When people observe the track records of Wall Street titans like Warren Buffett, who hold stocks through any storm and always come out ahead, they often miss the bigger picture. The big picture in this case is that these investors find companies with relatively attractive risk-to-reward ratios and a fundamental belief that there is an upside in the near future for these stocks.
Today, most in the stock market are trying to figure out where the next opportunity may be or where safety can be found within the way the S&P 500 has been trading on higher volatility lately. To achieve this sense of safety without sacrificing the upside, investors may want to keep an eye on stocks like PayPal Holdings Inc. (NASDAQ: PYPL), the Walt Disney Co. (NYSE: DIS), and even go on a contrarian value play within China’s technology sector through Alibaba Group (NYSE: BABA).
The reason to watch these names in the coming cycle is simple: They are trading relatively cheaply compared to their historical prices and valuations, which lays the foundation for investors to achieve a more optimal risk-to-reward ratio during market volatility. More than that, a few catalysts lay ahead, such as potential interest rate cuts coming from the Federal Reserve (the Fed).
Wall Street Sentiment Shifts in Favor of PayPal Stock
PayPal stock is now trading at a low price-to-earnings ratio of only 15.3x, compared to its historical 45.0x average through the past cycle. As news follows the stock price, this compression in valuation will, of course, bring a few negative headlines to the company, but that doesn't mean they're all true.
In their most recent quarterly earnings, the company reported user growth of only 0.4%. This low growth didn't excite the markets, so they kept the stock down to less than a third of its all-time high price of $310.2 a share made in 2021.
However, revenues did increase by 8%, driven mainly by a rise in total payment volume of 11%.
Investors need to remember that PayPal is still doing very well despite being at the low end of its cycle, and management knows that it can only get better once the Fed cuts interest rates.
This is why they have pledged 100% of the expected free cash flow (operating cash flow minus capital expenditures), which could amount to up to $1.5 billion, toward a stock buyback program. This buyback would make up to 2.1% of the company's market capitalization.
Knowing that PayPal stock's best is yet to come, Mizuho placed a $90 price target on the company. To prove these targets right, the stock would need to rally by as much as 30.6% from where it trades today.
Disney's Streaming Investments Are Finally Paying Off
When the COVID-19 pandemic hit its peak in 2020, Disney’s management had to face a harsh reality. Most of the company’s revenues had gone out the window as lockdowns and social distancing kept people from visiting parks and hotels.
So, they decided to plow billions into their streaming and online entertainment segments, which scared investors further away. The company had to suspend its dividend to afford these investments. A few years later, these investments are starting to become profitable.
For reference inside Disney’s financials, investors can note a net income margin of up to 21.2% in 2018. This profit margin dropped to 2.6% after the COVID-19 shifts hit the business hard.
Now that cash flows are starting from these investments, investors only have the past margins to look forward to as Disney works its way back.
As the company trades at a mere 71% of its 52-week high, the risk-to-reward scale favors the bulls right now. Analysts at J.P. Morgan Chase & Co. see the potential for Disney stock to reach $125 a share, a net upside of 42.2% from today’s price.
Contrarian Value Investors Hold Strong on Alibaba in This New Market Cycle
Surprisingly, a few of America’s best investors have recently found enough reasons to invest in Alibaba stock. Michael Burry and David Tepper have made this company the largest holding in their funds.
One reason for this decision is that the stock is now trading at only 85% of its 52-week high. On a valuation basis, Alibaba’s current 21.3x P/E ratio is well below the pre-COVID average valuation of 45.0x P/E. Simply put, if volatility does continue in the S&P 500, Alibaba—like the rest of this list—has much more room to move up than down.
Analysts at Susquehanna have placed a $130 price target on Alibaba stock, daring it to rally by 60.1% from where it trades today.
While many catalysts are building up for a bullish China case, these mega investors may have simply considered that this could be one of the best places to keep their capital during the next cycle.
Or, they could have focused on Alibaba’s recent news about a primary listing in the Chinese stock market, opening a path for millions of citizens to invest billions in Alibaba stock and forcing asset managers like the iShares MSCI China ETF (NASDAQ: MCHI) to add more of this blue chip to their holdings.
