For many investors, the past 15 months have been challenging. At one point or another, the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite fell into a bear market. While the Dow and S&P 500 have bounced notably, the Nasdaq Composite, along with the Nasdaq 100 -- an index consisting of the 100 largest nonfinancial stocks listed on the Nasdaq exchange -- remain more than 20% below their record-closing highs.
Although big declines in the broad-market indexes can test the resolve of investors, they're also, historically, an excellent time to put your money to work. Over time, every stock market crash, correction, and bear market has eventually been fully recouped by a bull market. This holds true for the traditionally growth-oriented Nasdaq 100.
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In the meantime, patient investors have an opportunity to pick up high-quality stocks at a discount. A perfect example being the following three Nasdaq 100 stocks, which are all cheaper on a forward earnings basis than they've ever been as a publicly traded company.
PayPal Holdings: Forward-year price-to-earnings ratio of 13
The first Nasdaq 100 stock that's historically cheap is fintech leader PayPal Holdings (PYPL -1.83%). After losing three-quarters of its value, PayPal is trading at just 13 times Wall Street's forecast earnings per share for 2024. That's by far the cheapest PayPal has ever been.
The biggest issue for PayPal over the past year has been persistently high inflation. When the price for goods and services climbs, it can reduce the discretionary spending power of low-earning workers. Since PayPal and Venmo, the company's top two digital payment platforms, are fee-based services, higher inflation threatens to reduce both the number of transactions and total payment volume (TPV) traversing PayPal's digital networks.
However, this potential short-term headwind hasn't had the impact you might think. Though TPV growth has slowed, PayPal's key performance indicators continue to move in the right direction. Excluding currency movements, PayPal's TPV rose 13% to $1.36 trillion in 2022. Considering that the U.S. economy produced two quarters of negative gross domestic product to kick off 2022, double-digit TPV growth is quite impressive.
Even more important is the fact that active account engagement is higher than it's ever been. When 2020 came to a close, the average active account had completed 40.1 digital transactions over the trailing-12-month (TTM) period. As of the end of 2022, PayPal's active users were completing an average of 51.4 transactions over the TTM. Put simply, higher usage equates to more gross profit for PayPal.
Despite being a growth stock, PayPal still has shareholder interests in mind. Understanding that the current economic environment is challenging, the company is planning to reduce its operating expenses by at least $1.3 billion (in aggregate) this year. In addition, the company's board approved an up to $15 billion share repurchase program.
With a sales growth rate that's regularly topped 20% in an expanding economy and digital payments still, arguably, in their infancy, PayPal looks like a no-brainer buy.
Sirius XM Holdings: Forward-year price-to-earnings ratio of 11
The second Nasdaq 100 stock that's cheaper now than at any point in its nearly 29-year trading history is satellite-radio operator Sirius XM Holdings (SIRI -1.29%). Following a big decline since the beginning of February, Sirius XM's forward-year price-to-earnings ratio has fallen to around 11, which is approximately 36% lower than the forward price-to-earnings ratio of the benchmark S&P 500.
Sirius XM's poor performance can primarily be attributed to fear about ad spending. With multiple recession-forecasting tools portending trouble ahead for the U.S. economy, there's the expectation ad revenue will decline substantially. While this concern certainly has merit for much of the radio industry, Sirius XM is well-positioned to navigate choppy waters.
One factor working in the company's favor is that it's the only approved satellite-radio operator. Being a legal monopoly comes with its advantages, such as being able to pass along subscription price hikes to outrun inflation.
What's even more important is that Sirius XM's revenue channels look markedly different from traditional and online radio companies. Whereas the latter are heavily reliant on advertising for their revenue, only 20% of Sirius XM's $9 billion in sales last year derived from ads. A majority of Sirius XM's revenue (77% in 2022) comes from subscriptions. While advertisers are prone to pull back on ad spending at the slightest hint of a recession, subscribers tend to be less-inclined to take action. In other words, a large percentage of Sirius XM's revenue and cash flow won't change much, if at all, during an economic downturn.
As I recently pointed out, several aspects of Sirius XM's cost structure are highly predictable. Though royalty and talent acquisition costs often change, equipment and transmission costs typically don't. As Sirius XM adds new subscribers, its transmission costs remain relatively fixed. This predictable cost structure allows the company to slowly but steadily expand its operating margin over time.
While Sirius XM's high-growth days are now in the rearview mirror, its 2.8% yield and historically low forward-year price-to-earnings ratio offer incredible value.
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Walgreens Boots Alliance: Forward-year price-to-earnings ratio of less than 7
A third Nasdaq 100 stock that's simply never been cheaper is pharmacy chain Walgreens Boots Alliance (WBA -0.23%). If Wall Street's consensus earnings forecast for fiscal 2024 (ended Aug. 31, 2024) is correct, shares of Walgreens can be purchased for a multiple of less than 7.
Usually, healthcare stocks are exceptionally safe investments given that the sector is highly defensive. By this, I mean we don't get to choose when we become ill. While it'd be nice to flip a switch and not get sick when it isn't financially convenient, we don't get to do that. Ongoing demand for prescription drugs, medical devices, and various healthcare services tends to provide steady cash flow in any economic environment.
But Walgreens proved a rare exception to the rule during the COVID-19 pandemic. Because most of its revenue comes from its physical stores (front-end retail sales, pharmacy, and clinics), initial lockdowns during the pandemic reduced foot traffic, which ultimately hurt sales and profits. Thankfully, this short-term pain is translating into a once-in-a-lifetime opportunity for long-term investors.
Despite its challenges, Walgreens is years into a multipoint turnaround strategy that's focused on promoting repeat visits/customer loyalty, increasing the company's organic growth rate, and lifting its operating margin.
The most transformative aspect of this strategy is Walgreens' ongoing shift to healthcare services. Walgreens has partnered with and became a majority investor in VillageMD. The two have, thus far, opened 200 full-service, physician-staffed health clinics co-located at Walgreens' stores. Whereas most competing clinics can handle a vaccine or simple sniffle, the Walgreens/VillageMD clinics are geared for repeat clients with a wide range of concerns or ailments. By the end of 2027, the duo expects to be operating 1,000 stores in over 30 U.S. markets.
Walgreens is also making hefty investments in digitization. The COVID-19 pandemic was a much-needed reminder to management of how important convenience is to today's consumer. Even though Walgreens' physical stores will continue to account for the bulk of its revenue, expanding its online product availability should lead to double-digit digital sales growth.
Aside from these organic growth opportunities, Walgreens has also trimmed more than $2 billion off its annual operating expenses, as well as divested its wholesale drug business to AmerisourceBergen for approximately $6.5 billion.
Considering that Walgreens Boots Alliance is approaching a 6% yield with a historically low forward-year price-to-earnings ratio, it looks like a rock-solid buy for more risk-averse investors.
