Got $100? These battered stocks are gearing up for bull runs
Adding to sold stocks can often seem like an uncomfortable proposition for investors. However, it is crucial to remember that stock price movements and a company’s operating performance are often two very different things.
This divergence can create unique opportunities for long-term oriented investors as they receive the rare chance to buy big companies at fair valuations.
Here, three Motley Fool contributors will take a look at some of their favorite battered stocks to add $100 right now in disney (SAY -1.40%), Etsy (ETSY 0.25%)and Crocodile (CROX -1.64%).
A beloved brand trading at a discount
Bradley Guichard (Disney): Stock for one of the most iconic global brands in history is down 45% from its 52-week high. It’s time for savvy long-term investors to take notice. The pandemic and a potential recession are a double, but far from a fatal blow. In fact, Disney has the ability to significantly outperform the market from here.
The streaming wars are heating up and Disney may soon be the one to beat. The global video streaming market was $59 billion in 2021 and will grow at a compound annual growth rate (CAGR) of over 20% through 2030, according to one estimate. Capturing as much of this market as possible is crucial to Disney’s future. Disney services Disney+, Hulu and ESPN+ explode as they lead the industry netflix lose subscribers.
In the second quarter, Disney+ added nearly 8 million subscribers, bringing Disney’s total across all services to 205 million. People are also flocking to the parks, pushing total revenue up 29% for the first half of 2022 compared to the same period in 2021.
Unfortunately, costs are also rising due to inflation, a tight job market, and heavy spending on content for streaming services. These expenses weighed on Q2 results. Net income from continuing operations fell to $577 million from $1.1 billion in the first quarter. This has investors worried that if inflation gets worse, margins will continue to fall. A recession could also lead to fewer park visitors.
But we don’t beat the market by buying stocks when everything is fantastic; by then it is too late. We have to think ahead. Disney’s streaming business is only scratching the surface of its potential, and the company has seen far worse economic times in its 98-year history. It has always bounced back because the product is so compelling. The stock is currently trading at around $100 per share, near the worst of the March 2020 stock market crash. With plenty of pessimism already priced in, long-term investors are getting tremendous potential with this contrarian pick.
Strong growth with many opportunities to come
Jeff Santoro (Etsy): It’s been a wild few years in the stock market for e-commerce marketplace Etsy. After hitting a pandemic-induced low of $32 in March 2020, the stock soared to a high of $297 in late 2021 before dropping $69 a few weeks ago. Since then, the stock has had a nice climb to its current price of $96, and I think that might just be the start.
Etsy operates a two-sided marketplace that connects buyers and sellers of unique and creative items. Being the major player in this niche has proven successful for the company, and the most recent results, Q1 2022, demonstrated strong growth.
Etsy has advanced much of the growth during the pandemic, significantly impacting several quarters in 2020 and early 2021. As a result, recent year-over-year comparisons appear weaker than they are. For example, Etsy’s first quarter revenue grew 5% to $579 million, but that’s on top of 142% growth in Q1 2021. Year over year, revenue grew 154% .
Sticking with two-year comparisons, the growth on the platform has been impressive. The number of sellers has increased by more than 100% since the first quarter of 2020 and the number of buyers has increased by more than 80%. This led to gross merchandise sales (the sum of all sales on the Etsy platform) of $2.8 billion, an increase of over 130%.
Even with this strong growth, Etsy believes there is a big market opportunity ahead of it. In addition to the 89 million users that Etsy classifies as active buyers, there are another 100 million who haven’t purchased in over a year, providing an opportunity for engagement from existing users.
Additionally, Etsy has approximately 180 million unique visitors to Etsy.com each month, providing another cohort to try and monetize. Finally, in Etsy’s seven major markets, the company’s absolute shopper penetration rate is less than 50%.
It remains to be seen what percentage of these identified groups can be converted into active buyers, but it is clear that Etsy is far from market saturation. Etsy’s growth record is reason to believe it can continue to grow, but time will tell.
Etsy currently has a price-to-sales ratio of 6, trading below its average of 8.7. So while the stock isn’t necessarily cheap, it’s trading pretty much where it was at the start of 2020, a time when the company has grown significantly. If Etsy is able to continue growing at its historic rate, the current beaten stock price may be a gift to investors.
How low can this valuation go?
Josh Kohn Lindquist (crocodile): While I can’t claim to be a Crocs brand ambassador, the fact remains that it’s one of the biggest retail success stories of the past five years – up over 2,000 % before its recent sale.
After selling more than 720 million pairs of foam shoes since its genesis in 2002, Crocs continued to grow in the first quarter of 2022, posting Crocs-specific sales growth of 19% year-over-year. However, if you include sales from its recent $2.5 billion acquisition of HeyDude, revenue jumped 44% for the same period.
To finance this acquisition, Crocs took out a $2 billion loan that matures in 2029, resulting in an increase in the company’s net debt.
While Crocs is still earning 18 times more than it will have to pay in interest, its stock has fallen almost 50% since the announcement of the acquisition, in part due to concerns about its high debt balance. . Considering Crocs trades with a market capitalization of $4 billion, that $2.6 billion in debt leaves the company heavily leveraged.
Due to this new debt, management has announced that it is forgoing share buybacks in the immediate future in order to bring this balance to a more manageable level.
So with this increased debt, what makes Crocs worthwhile right now, you might be wondering?
First, Crocs continues to build its brand power, ranking 51st on Comparably’s Top 100 Brands and 50th on its Best Brands for Gen Z lists. Spring 2022 Piper Sandler, placing him in the top 10 for the second year in a row.
Additionally, Crocs still generates 58% of its revenue in North America, highlighting a long streak of international growth. For example, China currently accounts for less than 5% of revenue, but management expects that figure to grow to 10% by 2026.
While management expects earnings per share of $10.05 to $10.65 in 2022, the company’s current price-to-earnings (P/E) ratio of 5.6 looks quite enticing.
Guiding 17% annual sales growth for the Crocs brand through 2026 and 20% growth for HeyDude through 2024, this P/E ratio could prove to be an incredible steal. If Crocs manages to hit (or even get close to) those goals of more than doubling its sales over the next few years, its leverage should quickly decline over time, which could set the stock up for a big run up.