We recently published a list of 10 Most Undervalued S&P 500 Stocks to Buy Now. In this article, we are going to take a look at where Discover Financial Services (NYSE:DFS) stands against other undervalued S&P 500 stocks to buy now.
Earlier on March 13, Michael Cuggino, President and Portfolio Manager of the Permanent Portfolio Family of Funds, appeared on CNBC’s ‘The Exchange’ and began discussing his fund’s performance. Despite a challenging market environment, his fund achieved a 4% return this year, which he attributed to diversification rather than reliance on a single asset class like gold. The portfolio includes gold, silver, diversified equities, and bonds. When asked about market reactions to tariff-related headlines, Cuggino emphasized the importance of not overreacting to daily news fluctuations. He described the market’s behavior as herky-jerky and advised investors to focus on long-term opportunities rather than reacting impulsively. His base case anticipated some turbulence due to the transition under the new administration’s economic policies. His strategy involves identifying opportunities during volatile periods rather than making significant portfolio changes.
The discussion also featured David Zervos, Chief Market Strategist at Jefferies, who provided insights on Washington’s role in market volatility. Zervos acknowledged that while policies such as tariffs, immigration reforms, and drug policies were largely unfolding as expected, the speed of changes under the current administration was surprising investors. He pointed out rapid spending cuts and layoffs in the public sector as key contributors to market unease. For instance, courts recently ordered the federal government to rehire probationary employees who had been dismissed. Zervos likened this abrupt shift to transitioning from a public-sector-reliant economy to one driven by the private sector, which is a process that has introduced significant uncertainty. Regarding tariffs specifically, Zervos downplayed their overall impact on the US economy, which he described as domestically driven. While tariffs could affect specific industries like wine or automobiles with high overseas components, he argued that broader economic trends would be shaped by deregulation, reduced business costs, and a shift toward private-sector efficiency. He warned that the speed of these transitions could lead to short-term volatility but maintained optimism about long-term productivity gains.
Methodology
We used the Finviz stock screener to compile a list of the top S&P 500 stocks that had a forward P/E ratio under 15. We then selected the 10 stocks that were the most popular among elite hedge funds and that analysts were bullish on. The stocks are ranked in ascending order of the number of hedge funds that have stakes in them, as of Q4 2024. The hedge fund data was sourced from Insider Monkey’s database which tracks the moves of over 1000 elite money managers.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 373.4% since May 2014, beating its benchmark by 218 percentage points (see more details here).
A close-up of a laptop with a modern user interface for a consumer finance service.
Discover Financial Services (NYSE:DFS)
Forward P/E Ratio as of March 14: 12.2
Number of Hedge Fund Holders: 91
Discover Financial Services (NYSE:DFS) offers a range of digital banking and payment services across the US. These include Discover-branded credit cards, personal & home loans, and deposit products. It operates the PULSE (ATM and debit network) and Diners Club (global charge card network) payment networks.
The company’s Credit Card division had a strong Q4 2024 performance. The net interest margin reached 11.96%, which was a 0.98% increase year-over-year. Card receivables saw a modest 1% increase, which reflected a slight decrease in payment rates. Credit performance within the card segment showed positive trends. Card net charge-offs decreased by 0.25% sequentially. Additionally, credit card accounts from 2023 are projected to be more profitable than those from 2022. The consumer base remains stable, which is supported by wage growth and a strong labor market.
The company anticipates loan growth to return to pre-pandemic levels, with sales and new account generation playing a more significant role. The company is also preparing for its merger with Capital One. The merger will combine Discover Financial Services’ (NYSE:DFS) payment network and credit card business with Capital One’s. This will create a larger financial services company with increased scale and market share.
Middle Coast Investing stated the following regarding Discover Financial Services (NYSE:DFS) in its Q3 2024 investor letter:
“The good transitions tend to tie back to the macroeconomy. Financial companies are seen as the big winners in a soft landing. Each of our winners have good things happening with them, too. Discover Financial Services (NYSE:DFS) is cleaning up many of its problems from the past few years. Whether or not its deal with Capital One goes through, Discover’s business has gotten much stronger in the past six months.”
Overall, DFS ranks 9th on our list of the most undervalued S&P 500 stocks to buy now. While we acknowledge the growth potential of DFS as an investment, our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than DFS but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 20 Best AI Stocks To Buy Now and 30 Best Stocks to Buy Now According to Billionaires
Disclosure: None. This article is originally published at Insider Monkey.
