The recent market sell-off pushed many stocks to 52-week lows. Many are tech stocks, under pressure due to concerns that the rise of generative artificial intelligence could turn into a disruptive headwind for the sector.
That said, many nontech names have also sold off. This is due to related concerns about the potential for AI disruption to spill over into other sectors, such as financial stocks.
However, this bearishness appears overdone with three stocks in particular: Automatic Data Processing (ADP 2.62%), American Water Works (AWK +3.01%), and PayPal Holdings (PYPL 2.65%).
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1. ADP could rerate once sentiment improves
Automatic Data Processing, or ADP for short, is the leading name in payroll processing and other HR outsourcing services. The company has a decades-long track record of steady, consistent growth. ADP is also one of the Dividend Kings, or stocks with over 50 consecutive years of dividend growth.
NASDAQ: ADP
Key Data Points
Currently, near-term uncertainties are top of mind. Late last year, shares began to decline, on concerns that the company would not meet medium-term growth forecasts. Shares kept pulling back, despite a recent earnings beat and a boost in guidance.
Yet while worries about AI disruption's impact on employment may explain this further pessimism, ADP's recent guidance raises suggestions that such concerns are overblown. After falling by 25% over the past six months, shares trade for only 21 times forward earnings. If sentiment improves, the stock could rerate back to around 25-30 times forward earnings.
2. A pending merger could spark an American Water Works recovery
American Water Works has been trending lower for several years. First, high interest rates put pressure on the water utility's valuation. There are also concerns about future capital expenditures and increased regulatory scrutiny, as well as as opposition to the company's planned merger with Essential Utilities (WTRG +3.24%) by politically connected concerned about future rate hikes.
NYSE: AWK
Key Data Points
While the merger has received shareholder approval , it's unclear whether this deal will obtain the necessary regulatory approval.Still, if the deal goes through, management believes it will help the company maintain its long-term annual earnings and dividend growth targets of 7% to 9%. In turn, a rerating for American Water Works may be substantial.
At least, that's the view of Bank of America analyst Ross Fowler. He upgraded the stock in January, arguing that the valuation premium over regular utility stocks would rise again once the deal is approved. American Water Works currently trades for 20 times forward earnings, but as recently as earlier this year, the stock traded for over 25 times forward earnings.
3. After PayPal's failed turnaround, a new catalyst could emerge
Following PayPal's post-earnings plunge on Feb. 3, you may think the fintech company's shares are in a "steer clear" situation right now. The stock's nearly 21% drop appears to signal more trouble ahead. After all, shares tanked not only due to weak earnings and guidance but also because of news of a CEO change.
NASDAQ: PYPL
Key Data Points
Former HP CEO Enrique Lores is replacing Alex Chriss. Chriss came on as CEO in September 2023, but his turnaround efforts, including the launch of new product offerings, failed to reignite growth.
However, due to these declines, PayPal's valuation has fallen to rock-bottom levels. The stock today trades for less than 8 times forward earnings. Compare that to the valuation of competitor Block, which trades for 17 times forward earnings.
After failed turnaround efforts, a new catalyst could emerge. That is, PayPal's new management team could soon begin to seriously consider strategic alternatives. Even an announcement about going this route may lead to a rebound in shares.
