Today I’d like to share with you three “undervalued” stocks on my watchlist right now.
“Panic-selling” is a term with which we are all too familiar right now, but it’s often a huge mistake.
When you’re frantically jettisoning items off a sinking ship, everything goes. You toss a case of wine just as fast as a case of canned food… even though you might be needing that canned food shortly afterwards.
The object is surviving today…and worrying about tomorrow.
That’s what many investors have been doing for the last several months. They’ve been tossing stocks overboard in an effort to stay afloat. And it’s not hard to understand why. From its high point last November, the Nasdaq Composite Index dropped more than 30%, while hundreds of former high-flyers tumbled twice as much.
That’s frightening. But as I said just a moment ago, panic selling isa mistake.
It’s true; good and even great stocks are weathering big losses right now. But throwing them out with the other not-so-good stocks you own might cost you double- or even triple- or quadruple-digit gains in the future.
New Fry’s Investment Report Issue Incoming
This week, I’m dropping my latest Investment Report monthly issue. I plan to recommend at least one new stock – and you’ll be surprised which megatrend it plays into. Click here to learn how you can get the issue as soon as it releases.
Undervalued Stock No. 1: Travel + Leisure Co. (TNL)
My first undervalued stock is in the travel resurgence space.
This is a megatrend that I’ve foreseen since about this time last year, and while we’ve yet to see fully the rewards of it, it is gearing up quicker and stronger than ever before.
Travel + Leisure is reporting strong travel trends throughout its operations, but you would never know it from the company’s share price of $44.03, at the time of this writing.
A few of the highlights from the company’s first-quarter earnings report would include…
- Average volume per guest (VPG) hit $3,377 – an all-time high for the company and 40% above pre-pandemic levels…
- Average length of stay rose 8% above pre-pandemic levels…
- “Travel and Membership” transactions increased 6%, while revenue per transaction jumped 12%…
- Travel Club transactions increased 18%, while revenue per transaction jumped 21%…
- Vacation Ownership revenue and gross profit (EBITDA) surged 35% and 56%, respectively…
- And occupancy rates are tracking 10% above pre-pandemic levels.
In short, TNL is continuing to build on its core business by developing complementary products and services that “put the world on vacation.”
The company remains on track to post strong earnings per share above $4.50 this year and $5.50 next year. Assuming the company comes close to hitting those targets, the stock would be selling for just nine times this year’s earnings and seven times next year’s result.
That valuation is unusually low for a stock in the hospitality industry. For perspective, the 2022 and 2023 per share earnings estimates for Hilton Worldwide Holdings Inc. (HLT) are nearly identical to TNL’s. And yet, Hilton shares change hands at $113 – or nearly triple the TNL share price.
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Undervalued Stock No. 2: Liberty Energy Inc. (LBRT)
The second undervalued stock on my list also adheres to a megatrend I’ve discussed with you many times: energy’s “swan song,” but it is actually a tech company. Let me explain…
Liberty Energy is a different sort of under-the-radar tech company that is producing robust revenue and profit growth. It is an oilfield services firm that offers one of the most innovative suites of completion services and technologies to onshore oil and natural gas exploration and production companies… including next-generation all-electric fracking fleets.
On Jul. 26, the company announced a hefty 62% jump in second-quarter revenues, which produced an estimate-busting profit of $0.55 per share. That result was 140% higher than the consensus estimate of $0.23 a share!
When this stock first caught my eye, I expected the company’s technological leadership in the industry to garner robust demand that would produce enviable profit margin growth.
The second-quarter result did not disappoint; Liberty’s operating margins swelled from less than 1% to 11.7%. And yet, despite Liberty’s blockbuster second-quarter result, its stock price is exactly where it was when I recommended it.
Like TNL, Liberty is on the verge of a major growth spurt that its share price does not fully reflect. Right now, LBRT shares are trading just under $13.
Meanwhile, Liberty is maintaining its technological leadership, which should fatten margins even more. The company will be deploying its two cutting-edge digiFrac™ all-electric fracking fleets later this year and also signed multi-year agreements to deploy two additional digiFrac™ fleets next year.
Liberty’s excellent second-quarter result, coupled with its strong growth outlook, has caused Wall Street analysts to ramp up their estimates significantly. Just three months ago, the consensus was looking for earnings per share (EPS) of $1.25 this year and $1.65 in 2023.
But now, the 2022 estimate has jumped to $1.70, while the 2023 estimate has soared to $2.40. At those levels of profitability, Liberty shares are trading for just eight times 2022 EPS and less than six times the 2023 number.
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Undervalued Stock No. 3: Paramount Global (PARA)
My final undervalued stock doesn’t align with any major trends… unless you still count at-home entertainment that rose during the height of the COVID-19 pandemic.
Paramount has had four major movie releases this year, the biggest by far being Top Gun: Maverick which, following its late-May release, crushed its budget of $170 million by grossing $1.325 billion at the box office.
But whether the rest of the movies Paramount has planned for 2023 and beyond will be just as successful is moot; I believe Paramount has become a compelling and undervalued speculation.
This famous brand is the owner of many other famous brands, like CBS, Nickelodeon, and Showtime. Collectively, these media brands create a formidable competitive moat that surrounds what is fast becoming an impressive citadel of streaming services.
Although many investors view Paramount’s streaming services, Paramount+ and Pluto TV, as also-rans, these also-rans are sprinting ahead of most of the competition.
Netflix Inc. (NFLX), for example, saw its subscriber count fall for the first time ever during Q1 2022… and again in Q2, despite its fourth-season premiere of Stranger Things.
Alternatively, Paramount+ boasts a subscriber count of over 62 million, which is a 32% increase from its 2021 numbers. Pluto TV, for its part, added 3.1 million monthly average users (MAUs) during Q1 to raise its total to 68 million MAUs.
Paramount’s Yellowstone is the No. 1 series on cable, while CBS has been the nation’s No. 1 broadcast network for 14 straight years.
In other words, there’s a lot to like here. And yet, on most metrics, the shares trade at a steep valuation discount to peers like Comcast Corp. (CMCSA) and The Walt Disney Co. (DIS).
On price-to-sales, for example, PARA is about one third the valuation of CMCSA and about one-fifth the valuation of DIS.
Bottom line: I believe Paramount is in the early stages of what could become a strong growth phase.
Even if that growth materializes more slowly than I anticipate, the stock offers ample downside protection at its current quote.
Regards,
Eric
On the date of publication, Eric Fry did not have (either directly or indirectly) any positions in the securities mentioned in this article.
