Daily Stock Pick for May 24, 2023

For the past decade or more, the dominant stock market narrative has been all about growth. The market darlings were those that kept boldly expanding into new frontiers, disrupting established industries, and creating whole new markets instead of just competing for market share.

Much of this was fuelled by rock-bottom interest rates, which unleashed a torrent of cheap money that flowed into this sector. The name of the game were companies that didn’t worry so much about profitability as they did about acquiring as many customers as possible, that investors knew would never pay them a single cent in dividends.

But the game has changed. Interest rates are the highest they’ve been in over 15 years – and that supply of cheap money has all about dried up. Now, lofty valuations are looking more like negatives than positives, and profitability has once again reclaimed its rightful place in the spotlight.

Today’s daily stock pick is a stable company with stable profits in a stable sector. While its stock has taken a beating over the past year, that has translated into healthy dividend yields – making it a valuable option for income investors. 

On top of that, this stock is also likely substantially undervalued, and with several growth catalysts on the near horizon, gives it significant capital appreciation opportunities. In short, this is a stock every investor – no matter their goal – should be paying close attention to.

Verizon Communications Inc. (VZ)

The company itself needs no introduction. And while your personal experiences with Verizon’s services might be less than positive, try not to let that cloud your judgment as an investor. Because here are the facts:

  • Because its stock has fallen by about 30% over the past year, Verizon currently trades at a P/E ratio of just over 7x – nearly half the industry median (and Verizon’s own long-term average). It is thus likely trading at a deep discount
  • Because of that, its dividend yield has now breached over 7%, making it an attractive opportunity for income-oriented investors
  • The market is undervaluing the stock because it has the highest churn rate for its postpaid phone customers. However, despite this, Verizon’s overall profitability remains solid. With just three major telco players in the game, there is little incentive for any player to start a price war that would hurt everybody.
  • There is significant upside in the wireless space, with Verizon continuing to show healthy subscriber growth in this segment. This was especially the case on the business side, which generally commands higher profits compared to the consumer side.
  • The 5G revolution may have been slower to take off than expected – but it’s coming, and Verizon is well-positioned to take advantage of it. The company spent $53 billion in 2021 to acquire C-band spectrum, which will allow it to provide 5G broadband to up to 50 million homes and 14 million businesses by 2025.

In short, if you’re willing to hold the stock for a while – and collect some fat dividend checks in the process – Verizon could end up delivering a double whammy of both substantial capital appreciation and healthy income.

To your wealth,
Felix @ Ace of Investing