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Let us introduce our latest addition to the Investor’s Edge catalog: a monthly “Top Stocks to Watch” report. In this exclusive article we will break down 10 stocks that we are watching in the upcoming month and beyond so you can be prepared for what lies ahead.

The article will be issued on the first Wednesday of every month so be sure to add it to your calendar.

Without further ado, here are the top 10 stocks to watch in February.

Grab your coffee and let’s dive in.

Top 10 Stocks to Watch - February 2024

PayPal

PayPal, an American multinational financial technology company established in 1998, operates a widely used online payments system across numerous countries, facilitating electronic transactions as an alternative to traditional paper methods. PayPal went public in 2002 and later became a wholly-owned subsidiary of eBay. In 2015 eBay spun off PayPal to its shareholders, and PayPal became an independent company again.

PayPal is down -80.0% since making a double top in August 2021. Intensifying competition from both fintech apps and major tech players is posing challenges for PayPal, evident in its declining transaction margin over the past year, hindering potential growth. However, there is optimism for a turnaround in 2024, with the company's stock currently trading at historically low levels.

PayPal reported third quarter 2023 earnings on November 1, 2023. The company generated a net income of $1.30 per share, beating estimates of $1.23 per share, and rising 20% from the same period the year prior. Revenue rose 9% year-over-year to $7.42 billion. Analysts had expected $7.39 billion.

On top of beating on the top and bottom lines, PayPal’s operating income rose 8% YoY to $1.6 billion. Total payment volume rose 15% to $387.7 billion, but operating cash flow fell 28% YoY to $1.3 billion due to pressure on its operating margins.

While PayPal’s EPS fell 40% in 2022, the company expects to surpass 2021’s full year EPS in 2023. PayPal’s forecasted EPS growth rate is 21% this year and analysts estimate an 18.2% CAGR over the next 5 years.

When taking this into account, valuations look very enticing at these prices. PayPal is currently trading at a P/E ratio of 18.7x, which is well below its historical average P/E of 39.2x and lower than the industry average of 24.1x. When accounting for future growth, the forward P/E ratio is 11.4x.

As you know by now, our favorite metric to look at when evaluating a company is Free Cash Flow. Whether you are looking at a dividend stock or a growth stock, free cash flow is extremely important to a business.

Over the last 12 months, PayPal has generated $3.2B in free cash flow, or $2.79 per share, resulting in a P/FCF of 22.62x. That is slightly below its 10 year historical average of 24.4x and in line with the industry average of 22.4x.

Our favorite way to determine the price we are willing to pay for a stock is the discounted cash flow (DCF) valuation. Using the DCF method, a stock price of 88.38 would be reasonable for PayPal. Based on the current share price of 63.18, this represents a rise in price of 40%.

Relative value is another way to value companies by comparing them to other businesses in the same field based on certain metrics. As we mentioned above, our favorite model is DCF but this helps give a clearer overall picture. Using this method, a stock price of 125.97 would be reasonable for PayPal, meaning the shares are undervalued by 100%.

When we combine both models, this gives PayPal an intrinsic value of 107.18, which means there is a 70% upside for the price.

The stock is up +2.6% to start the year, even after its big AI announcement fell flat for investors. The small move higher is thanks in part to the company’s recent layoffs announcement. We actually think PayPal may be starting to right the ship here under its new CEO and it may be a good time to add to our position.

PayPal reports earnings on February 7th. We wouldn’t be surprised if they beat earnings and issued stronger than expected guidance for 2024. We will be watching this report closely as it will help us better understand where the company is in terms of its turnaround.

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