If you're planning to start a stock portfolio, or if you simply have a few hundred dollars to add to an existing one, there are literally thousands of stocks to choose from. However, with the S&P 500 rising sharply in 2023, it has become significantly more difficult to find bargains.
With that in mind, here are two stocks that look ridiculously cheap right now, and both have the potential to deliver market-beating returns for many years to come.
This ultra-cheap industry leader is a steal right now
If you had told me a couple of years ago that PayPal (NASDAQ: PYPL) would be a $60 stock once again, I would have laughed. After all, it briefly surpassed $300 in 2021. But here we are.
After a period of rapid pandemic-fueled growth in 2020 and 2021, PayPal's user growth sharply declined, and management conceded that its near-term goal of 750 million active users wasn't going to happen anytime soon (for context, there are currently 428 million). There was also not a clear growth strategy, and management made some moves -- or at least planned to -- that left investors scratching their heads. For example, at one point PayPal was reportedly considering buying Pinterest(NYSE: PINS) at a huge premium.
While user growth is certainly lacking these days, that doesn't mean the company's growth story is over. One big factor is that PayPal is seeing a lot of churn from barely active accounts that were formed during the growth boom. However, management is focusing on PayPal and Venmo's most active users to maximize engagement, and it's working. Despite a 1% decline in active users, PayPal managed to grow payment volume by 15% year over year in the most recent quarter.
It's also important to mention how financially strong this business is. Not only does PayPal have about $11.5 billion in cash on its balance sheet, it generates about $5 billion in annualized free cash flow that it can use to pursue acquisitions, invest in its own growth, or (the recent focus) buy back stock at a cheap valuation.
Speaking of valuation, PayPal trades for less than 12 times forward earnings -- an absurdly low valuation for this fintech leader.
An up-and-coming homebuilder with a winning model
Dream Finders Homes(NYSE: DFH) isn't exactly a household name -- at least not yet. But it's one of the fastest growing homebuilders in the United States, and it could have plenty of runway ahead of it.
If you aren't familiar, Dream Finders is based in Jacksonville and also has a presence in Orlando, Georgia, both Carolinas, Texas, Colorado, and Washington, D.C. For the most part, these are areas with above-average job and wage growth, positive net migration, and (relatively) affordable home prices.
The company uses a land-light model, which is only used by one other major builder, NVR (NYSE: NVR). Instead of buying large amounts of land, Dream Finders buys purchase options on land but doesn't actually buy any lots until it's ready to build a home for a customer. This makes the business highly capital-efficient and is one of the big reasons NVR has been one of the best-performing stocks in the entire market throughout its 30-year public history.
Recent results have been excellent. Dream Finders home closings increased 17% year over year in the most recent quarter, net new orders grew by 38% despite the high mortgage rate environment, and earnings per share increased by 9% despite higher buyer incentives and interest expenses.
Now, it's worth noting that Dream Finders Homes' stock price has increased by 230% over the past year. In simple terms, the environment for homebuilders turned out to be far stronger than most experts had predicted. So, it isn't quite as absurdly cheap as it once was. But given how well it's doing in a bad real estate market, and its future growth potential, a valuation of just 13.3 times forward earnings sounds more than reasonable.
Not a sure thing
To be perfectly clear, I'm confident that investors who invest in PayPal and Dream Finders at these levels will be handsomely rewarded. In fact, Dream Finders is a top-five position in my own stock portfolio, and I recently added shares of PayPal as well.
Having said that, there's a lot of execution risk (a lot needs to go right). Dream Finders will need to navigate the normalization of the housing market, and PayPal is still figuring out its growth strategy now, just to name a couple of things. The point is that these are two very cheap stocks that are capable of long-term, market-beating returns, but it's wise not to expect a smooth ride along the way.
Should you invest $1,000 in PayPal right now?
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Matthew Frankel, CFP® has positions in Dream Finders Homes, PayPal, and Pinterest. The Motley Fool has positions in and recommends Dream Finders Homes, NVR, PayPal, and Pinterest. The Motley Fool recommends the following options: short March 2024 $67.50 calls on PayPal. The Motley Fool has a disclosure policy.
