Very often the stock market can feel like a treasure chest, brimming with opportunities at every corner. However, investors with tunnel vision on high-growth names can risk overlooking the occasional diamond in the rough. I’m referring to those underappreciated, and more importantly, undervalued stocks. The modern term for this is value investing where investors seek out contrarian investing opportunities to capitalize on the long-term gains.
This year is shaping out to be a spectacular one for the markets with the S&P 500 returning 11% in Q1. As markets reach new highs, it seems reasonable to assume that stocks leading the bull run may be too overvalued to offer substantial long-term returns.
On this premise, I think undervalued stocks poised to power higher and shock Wall Street are sound investments. These industry leaders hold strong fundamentals, robust growth potential and are in sectors with long-term favorable trends.
Lowe’s (LOW)
Lowe’s Companies (NYSE:LOW), a leader in the home improvement space, is poised for a resurgence in the coming months. This will be driven by the company’s two key strengths- an extensive store presence and a loyal customer base. These factors along with the anticipated rebound in the housing market will set the stage for its comeback.
The financials, however, present a mixed picture. Comparable sales in the last quarter were down 4.1% year-over-year (YoY) and are expected to decline by 2% to 3% for the full year. But on the flip side, the dividend rate was raised by 5%, suggesting confidence in its future earnings potential.
While sales and growth have certainly been a challenge for Lowe’s, my long-term prognosis for the company remains positive. Lowe’s focuses on returning value to its shareholders with share repurchases amounting to $743 million in Q1. Moreover, it continues to invest in several offerings such as the DIY loyalty program and Pro business. These investments will position the company to capitalize on the anticipated rebound in the housing market.
It’s also worth noting that Lowe’s forward price-to-earnings (P/E) ratio is 17.7 while the industry average is 20.8. Needless to say, this underappreciated stock is ready to shock Wall Street with a strong baseline business and favorable market trends.
Delta Airlines (DAL)
With the summer season upon us, it’s safe to say that airline stocks are going to experience a boost in the coming months. One name that currently looks undervalued is Delta Airlines (NYSE:DAL). After a slow recovery following the pandemic, the airline is back on its feet, posting strong results in Q1. However, the stock is still undervalued, trading at a 22% discount from its pre-pandemic price.
The case for this undervalued airline stock is compelling. In addition to posting a 6% increase in revenue, Delta is seeing a rise in premium travel. The airline’s premium revenue grew by 10% and accounted for 57% of total revenue. This differentiates the airline from industry peers and will serve as a major tailwind for growth in the coming years.
In more good news, Delta anticipates $3 to $4 million in free cash flow (FCF) which will soften its debt burden. This positive outlook will be strengthened by an easing monetary policy which will boost consumer spending and push debt even lower. Moreover, Delta’s focus on its premium customers and improving the traveler experience will lock in long-term profitability.
In short, underappreciated stocks like Delta are ready to power higher in the coming months.
PayPal (PYPL)
Shares of the fintech platform PayPal (NASDAQ:PYPL) have been on a rollercoaster ride for the last few years. Now, amidst a competitive landscape, the stock is down 80% from its pandemic highs, trading at a forward P/E ratio of 14.1. In other words, PYPL stock seems significantly undervalued.
Looking at the company holistically, it has a fundamentally strong business. PayPal was one of the first online payment companies- giving it an early mover advantage. However, new market entrants have crushed its shares in recent years.
But let’s focus on its long-term potential over the short-term outlook for a second. One major catalyst for better performance is PayPal’s Venmo business. This platform accounts for a significant portion of PayPal’s total payment volume and has the potential to command a higher market share as PayPal continues to invest in it.
The scenario holds merit as seen in its Q1 numbers. Revenue in the first quarter was up 9% YoY and payment volume increased by 14%. This suggests PayPal is capable of putting up strong numbers despite the competitive landscape. Moreover, the rising popularity of digital payments will boost transaction volumes and PayPal’s performance further.
PYPL stock is currently undervalued and shows immense upside potential. However, the competitive landscape remains an underlying threat making underappreciated stocks like this one ideal for risk-friendly investors.
On the date of publication, Divya Premkumar 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.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Divya has a background in finance and accounting and has worked in FP&A roles at Fortune 500 companies. She is an avid reader and enjoys writing on a variety of topics including stocks, crypto, blockchain and global policy.