There are three main drivers of a stock’s return: growth, the change in price-to-earnings (P/E) multiple and capital return. While investors often focus on the growth angle, an upward rating in multiple can also be a significant return driver for bargain stocks.
The following three bargain stocks have millionaire-maker potential. First, their forward P/E multiple reflects a 30% discount to the S&P 500’s valuation despite their solid growth prospects. If their P/E ratio matches the market’s multiple, these stocks could soar.
Beyond valuation, these stocks have pursued attractive capital returns through dividends or buybacks. Due to their excellent free cash flow generation, these companies have kept excellent shareholder returns. Furthermore, continuing accretive buybacks at these bargain levels will support stock prices.
Considering the undervaluation, growth prospects and continued buybacks, these bargain stocks offer solid return prospects. Moreover, there is a significant margin of safety at these trough valuations.
AutoNation (AN)
Warren Buffett has noted that “the best business is one that is a royalty on the growth of others.” AutoNation (NYSE:AN), one of the largest auto dealerships in the U.S., fits this description. It doesn’t invest heavily in auto manufacturing. Instead, it earns a markup on autos produced by various manufacturers.
At these levels, this auto dealer is one of the stocks that would benefit from a P/E rating. Based on analyst estimates, it trades at 8 times 2024 estimates. That’s a steep discount for a company that has had positive revenue growth for the last four quarters.
Historically, AutoNation has been an uber cannibal. In Q4 2023 and full year 2023 results it revealed that it had reduced share count by over 50% since the end of 2020. These repurchases continued in 2023, with the company buying back 6.4 million shares for $864 million, reducing share count by 13%. What’s more, as of the end of Q1 2024, the Board had authorized another $1 billion buyback.
Given the impressive capital return profile, it’s no surprise that Bank of America has included AN stock in its third quarter Top 10 U.S. Ideas List. They see upside to $210, which represents over 30% upside.
Baxter International (BAX)
This medical device maker has faced the perfect storm over the past four years. Increased leverage from the Hillrom acquisition in 2021 and pandemic-related cost increases rocked the boat. Then, last year, it was hit by fears that its renal care business would face negative impacts from GLP-1 drugs. As a result, shares have sunk by over 60% from April 2020 highs around $93.
However, at these levels, Baxter International (NYSE:BAX) stock is too cheap to ignore and one of the bargain stocks to buy. First, leverage levels will drop as the company uses proceeds from multiple asset sales to repay debt. In 2023, it sold its BioPharma Solutions unit for $4.25 billion. Also, Reuters reported on July 5 that Baxter was in talks to sell its kidney care unit for $4 billion to Carlyle Group (NASDAQ:CG).
Secondly, most of its long-term, fixed contracts with large healthcare organizations are ending. As a result, Baxter will raise prices to stem the inflationary pressures that have plagued the business for two years.
As of this writing, Baxter yields 3.3% and is one of the best bargain stocks. It trades at 12 times forward non-GAAP P/E compared to a five-year average of 19. That’s a significant discount, considering earnings are depressed but will rebound with higher pricing and cost efficiencies.
Corpay (CPAY)
Corpay (NYSE:CPAY), formerly Fleetcor, helps businesses manage business-to-business payments and is a cost manager for corporations. Its largest segment, vehicle payments, accounts for 53% of revenues and helps customers manage and pay for vehicle-related expenses.
Due to the emergence of electric vehicles, CPAY stock has experienced weakness due to perceived risks to its fuel card business. However, it’s important to note that even EVs use energy and there must be mediums to pay for it. To this end, the company is adapting to this transition and continues to add EV fleets to its customer base.
Moreover, its corporate payments segment, which helps businesses pay other businesses, will be a huge growth engine going forward. Corpay acquired Zapay and Paymerang to bolster this segment. Overall, organic growth has averaged 8.1% over the past 9 years and management expects to grow by 10% over the next three years.
Today, CPAY stock doesn’t reflect its fundamental performance. Earnings have grown from $13.21 in 2021 to 2024’s guidance of $19, yet the stock is below 2021 highs. This is an opportunity to buy one of the top bargain stocks at 14 times forward earnings and benefit from its $800 million buyback.
On the date of publication, Charles Munyi did not hold (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.