After a Brutal Month, Opportunities Emerge
TL;DR
The S&P 500 entered the final week of March on the back of a losing streak that began on Feb. 19. While uncertainty remains a theme, buy-low opportunities are beginning to emerge. But investors should be mindful that prices can still go lower before things begin to improve.
After recently speaking with a chief investment officer (CIO), something he said resonated: Investors should be preparing for bear markets during a bull market, and preparing for bull markets in a bear market. And while the current market downturn hasn’t resulted in a bear market, we’re seeing evidence that places us firmly in the late stages of the bull cycle.
For example, when the consumer discretionary sector begins to lag as shoppers begin avoiding non-essential purchases — like travel, dining out and e-commerce — and in turn, consumer staples sees inflows … it’s indicative of a fading bull market.
That’s precisely what has happened over the past month since the market began selling off. In fact, of the S&P 500’s 11 sectors, consumer discretionary has been the hardest hit over that period:
However, the performance of a single sector isn’t alone the bellwether of a looming bear market. As we’ve previously discussed, stock overvaluations, negative investor sentiment, tariffs and the historical average length of bull markets also come into play.
So today — being cognizant that the market can (and very likely will) continue to go lower — we’re going to make a recommendation that we think presents a great opportunity and could be a strong growth component of portfolios when things do eventually recover.
How to Prepare
Since Feb. 19, the market has been doing a lot of losing. How much? If stocks were a football team right now, they’d be the Jets. If they were a baseball team, they’d be the Marlins. And if they were a casino, they’d be Trump Taj Mahal.
Losers.
After falling by more than 10% between Feb. 19 and March 13 and briefly entering correction territory, the S&P 500 has been trying to bounce back as best as possible by dodging the incessant wrenches being thrown from the White House. During that time, safe-haven sectors — like consumer staples, utilities and health care — are where investors have flocked, which is traditionally what happens during turbulent and down markets.
The reasons why are obvious: Those sectors aren’t susceptible to elastic demand. They provide needs, not wants, like food, electricity and medicine. And no matter how bad market or economic conditions get, household budgets will always adapt for those (and similar) goods and services.
If we are approaching a bear market, looking to those sectors as hedges isn’t a bad idea. But maintaining balance is imperative, and over-allocating to conservative positions isn’t ideal. That’s because while you may be insulating your portfolio from the severe losses we’re currently seeing in consumer discretionary and tech, you could also be missing out on the sizable gains that will accompany their turnarounds.
Defensive positions in the aforementioned sectors provide a sense of security. They’re slow growth, but also offer lower volatility. For example, in Sept. 2023, we recommended HCA Healthcare as a fixture for buy-and-hold portfolios. Since then, the stock has risen nearly 30%, which isn’t enormous, but slow-and-steady stocks — over the long term — tend to not hurt investors as much as they reward them.
But returning to the advice of the CIO we recently spoke with, having exposure to both risk-on and risk-off equities can (1) shelter you from the biggest losses while also (2) providing you with buy-low opportunities in beaten-down stocks that are likely to see high upside once they find their bottoms.
Today’s recommendation falls into that latter camp. And while it has taken a beating recently — and could still fall farther — our protocol for stock-picking suggests an incredible opportunity awaits patient investors looking to add a position that’s currently on sale.
Old Dog, New Tricks
PayPal is a household name. Following its 1998 founding, it ballooned to a $71.41 billion fintech behemoth. It was one of the first companies that offered mobile payments and email-based money transfer services. Long before Cash App, Venmo and Zelle, PayPal was paving the way.
Fun fact: Since 2013, PayPal has owned Venmo when it acquired its parent-company Braintree. Braintree is the platform used by Airbnb to process its payments. Braintree also provides digital payment services for Uber, GitHub, Facebook, Pinterest, Live Nation, Lowe’s, Lenovo, Staples, Crocs, Big Lots and more than 11,500 other companies.
But PayPal’s stock has fallen on tough times. Since hitting its all-time high of $308.53 on July 23, 2021, shares have lost -76.91% and are currently trading $71.20. Woof:
There have been some signs of life, though, including a more than 44% gain in 2024, which outperformed the S&P 500 by 21%. But this year, the stock has suffered alongside the broad market with a year-to-date loss of -17.32%.
It also doesn’t pay a dividend (and you know how much we effuse dividends) and there has been more insider selling than insider buying. However, we have plenty of reasons to like the company and its current stock price.
Why We’re Bullish on PayPal
1. It’s dirt cheap from a valuation standpoint: The stock has a forward price-to-earnings (P/E) ratio of 14.04. As it was approaching its all-time high, its P/E ratio was 71.09. Right now, the S&P 500 is considered overvalued — given historical context — at a P/E ratio of 26.82. With PayPal trading at a P/E of 14.04, to say it is on sale is a dramatic understatement.
2. Follow the smart money: While short-term (i.e., last quarter) insider selling outnumbers insider buying, institutional ownership of PayPal remains robust: 71.4% of ALL shares are held by institutional investors, including 86 million by Vanguard, 74 million by BlackRock and 44 million by State Street — the three largest asset management companies. For good measure, JPMorgan and Morgan Stanley combine for an additional 35 million shares.
3. Our favorite technical indicator suggests a turnaround in progress: The Relative Strength Index (RSI) is a momentum indicator that calculates whether a stock is trending upwards, downwards or in neutral territory. The RSI uses three critical levels — 30, 50 and 70 — to determine those trends. If the RSI registers 70 or above, the stock is overbought and likely to see a near-term bearish price reversal. If it registers around 50, it’s neutral. And if it registers 30 or below, it is oversold and likely to see a near-term bullish price reversal.
Since January, shares of PayPal had been trending south, including a significant gap-down in early February. However, since then, it’s been a different story:
The stock dipped under the critical level of 30 in early March and has since been on an upward trajectory that’s been accompanied by a gain of 5.44% in the stock price. If that momentum continues, share appreciation should as well.
4. Lofty but Achievable Revenue Targets: The company recently stated that it aims to increase its revenue from just Venmo to $2 billion/year by 2027, which could easily be achieved given its growth metrics. In 2024, PayPal grew its monetized monthly active users by 24%.
To achieve that target with Venmo, the company has partnered with companies including DoorDash, Starbucks and Ticketmaster. When the company announced Q4 2024 earnings in February, it reported a 50% year-over-year increase in the number of merchants using Pay With Venmo.
Beyond user-driven revenue, the company is seeing the bulk of its revenue (and growing margins) from its B2B payment processing platform — PayPal Complete Payments — which saw total payment volume of $1.68 trillion in 2024. That has translated into a notable turnaround from an earnings perspective: PayPal has now beat on EPS forecasts in 13 of the past 16 quarters.
5. Cash rich: Free cash flow is a metric of a company’s financial health. Simply put, companies with positive free cash flow (FCF) are generating more revenue than they are paying out in capital expenditures, which leaves a surplus for addressing things like capital reinvestment, debt reduction, mergers and acquisitions, etc. Currently, PayPal boasts FCF of $6.8 billion — its largest stockpile in company history.
6. Wall Street Journal agrees: We pride ourselves on finding great opportunities. We do our research. We fact-check ourselves. We analyze companies’ fundamentals, technical indicators, and sector and industry trends. But once we come to a conclusion, it’s always nice to see that Wall Street analysts are in agreement.
According to the WSJ, the consensus median one-year price target for PayPal is $94/share, representing 32% potential upside from today’s price. The Journal’s lowest price target $70/share represents a loss of just -1.68% from current prices, while its high-end price target of $125/share represents a gain of 75.5%.
Of course, the market could continue to sell off and the brief bump we’ve seen in the S&P 500 over the past week could be no more than a dead cat bounce.
The reality is that for the better part of the next four years, the Wild-Card-in-Chief will continue doling out obstacles and making any outlook less certain while lambasting anyone and taking zero accountability for how his outrageous policies have already proven to negatively impact the market in just his first two months in office.
The numbers don’t lie:
As investors, all we can do is buckle up for a bumpy ride and try to identify opportunities when they arise. We feel strongly that PayPal is one of those opportunities right now.
