With the dawning of 2023 comes new reasons for optimism after a rough year in the stock market in 2022. The time of tax loss harvesting for last year is behind us, and new IRA and 401(k) limits for the year bring with them the potential for new money headed into stocks.
Thanks to those factors, three Motley Fool contributors went looking for companies whose shares appear oversold and thus worthy of consideration as potential investments. They came back with PayPal Holdings (PYPL 2.90%), Airbnb (ABNB 0.75%), and Broadmark Realty Capital (BRMK). Read on to find out why and decide for yourself whether they may turn out to be diamonds in the rough that deserve a spot in your portfolio -- or at least on your watch list.
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A solid Pal for your portfolio
Eric Volkman (PayPal Holdings): Even in the beaten-down financial sector, you can't get much more thrashed than PayPal stock's drubbing in 2022. The once-hot fintech saw its share price wither by more than 63%. And you thought the S&P 500's 20% fall across that stretch was steep.
Investors cooled on PayPal for several reasons. First, the company was a hot item in the thick of the pandemic, when (for obvious reasons) e-commerce surged and its payment solutions were very much in demand. Since then, interest rates began to rise, inflation reared its ugly head, and PayPal's growth in important metrics such as user count slowed.
All these factors are cause for concern, sure, but they don't merit a 60%-plus markdown. PayPal remains an excellent go-to option for both merchants and consumers, not least because it's becoming an ever-more pervasive transaction option online. And PayPal keeps securing major partnerships -- last October, the gorilla of e-commerce Amazon announced the company's Venmo would be a checkout option for Amazon shoppers.
The trajectory of Venmo, by the way, says much about PayPal management.
The transaction platform grew scale by providing quick and effective (not to mention largely free) peer-to-peer payments. PayPal was smart enough to leverage this into a broader system, to the point where it's not only a handy payment option on Amazon but also available through the services of top e-commerce facilitator Shopify and on the sites of trendy retailers like Lululemon.
As PayPal grows its business, management is also cognizant of the fact that costs are weighing on the company's results. That's why it's embarked on an ambitious cost-cutting program. This is a talented management team, as evidenced by its skill in lifting the visibility and the reach of the PayPal brand, so I have every confidence it can succeed in that endeavor.
Finally, the future remains bright for the brightest fintechs. The migration from real-world shopping to online will only continue, and with more digital spending PayPal will be right there to benefit handsomely. This stock isn't going anywhere, and at its still-depressed level, it's an irresistibly priced and valued bargain.
A stock that benefits from pent-up travel demand
Parkev Tatevosian (Airbnb): It was not surprising that travel collapsed at the pandemic's onset. Folks did not want to get on crowded planes, trains, and buses with a potentially deadly virus in circulation. As a result, Airbnb's revenue fell by 30% in 2020. That said, people can only delay vacations for so long. Eventually, planned trips get rebooked. That's precisely what Airbnb is benefiting from now.
Revenue surged by 77% for Airbnb in 2021. Moreover, during the down year in 2020, Airbnb took the opportunity to cut costs and optimize the business. When revenue recovered in 2021, profits increased even more. Indeed, operating income rose to $542 million in 2021, up from an operating loss of $3.4 billion in 2020. The trend continued in 2022, with Airbnb's operating income exploding to $1.6 billion as of the nine months ended Sept. 30.
Meanwhile, overall spending on travel and resorts in 2022, estimated at $1.1 trillion, was still over $400 billion below where it was before the outbreak in 2019. In other words, Airbnb could continue capturing the tailwind from pent-up consumer demand for travel well into 2023 and beyond.
ABNB Price to Free Cash Flow data by YCharts
Excellent business prospects are only one of the reasons why Airbnb stock is on top of my watch list for 2023. The other primary factor is its relative bargain valuation. Trading at a price-to-free-cash-flow ratio of 18, Airbnb's stock has arguably never been cheaper.
Sometimes it's darkest just before dawn
Chuck Saletta (Broadmark Realty Capital): With interest rates rising and talk of high recession risk continuing, owning stock in a company that's known for being a "hard money lender" may seem crazy. When that company also slashes its dividend by half, it might seem downright toxic.
Yet sometimes, it takes really bad news for a company's stock to be cut down to the point where it's so oversold that it's worth considering as a potential deep-value type purchase.
Broadmark Realty Capital checks all those boxes at the moment. What makes it worth considering anyway is a combination of:
- Decently strong lending standards.
- A surprisingly healthy balance sheet for its industry.
- A price-to-book ratio well below 1.
- A now-covered dividend with a still-high yield.
From a lending standards perspective, almost all its loans are "senior secured" loans -- meaning it's near the front of the line for repayment if there's a default. When you add in the fact that its typical loan-to-value is just over 60%, a lot of value has to get destroyed in a default before it's at risk of significant losses.
In addition, its own debt-to-equity ratio is only around 0.1, meaning it has very little debt of its own to worry about. Yet despite that healthy balance sheet, the company can be bought in the stock market for less than half its book value. The fear is palpable around this company, likely due to its industry and its recently cut dividend.
Yet that dividend now sits at $0.035 per share per month, a number the company called "aligned with distributable earnings" when it cut that payment to that point. Since Broadmark Realty Capital is a REIT, it must pay out at least 90% of its earnings as a dividend. That structure makes it likely that a dividend will continue as long as the company remains profitable. At a recent market price of $3.83 per share, that gives it a current yield a bit above 10%.
As with any oversold deep potential value investment, there are very clear risks involved. Yet when you put all the pieces together for Broadmark Realty Capital, it paints a picture of a company available at a price where its investors have a good shot of being adequately compensated for those risks.
When you get knocked down, it's important to get back up again
PayPal Holdings, Airbnb, and Broadmark Realty Capital have all seen their shares suffer recently, and that's rough for those who've held their shares from the highs. For investors looking to put new money to work this new year, though, those past declines just might make their stocks worth considering today. The market's bargains don't tend to last forever, though, which would make now a great time to at least get them on your watch list.
