS)
PagSeguro (NYSE:PAGS) is another fintech pick very similar to StoneCo. This is another Brazilian company with similar characteristics.
I won’t go into this stock too much, as I’ve already covered StoneCo, but PAGS is a perfect bet if you’re seeking something a little more volatile. The sales growth is much lower here but is still solid. Both PagSeguro and StoneCo will have similar growth in the following two years. And as an offset, this is a company that didn’t let its net income go red. As a result, PagSeguro has a debt load of just $64.6 million against $358 million in cash. StoneCo has $905 million in debt compared to $1 billion in cash.
But again, PagSeguro is a smaller company, and investors would need to weather more volatility in the market despite the financial safety. Regarding analyst estimates, the story here is almost the same as StoneCo—mixed feelings about the upside but little downside potential.
LiveRamp (RAMP)
LiveRamp (NYSE:RAMP) is a leading data connectivity platform that enables companies to access, manage, and activate data across various channels and platforms. The company helps clients deliver personalized and relevant experiences to their customers, measure the impact of their marketing campaigns, and optimize their business outcomes. Data segments are seeing solid growth across most companies, and LiveRamp has been quiet so far on that front and trades at a 68% discount compared to its peak.
However, sales growth is expected to accelerate to 17.1% in the next two years. It’s not profitable on paper, but losses are insignificant. EPS will grow at a rate of ~30% for the next few years. The average analyst also has a $36 price target for RAMP, implying a 38% upside potential. All things considered, this is a well-rounded bet among low-risk, high-reward stocks.
Sirius XM (SIRI)
Sirius XM (NASDAQ:SIRI) is a leading audio entertainment company that offers music, sports, news, comedy, talk, and podcasts through satellite and online platforms. The stock tumbled earlier this year but is building momentum lately as investors recognized the company’s growth potential and competitive position in the audio entertainment market. The long-term outlook here also remains positive, but sales growth will likely remain lousy at a 3% YOY through 2026. Indeed, this is mostly a value pick, and I don’t expect tremendous growth here. But the downside risk is low, and Gurufocus’ model puts the fair value at $7.
| PYPL | PayPal | $68.89 |
| SE | Sea Ltd. | $61.21 |
| MOMO | Hello Group | $9.41 |
| STNE | StoneCo | $14.19 |
| PAGS | PagSeguro Digital | $10.78 |
| RAMP | LiveRamp | $26.44 |
| SIRI | Sirius XM | $3.75 |
On the date of publication, Omor Ibne Ehsan 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.
