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2 Industry-Leading Stocks That Are Dirt-Cheap Right Now

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The stock market is off to a good start in 2023, but there are some stocks that are still trading for extremely attractive valuations. Here are two industry-leading companies, both of which have lots of growth potential, that look especially attractive after their recent earnings.

Malls aren’t dying — they’re just evolving

Many investors believe that shopping malls are dying off, and it might be true when it comes to the lower-end community shopping malls. However, Simon Property Group‘s (NYSE: SPG) earnings show that the higher end of the mall business is doing quite well.

Simon, which owns a portfolio of high-end malls (including those under the Mills brand) and has the largest share in the outlet industry with its Premium Outlets brand, reported net operating income growth of nearly 6% year over year at its domestic properties. Occupancy increased by 150 basis points to 94.9% year over year, and base rent grew by 2.3%. And it’s not a surprise Simon has been able to keep demand high for its properties — in 2022 retail sales at Simon’s malls increased by 5.6% compared with 2021.

The news isn’t all great. Simon has acquired a number of retail businesses out of bankruptcy along with partners, and some of them — especially Forever 21 and JCPenney — have been hit by inflationary pressures and a slowdown in consumer spending. These have been a drag on earnings and are a main reason Simon’s funds from operations (FFO) are expected to be roughly flat year over year in 2023. However, Simon is taking steps to improve its performance and in the meantime, the mall real estate business is generating more than enough money to maintain (and likely raise) its dividend in the years ahead. With a 5.8% yield currently, $7.8 billion in liquidity to pursue opportunities as they arise, and the ability for its business to get even stronger as lower-end malls continue to close, Simon could be an excellent long-term investment at these levels, especially with the stock trading for less than 11 times expected 2023 FFO — the equivalent of earnings for real estate investment trusts (REITs).

Change could be just what this industry leader needs

PayPal‘s (NASDAQ: PYPL) recent earnings report was a mixed bag. On one hand, payment volume grew by 11% year over year to $1.36 trillion even though person-to-person volume declined as COVID-19 restrictions are looser than a year ago and make it generally easier to pay in person. However, growth has been sluggish, and the active user base grew by just 2% in 2022.

Even so, PayPal is a massive fintech company and a cash machine with more than $5 billion in annualized free cash flow. And the company surprised investors by announcing the upcoming retirement of CEO Dan Schulman, who has been at the helm throughout PayPal’s publicly traded history.

To be sure, Schulman has had a lot to do with PayPal’s evolution into the fintech giant it currently is. Under Schulman’s leadership, PayPal has added 254 million active users, has more than quadrupled the payment volume through its platform, and has grown its free cash flow from under $2 billion to more than $5 billion annually. And even after the massive downturn in growth stocks over the past year, PayPal has delivered 11% annualized returns since spinning off from eBay in 2015.

However, a new, visionary leader could be exactly what PayPal needs to take it to the next level. Schulman has made some moves that have left investors scratching their heads, such as calling for 750 million active users by 2025 in 2021, only to abandon that target a year later, and considering a $40 billion acquisition of Pinterest even though there wasn’t a clear fit in PayPal’s business. While it’s not known who the next leader will be yet and Schulman isn’t stepping down until the end of the year, this could be a positive for patient long-term investors. And in the meantime, PayPal trades for its lowest forward P/E valuation (15.7) ever and will continue to generate billions of dollars in free cash flow and deploy it in ways that create value for investors.

2023 could be a roller-coaster ride

To be perfectly clear, both stocks look attractive from a long-term perspective. They could certainly face headwinds in 2023 as the Federal Reserve struggles to get inflation under control and consumers pump the brakes on spending. But both are well-run companies that should continue to generate billions in profits and have excellent long-term growth potential.

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Matthew Frankel, CFP® has positions in Pinterest and Simon Property Group. The Motley Fool has positions in and recommends PayPal and Pinterest. The Motley Fool recommends Simon Property Group and eBay and recommends the following options: short April 2023 $52.50 calls on eBay and short April 2023 $70 puts on PayPal. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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