Two Stocks Trading at <4x EBIT, Repurchasing Shares

These companies have seen their valuations compress dramatically over the past few years, even as their business fundamentals have continued to improve.

Imagine getting the chance to own the PayPal or Stripe of Brazil for a tiny fraction of what those juggernauts are worth. Sounds impossible, right?

Well, that's exactly the kind of opportunity I think might be hiding in plain sight with two Brazilian fintech giants: Pagseguro Digital (PAGS) and StoneCo (STNE).

These payment processors have been absolutely crushing it, posting monstrous revenue growth north of 30% annually. You'd think investors would be tripping over themselves to own these compounders. But instead, Mr. Market has left them for dead, valuing them at a mind-boggling discount to their US peers.

We're talking EV/EBIT multiples of 2-3x here, people. That's not a typo.

While U.S. fintech giants like PayPal trade at a lofty 11x multiple and Global Payments hovers near 10x, Brazilian counterparts STNE and PAGS languish at bargain-basement valuations despite their impressive top-line expansion.

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As a value investor, this kind of disconnect gets my contrarian juices flowing. Sure, Brazil's economy has seen sunnier days with soaring interest rates and FX headwinds. But do these short-term speed bumps justify pricing these fintech stars like they're going out of business? Color me skeptical.

Now, cheap doesn't always mean easy money. But when I see high-quality businesses spitting out cash trading at a fraction of intrinsic value, my ears perk up. It's the kind of fat pitch that can mean big returns if you have the temperament to buck the crowd.

So why the gaping valuation discount?

Part of the story is undoubtedly the challenging macro setup in Brazil. Sky-high rates and a volatile currency can spook a lot of investors. Layer on top the ever-present threat from PIX and the market's palpable recency bias, and you have a recipe for multiple compression.

But while these risks are real, I suspect the market may be overestimating their impact and underappreciating the strength and resilience of STNE and PAGS' underlying business models.

After all, these companies have not only weathered past storms but posted eye-popping growth in the face of heated competition.

To understand how they've pulled off this feat and why I believe the market's fears may be overblown, we need to roll up our sleeves and examine what makes their businesses tick.