As the stock market stays stuck in the artificial intelligence (AI) doldrums, hindering gains for growth stocks, now may be the time to shift focus toward value stocks.
Yes, value stocks present their own set of challenges. Many undervalued stocks have the risk of becoming value traps, or stocks that are cheap, but stay that way, due to a lack of growth and/or other issues related to fundamentals. Yet while value investing isn't as easy as buying the cheapest stocks, that doesn't mean success in this arena is elusive.
In fact, quite a few undervalued stocks are hiding in plain sight, with potential catalysts that could propel them to significantly higher prices in the years ahead. Let's look at these three value stocks: Comcast (CMCSA 1.10%), Altria Group (MO +1.88%), and PayPal Holdings (PYPL 2.17%).
Image source: Getty Images.
Comcast could keep unlocking value through M&A
Comcast, as a provider of cable TV and internet service, is primarily a telecom company, so it's not surprising that its shares trade at a high-single-digit forward multiple, lower than media stocks but on par with AT&T and Verizon Communications.
NASDAQ: CMCSA
Key Data Points
But this low-priced media stock could unlock additional value. In fact, Comcast has already begun doing so through last month's spinoff of Versant Media Group, which owns cable broadcasting networks like CNBC, MSNBC, and USA Network.
There's also growing speculation that, if Netflix's bid for Warner Bros. Discovery prevails, Paramount Skydance and Comcast will pursue a merger. This could serve as a prelude to an ultimate splitting off of Comcast's media business from its telecom business.
Altria Group could stay a top-performing value stock
Cigarette maker Altria Group delivered total returns higher than the S&P 500 over the past five years. Over this time frame, Altria's total returns, from price appreciation and dividends, have totaled 126.6%, whereas the S&P 500's total returns have totaled 89.1%.
NYSE: MO
Key Data Points
This trend could continue if Altria finally breaks through in the non-cigarette tobacco and nicotine products space. If that happens, shares could experience heavy valuation expansion. Right now, Altria trades for only 12 times forward earnings.
Philip Morris International, which is generating an increasing percentage of its overall sales from non-cigarette tobacco and nicotine products, trades at over 22 times forward earnings. This appreciation potential, coupled with Altria's 6.3% forward yield, could keep the stock in outperformance mode for years to come.
PayPal may stay cheap for now, but not forever
Put simply, investors have given up hope for a growth turnaround for PayPal. Now-ex CEO Alex Chriss' efforts, focused on expanding PayPal's branded checkout business, failed to deliver. As his replacement, former HP head Enrique Lores, takes the helm, it's back to the drawing board.
NASDAQ: PYPL
Key Data Points
However, what if, instead of another organic growth effort, PayPal decides to pursue "strategic alternatives" to boost the share price? Following the latest investor exodus, PayPal trades for less than 8 times forward earnings.
PayPal's fintech competitors, as well as major banks, trade at far higher valuations. This could open the door for strategic acquirers to buy some or all of PayPal's businesses at big premiums. In turn, that could drive a big rebound for this undervalued stock.
