Undervalued stocks offer a margin of safety. This extra precaution can minimize a stock’s potential downside if the stock market endures a correction. A margin of safety doesn’t make a stock risk-free, but it also means a stock has more upside potential.
Some stocks stay undervalued for a while. The stock market may not appreciate the valuation due to a string of negative news, obscurity, and other factors. An undervalued stock can quickly take off if more investors recognize its value.
Finding undervalued stocks can be rewarding. These are some of the investment opportunities that offer a margin of safety for long-term investors.
American Express (AXP)
American Express (NYSE:AXP) makes money from each AMEX credit and debit card transaction. This business model has helped the company deliver steady returns and double-digit profit margins for long-term investors. Shares have more than doubled over the past five years and only come with a 20 P/E ratio.
The fintech company also demonstrated its fiscal strength by raising its dividend 17% this year. The firm grew its revenue by 11% year-over-year and achieved a 23% year-over-year increase in net income. American Express anticipates delivering revenue growth above 10% and EPS growth in the mid-teens beyond 2026. This guidance gives investors a deeper glimpse into the company’s long-term plans. Most corporations only offer guidance for the current year and the upcoming quarter.
Visa (NYSE:V) and Mastercard (NYSE:MA) have much higher P/E ratios. While these two companies have higher profit margins, all three credit and debit card companies exhibit similar revenue and net income growth rates. American Express also has the highest dividend yield of the bunch.
Caterpillar (CAT)
Not every growth stock is a tech stock. Caterpillar (NYSE:CAT) has outpaced the stock market with a 160% gain over the past five years. The construction firm has an excellent dividend growth program and a 1.43% yield. Shares currently trade at an 18 P/E ratio.
Caterpillar has been expanding its profit margins in recent quarters. The net profit margin reached 15.7% in the fourth quarter of 2023. Revenue increased by 3% year-over-year, while net income jumped by 84% year-over-year in that quarter.
Caterpillar achieved record full-year sales and revenue and a record adjusted profit per share. The corporation also reinvested $5.0 billion into stock buybacks and dividend distributions. The firm’s $7.0 billion cash position at the end of 2023 highlights its financial strength.
Given the company’s growth rates, the stock trades at a reasonable valuation. Investors can also count on this company’s stability, as it has been around for almost 100 years. Caterpillar has survived the Great Depression and other economic challenges.
Deckers Outdoor (DECK)
Deckers Outdoor (NYSE:DECK) continues to deliver impressive financials as Hoka and Ugg expand on their gains. Revenue increased by 16% year-over-year to a record $1.56 billion in the third quarter of fiscal 2024. Profit margins expanded to 25% thanks to the company’s 40% year-over-year net income growth.
The corporation is putting some of its capital into stock buybacks. The company repurchased $99.7 million of its shares in the third fiscal quarter. Deckers Outdoor still has $1.046 billion for authorized stock buybacks.
Deckers Outdoor is swimming in cash and grew its cash position from $1.058 to $1.651 billion year-over-year. The stock has comfortably outperformed the stock market and is up 515% over the past five years. Shares are also up by 34% year-to-date as more investors realize the company’s value proposition. Despite its recent addition to the S&P 500, the stock trades at a reasonable 32 P/E ratio, given its financial growth rates.
On this date of publication, Marc Guberti held a long position in DECK. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
