There is no doubting the fact that a few curveballs have been thrown at the market in the past few years, concurrently resulting in a volatile environment. Moreover, various sectorial drifts have occurred, leading to a strange overall valuation outlook.
In my view, sector-based conviction investing is an excellent strategy to follow at this time as various best-in-class stocks remain below their pre-Covid levels. In essence, value-based investing is as applicable as ever in today's market environment.
Here are two stocks worth considering if you share the same fundamental outlook as I do.
Delta Air Lines
Despite its 31% year-over-year recovery, Delta Air Lines Inc.'s (DAL, Financial) stock is down by more than 35% since five years ago, lending the argument that the asset is trading below its cyclical midpoint.
I believe Delta presents a solid top-to-bottom opportunity. For starters, Bank of America recently reported that monthly airline sales ticked up by 8.5% in August, and although airline pricing remains softer than in 2019, demand is robust, suggesting price elasticity is waiting in the wings.
A potential headwind for Delta is the recent uptick in oil and gas prices, which will likely influence its fuel costs. However, among an array of analysts who share a similar view, Bob Brackett of AllianceBernstein believes the recent surge in commodity prices is temporary as overall trend growth is diminishing.
Delta Air Lines will benefit dearly if commodity prices compress. In fact, a softer labor market has already provided it with the necessary latitude to reduce its cost structure during the latter stages of 2023.
Further, an idiosyncratic vantage point suggests Delta is on a recovery trajectory. For example, the company's most recent earnings showed resilience against waning consumer sentiment as it beat its revenue estimate by $120 million after posting 12.7% top-line growth.
Much of Delta's earnings momentum stemmed from record international flight income, which ticked up by 61% year over year. Moreover, Delta Air Lines' Premium and Loyalty revenue continued to provide diversified income after increasing by 25% year over year.
Lastly, here is an overview of Delta Air Lines' stance within the capital markets: The stock's salient price multiples are below their historical and sector averages. Additionally, the airline's dividend program was reinitiated in its previous quarter at 10 cents per share, providing investors with the added benefits of securing income from their exposure to its stock.
Alibaba
Alibaba Group Holding Ltd.'s (BABA, Financial) American depositary receipt is down by nearly 50% since 2018, primarily due to Covid-19 and the pandemic's after-effects on China's consumer base. In addition, secondary effects such as political tensions caused China's risk premium to rise, concurrently assigning a lower valuation to the stock.
Although Alibaba's retrospective performance is worrisome, I believe its substantial drawdown provides an excellent entry point for growth investors. Let me run through a top-down analysis to illustrate why the stock is investable at its current price.
The University of Michigan's data suggests China's consumer sentiment is starting to tick up after a prolonged curtailment. In my view, much of the sentiment is linked to improving manufacturing, which tends to set the foundation for Chinese consumers. In addition, unlike many global powers, China's inflation and borrowing rates are currently at the lower end, providing its consumers with the freedom to spend. Thus, it is likely that regional spending will take flight in the coming years.
Source: Trading Economics; University of Michigan
Traversing into a bottom-up analysis of Alibaba shows the company is starting to recover from its lows. For instance, Alibaba's first-quarter results settled higher than estimated as revenue surged by 14% quarter over quarter to beat estimates by $1.08 billion. On top of that, the signs are that Alibaba's cost base is improving as its second-quarter earnings per share came in 39 cents above target.
Fundamentally, Alibaba is gaining a lot of traction from its Taobao and Tmall Group. The marketplace's revenue surged by 18% year over year in Alibaba's first quarter and could be assisted by its recent $1.4 billion investment in Trendyol, which is a Turkish e-commerce platform that could provide significant synergies like cross-sales and sharing of intellectual property.
Further, Alibaba's International Digital Commerce Group and Local Services Group offerings are progressing well as the prior experienced a 25% year-over-year increase in order growth during the company's second quarter, while the latter's revenue surged by 30% during the same period. As an add-on, Alibaba's Local Services group could experience significant tailwinds in the coming years as regional consumer sentiment starts to align.
Lastly, Alibaba's key price multiples indicate its ADRs are primed for growth. For instance, its earnings yield is at a five-year high, while its price-to-projected free cash flow of 0.45 implies the market has yet to price in the company's fundamental growth prospects.
Final word
A simple analysis of historical returns conveys that there are numerous undervalued stocks on the market that have yet to recover from their depletion in recent years. Among them are Delta Air Lines and Alibaba. Although a price analysis is the starting premise, both companies have solid fundamentals yet to be recognized by the broader stock market.
