The underlying dynamic of the stock market is that people not only perceive the value of a company differently, but they speculatively count on other people to do so. This translates to a dichotomy between intrinsic value and perceived value.
Therefore, value investors prioritize a company’s intrinsic value, preferably one that is currently mispriced to the point of being undervalued (under discount) by the wider market. Or, as Warren Buffett put it, “Price is what you pay. Value is what you get.”.
If investors have a long-term outlook, they can bet on future value with companies that are showing above-average growth. Accordingly, they would prioritize future value over current value, making them growth stock investors.
With that in mind, which stocks fit the bill for being presently mispriced?
1. Encore Capital Group
Followers of macro trends could have noticed a rapid rise in delinquency rate on credit card loans. In Q3 2024, it reached the highest level since Q4 2011. This is to be expected as lockdown-period excess savings depleted, having turned negative by this March.
Combined with the eroding effect of inflation since 2021, after the Federal Reserve ballooned the money supply to historic proportions, the ability to repay debt is lower. Encore Capital Group (NASDAQ:ECPG) is there to purchase delinquent consumer debt at a discount and then attempt to recover it.
As of the November investor presentation, Encore collected $2.1 billion debt for the last twelve months through Q3 2024, split between the US at 72% and Europe at 28%. In that quarter, the company’s revenue went up 19% year-over-year to $367 million. More importantly, Encore’s net income increased by 58%, from $19 million to $31 million in Q3.
The company’s debt-to-equity ratio is now 3.4, having exceeded $23 million in debt recoveries above forecast in Q3.
Although Encore missed Q3’s EPS estimate, due to its underperforming subsidiary Cabot (NYSE:CBT) Credit Management (CCM) in the UK, the US operations largely offset the loss. Image credit: Encore Capital Group
Encore’s forward price to earnings (P/E) ratio is at relatively low 5.54 while price to book (P/B) ratio is 1.11. Presently priced at $48.73, ECPG stock is well under the bottom outlook of $58 per 5 analyst inputs aggregated by Nasdaq. The average ECPG price target is $61.6, while the top twelve months ahead is estimated at $65 per share.
2. Datadog
Since the last coverage of this software-as-a-service (SaaS) company in November 2023, Datadog (NASDAQ:DDOG) stock is up 31%, from $99.81 to present $130.54 per share. As demonstrated by Adobe (NASDAQ:ADBE), CrowdStrike (NASDAQ:CRWD) and others, SaaS business model provides companies with predictable cash flows based on a subscription-based service.
Datadog has another hook by offering free basic service for network monitoring up to 5 hosts. Businesses can then scale up with their own expansion to the next tier with a leveled up 15-month network monitoring retention vs just 1-day. This provides companies an invaluable insight in how their online presence is monitored, managed, automated and optimized.
Datadog beat its earnings per share (EPS) estimates for the last four consecutive quarters. The most recent Q3 EPS estimate was beaten at 87.5% positive surprise, having reported $0.15 vs estimated $0.08 EPS. Compared to a year-ago Q3 ‘23 period, Datadog more than doubled its net income, from $22.6 million to $51.7 million. Even more impressively, the company has a very low debt to equity ratio of 0.28.
While Datadog’s P/E ratio is expectedly high at 244.91, alongside P/B at 16.77, investors are still seeing DDOG as undervalued. After all, Datadog is outside the Big Tech circle. As such, there is more space for growth in a high-growth cloud-computing and monitoring market.
Although Dynatrace (NYSE:DT) and New Relic (NYSE:NEWR) are Datadog’s competitors in that niche, it seems there is plenty of demand for all companies. Currently priced at $130.54 per share, DDOG’s average price target is $151.25 based on 36 analyst inputs. The low estimate is still above the present price, at $133, while the high estimate is $165 per DDOG share.
3. Nu Holdings Ltd
Over the last five years, MercadoLibre Inc (NASDAQ:MELI), the Amazon (NASDAQ:AMZN) equivalent for South America, grew its revenue from $2 billion to $18.5 billion. Although JP Morgan downgraded the company in October because its logistics expansion is taking a toll on profits, it remains the case that e-commerce is projected for double-digit growth across the continent by 2026, per PCMI data.
By providing digital payment solutions, Nu Holdings (NYSE:NU) is closely tied to that growth. Without its own e-commerce platform, Nu connects with marketplaces and digital retailers to drive online retail engagement. In other words, Nu is complementary to the smartphone + e-commerce combo, both of which boomed in South America.
The digital bank reported 23% customer growth in the latest Q3 financial report, now serving 109.7 million customers with an activity rate of 84%. Without the burden of brick & mortar banking costs, Nu’s net income increased from $303 million to $553.4 million.
Equally so, the company’s debt-to-equity ratio remains low at 0.19 as of the end of September. Nu’s forward P/E is 23 while its P/B is 8.58. But considering the fact that most investors focus on US-based companies, it is likely that NU stock still has some headway.
Like the previous two value stock picks, NU stock’s low estimate is also above its present price, at $15 vs $13.41 respectively. According to 12 analyst inputs, the average NU price target is $17.38, with the high estimate close at $18.9 per NU share.
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Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.
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