Adding $500 to a retirement account annually, or roughly $10 a week, may not sound life changing. However, I like to view it through the eyes of my 8-year-old daughter. Should these measly $10 weekly additions be made in perpetuity throughout the first 65 years of her life, her account would grow to over $2.6 million, assuming historical average market returns of 10%.
While it is doubtful that this account would go untouched, with potential use cases like college or a down payment for a house, it nonetheless highlights the power of a mere $500. And remember, these are just market-matching returns. If you find a potential long-term winner at an absurdly cheap valuation, you could do even better.
Here's what makes PayPal (PYPL 2.90%) and The Toro Company (TTC 0.90%) so interesting at today's discounted valuations.
1. PayPal
Down 80% from its all-time highs, digital payment platform PayPal's share price is now at a level it hasn't seen since 2017.
As tumultuous as this drop has been, PayPal's reduced share price leaves it trading at what appears to be a once-in-a-decade valuation in 2023.
PYPL PE Ratio data by YCharts
Is PayPal's meteoric rise ending? Or is the stock ripe for the picking at this discounted price?
Here are three key reasons I believe the latter is becoming the case:
- PayPal's booming unbranded operations: Growing sales by 32% in the third quarter, PayPal's "unbranded" operations continue to lead the company's growth charge. This unbranded unit is powered by Braintree, which focuses on customizable payment solutions for large enterprises, and PayPal Complete Payments (PPCP), its small-to-medium-sized business offering. While lower-margin than PayPal's traditional branded business (where you see the company's logo at checkout), these unbranded operations are crucial to the company's long-term success. Pairing roughly 35 million merchant accounts with over 400 million customer accounts, PayPal now has an incredible 5 billion vaulted financial instruments across its two-sided network. This stunning figure accounts for 25% of the world's payment cards (minus China), highlighting its incredible reach in the payments industry.
- The people's choice in buy now, pay later (BNPL): Despite only counting roughly a quarter as many BNPL users as industry-leading Klarna's 150 million, PayPal has quickly become consumers' favorite partner, according to a study by J.P. Morgan. Preferred by 43% of users -- compared to 18%, 13%, and 12% for Afterpay, Klarna, and Affirm -- PayPal's BNPL offering boasts an eye-catching Net Promoter Score (NPS) of 82. NPS scores measure how likely a customer is to recommend a product to a friend, rated on a scale of -100 to 100. Typically, a score in the 80s is reserved for life-changing purchases or products that bring joy into a customer's life. Growing from just 3 million users at the end of 2020 to 32 million in the last quarter, BNPL will remain an exciting growth story for PayPal. The cherry on top for investors? PayPal recently struck a deal with KKR, where the latter will continue buying up the company's BNPL loan portfolio, removing a lot of loan performance risk.
- Share buybacks at better prices: Generating an average of $4.7 billion in free cash flow annually over the last five years, PayPal is well positioned to continue returning cash to its shareholders through stock buybacks. However, with its stock trading at a deeply discounted price and a valuation well below the S&P 500's average price-to-earnings (P/E) ratio of 25, these buybacks generate even more value. PayPal lowered its share count by 6% in just the past year, and these repurchases could be a powerful catalyst alongside PayPal's unbranded and BNPL growth ambitions.
PayPal's dedication to buying back shares at just 18 times earnings could make the stock attractive enough to many investors in its own right. Pair these better-timed repurchases with a growth story that is still being told, and PayPal looks to be a long-term winner trading at an absurdly low price right now.
2. Toro
Toro has seen its share price dip by 22% in 2023. The company provides a range of landscaping equipment, from mowers for golf courses and sports fields to snow throwers, irrigation, lighting, underground construction, and a suite of residential products. Despite its long history of beating the market -- rising 16% annually since the start of the millennium -- Toro has struggled year to date as sales from its residential unit plummeted 35% in the third quarter.
The company saw a boom in mowers, snow throwers, chain saws, and trimmers during the height of the pandemic, but the stock finally reflected the post-lockdown slump.
However, this leaves Toro trading at a once-in-a-decade valuation.
TTC PS Ratio data by YCharts
Thanks to this combination of a price-to-sales (P/S) ratio well below Toro's 10-year averages and a 1.6% dividend yield at a decade-long high, the company seems absurdly cheap.
Perhaps most importantly to investors, Toro is launching a new partnership with Lowe's to sell equipment in its stores starting in the spring of 2024. While the company already has similar deals with Home Depot and Tractor Supply, these added sales could help Toro's residential segment rebound once they reach the cycle trough.
Furthermore, with Toro's focus on making tuck-in acquisitions over time -- including five in the past five years -- this temporary industry downturn could prove to be an opportunity for the company to strike again. While investors wait, Toro will likely reward its shareholders with its 20th consecutive year of dividend increases, thanks partly to a payout ratio of only 37%.
With time, customers will reach the replacement cycle on their lockdown-spurred purchases, leading to brighter days for Toro's residential business -- not to mention the steady results from its larger professional operations. However, in the meantime, Toro looks like an absurdly cheap investment with a reasonable dividend to add to until the cycle flips.
