You don’t always have to accept a sky-high valuation as part of doing business with growth investing. Some stocks present captivating growth opportunities while presenting reasonable valuations for their investors.
However, valuation is only one piece of the puzzle. Many telecom stocks have some of the lowest P/E ratios in the stock market, but these same companies don’t grow by much. Most of them are stagnant with very limited upside and high yields to compensate for fading growth prospects.
The best stocks don’t just have reasonable valuations. They also have rising revenue and profit margins. Strong financial success and growth catalysts can make a stock with a 50 P/E ratio look undervalued.
Meanwhile, a stock with an 8 P/E ratio can look overvalued if the c company’s revenue and profits are shrinking.
Investors looking for undervalued stocks may want to consider these promising opportunities for long-term growth.
Meta Platforms (META)
Meta Platforms (NASDAQ:META) is still undervalued, despite being one of the largest corporations on the planet. The stock has a $1.3 trillion market cap, but it only has a 26 P/E ratio.
Furthermore, net income growth is booming. The company reported a 73% YOY increase in profits during the second quarter of 2024. Soaring profits suggest that the P/E ratio will go even lower.
Net income isn’t the only thing going up. Meta Platforms also reported 22% YOY revenue growth as consumers continue to click on advertisements.
Additional ad spend during the Olympics plus the extra social media engagement from the games can result in a strong third quarter. The company has 3.27 billion daily active users spread across its family of apps.
Most Wall Street analysts are on board and believe that the stock can rally from current levels. Meta Platforms is rated as a “Strong Buy” and has a projected 11% upside.
Abercrombie & Fitch (ANF)
Abercrombie & Fitch (NYSE:ANF) may come as a surprise if you haven’t heard anything about the retailer for several years. However, this stock has done more than just beat the market.
Its year-to-date gains are higher than every Magnificent Seven stock, except Nvidia (NASDAQ:NVDA), and its 5-year gains are better than every Magnificent Seven stock except Nvidia and Tesla (NASDAQ:TSLA).
The American lifestyle retailer has posted a 63% year-to-date gain and a commanding 848% gain over the past five years. The stock’s rally caught many people off guard, but the valuation still looks good. Abercrombie & Fitch trades at a 18.48 P/E ratio, and profit margins have been soaring.
In just a few quarters, net profit margins went from mid single-digits to firmly above 10%. That also comes with three consecutive quarters of more than 20% YOY revenue growth, including 22.1% YOY growth in the first quarter.
Net income per diluted share came to $2.14 compared to $0.23 in the same quarter last year.
Abercrombie & Fitch even has $864 million in cash along with a $7.6 billion market cap. More than 10% of the company’s market cap is based on its cash position.
American Express (AXP)
American Express (NYSE:AXP) has a lower valuation than most credit and debit card issuers, despite having the better financials. The fintech firm trades at a 17.7 P/E ratio and offers a 1.18% yield.
American Express has maintained an annualized double-digit dividend growth rate for several years, including a 17% dividend hike earlier this year.
The stock has outperformed the market with a 26% year-to-date gain. Shares are also up by 90% over the past five years. The low valuation helps, but a P/E ratio is only good or bad based on a company’s financials.
Luckily, American Express regularly delivers rising revenue and profit margins. The Q2 2024 earnings report revealed that the company delivered 9% YOY revenue growth. Meanwhile, net income surged by 39% YOY to reach $3.02 billion.
American Express closed out the quarter with a 20% net profit margin. Recent earnings results suggest that profit margins will continue to expand in the years ahead.
On this date of publication, Marc Guberti held a long position in ANF. 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.