StoneCo

At face value, StoneCo Ltd looks inexpensive, following a substantial price decline over the past year. To account for the risk of a possible value trap, we have capped its rating at 3 stars. The stock currently trades at a 30% discount to our quantitative fair value estimate of $16.48 per share; however, caution is warranted due to this estimate's high uncertainty rating.

The company's profitability bolsters our fair value estimate. Highly profitable companies are often more resilient in recessions and are likely to generate stronger future cash flows for shareholders. For example, the firm's earnings yield of 19.0% sits in the top 10% globally. This suggests that it is generating substantial earnings relative to its share price, which contributes to our view that shares are undervalued.

The company's valuation metrics are an additional encouraging factor. A company's valuation metrics provide insights into the market's expectations for its future growth and profitability. The firm's enterprise value to EBITDA ratio of 3.5, for example, falls in the bottom 10% globally. Relative to the company's EBITDA, the enterprise value of the business is low, which further promotes our favorable price/fair value ratio.

With its quantitative economic moat rating of none, this business is unlikely to consistently outearn its cost of capital without structural protection from competition. Additionally, the firm's moderate financial health score suggests it is acceptably positioned against adverse economic circumstances.