Last May, I selected the three most undervalued Nasdaq stocks to buy at the time.
The three stocks were Sirius XM (NASDAQ:SIRI), LPL Financial (NASDAQ:LPLA), and Carlyle Group (NASDAQ:CG). The average one-year return of the three stocks was 21.5%, 340 basis points less than the S&P 500. Both LPLA and CG delivered better returns than the index, which was dragged down by the satellite radio business.
I’ll try to be better.
In selecting stocks for last year’s version, I looked for Nasdaq companies with a market capitalization of at least $2 billion, a price-to-earnings ratio of 23.9 or less, a price-to-sales ratio of 3.3 or less, and gross margins over 50%.
The P/E and P/S ratios were based on the average of two Nasdaq-related ETFs: Fidelity NASDAQ Composite Index ETF (NASDAQ:ONEQ) and the Invesco NASDAQ 100 ETF (NASDAQ:QQQM).
As of March 31, 2024, the average P/E and P/S ratio of the two ETFs was 25.2 and 3.9, respectively. Based on a gross margin of 50% or higher, I’ve got 32 Nasdaq stocks to choose from.
Here are three undervalued Nasdaq stocks to consider in May.
WillScot Mobile Mini Holdings (WSC)
WillScot Mobile Mini Holdings (NASDAQ:WSC) stock is down over 15% year-to-date. Its current P/S and P/E ratios are 3.09 and 23.06, respectively, less than the average of the two ETFs. Its market cap is $7.12 billion, with a gross margin is 55.6%.
The Phoenix-based business provides temporary space solutions such as modular office complexes, mobile offices, classrooms, temporary restrooms, portable storage containers, climate-controlled storage units, furniture and other related products and services.
WillScot’s Q1 2024 results were released on May 2. Its free cash flow in the quarter was $144 million, 40% higher than a year ago, and its free cash flow margin improved 660 basis points to 24.5%.
In January, WillScot announced its acquisition of McGrath RentCorp (NASDAQ:MGRC) for $3.8 billion in cash, stock, and the assumption of $800 million in net debt. McGrath shareholders will receive $123 a share in cash and shares accounting for 12.5% of the combined entity.
By the end of the first year, post-closing, WilScot will have $700 million in free cash flow. Based on an enterprise value of $14.6 billion ($3.8 billion plus $10.8 billion), it will have a free cash flow yield of 4.8%. I consider anything between 4% and 8% fair value.
Playtika Holding (PLTK)
Playtika Holding (NASDAQ:PLTK) stock is down nearly 8% year-to-date. Its current P/S and P/E ratios are 1.11 and 12.13, respectively, less than the average of the two ETFs. Its market cap is $2.88 billion, and its gross margin is 72.0%.
Playtika is an Israel-based developer of mobile video games. It was one of the first companies to provide free-to-play games on social media platforms. It was founded in 2010.
In Q4 2023, Playtika initiated a quarterly dividend of 10 cents, part of the company’s new capital allocation strategy to reward shareholders. Based on an annual payment of 4o cents, it yields 5.2%.
“With the introduction of our new capital allocation framework, we’re taking a multi-faceted approach to maximize shareholder value: initiating quarterly dividends to return capital to shareholders and earmarking $600 million to $1.2 billion for M&A over the next three years,” said Craig Abrahams, President and Chief Financial Officer. “We believe that we are well positioned to lead consolidation in the mobile gaming industry.”
Based on a free cash flow of $436 million in 2023 and a 17.0% free cash flow margin, it expects to generate about the same free cash flow and revenue ($2.57 billion) in 2024. Playtika’s free cash flow yield is 10.0% based on an enterprise value of $4.37 billion.
Anything over 8% is value territory.
Interactive Brokers Group (IBKR)
Interactive Brokers Group (NASDAQ:IBKR) stock is up more than 42% year-to-date. Its current P/S and P/E ratios are 1.54 and 20.53, respectively, less than the average of the two ETFs. Its market cap is $50.58 billion for a business with an 88.3% gross margin.
Interactive Brokers provides institutional and individual investors in 34 countries with low-cost, global access to stocks, options, futures, currencies, bonds, funds, crypto, etc.
The company’s history dates back to 1977 when Thomas Peterffy, Interactive Broker’s Chairman, created proprietary software to automate broker-dealer functions. It has grown into a business with $4.34 billion in 2023 net revenue and $3.07 billion in pre-tax income.
It’s worth noting that only $600 million in net income was available to common shareholders in 2023. That’s because IBKR is a holding company that owns 25.4% of IBG LLC, which owns its various businesses. Thomas Peterffy controls the remaining 74.6% of IBG LLC.
In 2023, it generated $1.55 billion in non-interest income (36% of its total) and $2.79 billion in net interest income (64%). The number of customer accounts increased by 25% to 2.75 million and an average of less than $170,000 per account.
Analysts like the asset-light business. Eleven analysts cover IBKR with 10 rating it a buy. The target price of $135 is 12% higher than a year earlier.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.