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Mastercard MA +0.49% and Visa V –0.06% have been on a tear—and yet their stocks remain cheap. Investors should take the opportunity to scoop up shares.

It’s hard to overstate just how attractive the companies’ business is. Visa (ticker: V) and Mastercard (MA) operate competing networks that process hundreds of billions of credit, debit, and other transactions annually by connecting consumers, businesses, and financial institutions. They each take a percentage off the top of the trillions of dollars of payment volume that travels across their networks. It doesn’t cost them any more to process an additional swipe on a network that already exists—each marginal transaction is nearly all profit.

Put simply, there may be no greater big business out there than payment processing.

The stocks have sought-after attributes for any investor and enjoy premium valuation multiples as a result. Not that premium lately, however. Even after gaining 18% this year, Visa stock fetches around 25 times its expected earnings for the next year, versus its average of 30 times over the past five years and up from 24 times at the start of 2023. Compare that to the S&P 500SPX –0.10% ’s 19 times forward earnings multiple today, up from closer to 16 times at the beginning of the year.

Visa’s current valuation multiple is a premium of about 30% over the S&P 500, half its historical average of roughly 60%. The picture is similar for Mastercard—it’s cheaper relative to the market and its own history than it has been in a while.

Nothing appears to have changed for either company to warrant a multiple that low compared with the S&P 500. Visa has had a mammoth 55% profit margin over its past four reported quarters—$17 billion in net income on $31 billion of revenue—a level that it can comfortably maintain a level that it can comfortably maintain while also growing sales by 10% annually. It’s a capital-light business: Free cash flow was also $17 billion over the past year. Mastercard’s margins are about 10 percentage points narrower due to its smaller scale. Both companies carry minimal net debt.

The current valuations present buying opportunities for both stocks. “The de-rating in Visa’s and Mastercard’s valuations appears to be largely technical, as business momentum is strong—the networks have both delivered nine straight quarters of positive surprises on revenue and EPS—and they are not facing any new or unusual risks or threats of disruption that would pressure their valuation,” writes MoffettNathanson analyst Lisa Ellis. She has price targets of $320 on Visa stock, up 32%, and $490 on Mastercard, up 23%.

Investors needn’t count on Visa’s or Mastercard’s valuation multiple returning to its historical premium—the anticipated growth in profits will be more than enough. Mastercard’s earnings per share are forecast to grow at nearly 18% annually over the next three years. Visa’s are seen rising 14% annually.

Barron’s recommended buying Visa stock late last year, and it has returned about 19% since then—putting it roughly a percentage point ahead of the S&P 500. We liked it then, and we still like it now. The lower-than-usual valuation makes for another attractive starting point and takes some near-term risk off the table. It’s worth a swipe.

Being an income investor usually means forgoing exciting stocks like Tesla and Nvidia for a regular payout. But that doesn’t have to be the case, thanks to an options play known as a “covered call.”

As options trades go, a covered call is rather simple. A call option gives the holder the right to buy a stock for a fixed price by a predetermined expiration date, while the seller of a call has to deliver shares to the buyer if the stock rises above the “strike price” specified in the options contract.

Selling a naked call option—that is, selling an option against a stock you don’t own—can be risky. An investor who sold a call option on Nvidia stock (ticker: NVDA) in mid-May with a strike price near $305—where it was trading at the time—would have received about $10 per share for selling the option, but they would have had to buy Nvidia stock only days later for between $380 and $400, or about $390 a share, after the chip maker’s blowout earnings, only to hand it over to the holder of the option for $305. That’s a quick $75 lost—or, since options contracts are issued in lots of 100, a quick $7,500.

A covered call—selling an option against a stock you already own—is far less risky. In our example, a call seller who already owned Nvidia stock would have missed out on a lot of the upside, but still would have pocketed the $10 options premium, effectively selling Nvidia shares for about $315 apiece.

That’s an extreme example, of course. Most stocks typically don’t go up 24% in a day, so selling calls on positions held can be an effective way to generate income without missing out on too much upside. After all, most options are never exercised.

That means even a stock as wild as Tesla (TSLA) could be turned into a source of income. A holder of 1,000 Tesla shares could sell one call option contract, giving the buyer the right to buy 100 shares for $275 each between now and July 21, versus $270 now. That sale would generate about $1,000, or about 0.4% of the total portfolio value. Repeat that every month, and the potential gain is north of 4% a year. Not bad for a stock that doesn’t pay a dividend.

Doing the same thing on 10% of a portfolio holding all of the magnificent seven stocks—Nvidia, Tesla, Microsoft (MSFT), Apple (AAPL), Alphabet (GOOGL), Amazon.com (AMZN), and Meta Platforms (META)—could generate an annual gain of about 2%, better than the S&P 500’s yield of about 1.4%.

Selling calls raises the risk of an investor’s shares being “called away.” To avoid that, Future Fund Active exchange-traded fund (FFND) co-founder Gary Black doesn’t sell covered calls on his Tesla position around events such as deliveries or quarterly earnings, when he knows the stock can experience a particularly large move. He is a Tesla bull and wants to reduce the risk that he will have to hand over his shares to a call buyer.

A covered-call strategy requires investors to think hard about which strike prices and expiration dates to use. Selling options with higher strike prices lowers the risk of handing over stock, but those options are worth less.

“I usually try to stress the importance of finding the right trade-off…where I still get some meaningful upside but also return a reasonable amount of premium,” says Susquehanna analyst Christopher Jacobson.

Covered calls are certainly more complicated than buying a set-it-and-forget-it dividend stock. There are also tax implications. If the option is exercised, it counts as part of the stock’s sale price for tax purposes, says accounting expert Robert Willens. But if it expires worthless, it’s treated as a short-term capital gain much like an ordinary dividend would be.

If you’re looking for income, covered calls have you covered.

“Goodbye copper, hello fiber.”

That’s Frontier Communications FYBR –11.88% ’ (ticker: FYBR) motto in its latest iteration, following a tumultuous few years that included bankruptcy, a pandemic, and pressure on older telecommunications technologies. With a new management team and a refreshed balance sheet, its stock looks attractive as Frontier progresses toward its goal of 10 million fiberoptic locations connected to its network.

Life hasn’t been easy for Frontier shareholders. The company filed for bankruptcy just over three years ago, wiping out the equity and some $11 billion in debt. Armed with a new balance sheet, Frontier is upgrading its network to fiber from copper. That’s capital-intensive—a turnoff to growth investors—and requires burning cash—discouraging value seekers. Its shares, at a recent $14.31, have dropped 42% over the past 12 months,

Extending fiber to millions of homes by digging up streets or climbing telephone poles won’t happen overnight, but it will happen. Frontier is more than halfway to its goal after adding 339,000 fiber locations in the first quarter. It’s getting more profitable with each fiber customer added, while pruning costs. Frontier might not be the most exciting story, but it does have a clear plan that should pan out.

“We’ve got a very simple strategy: Build fiber, sell fiber, improve care, reduce cost,” CEO Nick Jeffery said at a conference in late May.

If the old Frontier was stuck in the past, offering internet over slow copper wires, the new one is racing to build out its high-speed fiber network. The $3.5 billion market-cap company has nearly three million broadband internet subscribers across 25 states, on a network that reaches about 5.5 million homes and businesses via fiber and another 10 million via copper. About a third of Frontier’s potential fiber customers subscribe, three times the rate of those on copper lines.

Building out its fiber network will cost more than Frontier’s management forecast when the company emerged from bankruptcy in early 2021. Its latest two million locations cost an average of $830 to hook up. In May, management said it expects the remainder of this year’s build to cost between $1,000 and $1,100 per location. It costs Frontier another $600 or so to send a technician to a customer’s home to plug in all the necessary equipment and the like.

Yet even at the higher cost, the math works. Frontier says that 85% of its footprint has only one or no broadband competitor, helping to boost penetration, or the percentage of connected locations that actually subscribe, and average revenue per user, or ARPU. Frontier expects to reach penetration of at least 45% within a few years of extending fiber to a new market at a monthly ARPU of around $67.50, which it can increase by 3% to 4% annually.

Frontier still has debt, but it is manageable, particularly for an infrastructure-heavy telecom company with plenty of real assets to borrow against. After a first-quarter debt raise, it now has $7.8 billion of net debt on its balance sheet—for 3.7 times net debt to earnings before interest, taxes, depreciation, and amortization, or Ebitda, at the end of that quarter. Charter Communications CHTR –2.12% ’ (CHTR) net leverage stood at 4.5 times at the end of the first quarter, while AT&T T –4.10% ’s (T) stood at 3.2 times. Frontier’s debt doesn’t mature until 2027, while about 85% is at fixed rates, making it all doable.

Frontier’s profit growth should only accelerate from here. Management aims to add 1.3 million new locations this year, after adding 1.2 million in 2022. The company can charge more for service on the new network, which also costs less to operate and maintain. As a result, Ebitda margins were higher for fiber than copper, at 44% versus 26%, respectively, in the first quarter.

Frontier is doing what it can to cut costs across the organization by divesting real estate and noncore businesses, adding digital customer service options to replace home visits, and streamlining operations. Management has targeted $500 million in annual cost savings by the end of this year.

Earnings have started to reflect its efforts. Frontier reported its first year-over-year increase in adjusted Ebitda in more than five years in the first quarter, with fiber responsible for more than half of sales. Wall Street analysts expect full-year adjusted Ebitda growth of about 1% in 2023, to $2.1 billion, then 5% in 2024, and 8% in 2025, though sustained and meaningful profits on the net income line are farther off.

Frontier’s current valuation is undemanding, at around 5.3 times enterprise value to expected Ebitda over the next year. That’s a discount to Verizon Communications VZ –1.82% (VZ), which trades at 6.2 times; AT&T, which trades at 5.7 times; and Charter, which trades at 7.4 times. It’s also expected to grow faster than those competitors.

There’s always something new to worry about. This past week, Frontier stock dropped 21.3% after The Wall Street Journal reported on potential health risks posed by lead-sheathed copper wires in old networks across the U.S. Frontier declined to comment.

New Street analyst Jonathan Chaplin estimates that remediation costs to Frontier could reach $6 billion if it is required to rip out all the lead-covered copper on its own dime within five years. But there’s overlap with upgrading those same lines to fiber, and Chaplin calculates a $75 fair value for the stock in this unlikely scenario. “Even if it comes to pass, we see upside to the stock,” he writes.

Consider it a buying opportunity.