With all the major stock indexes posting double-digit losses year to date, investors have had a challenging year. But sooner or later, this bear market will turn into a new bull market. While some stocks still look expensive based on traditional valuation metrics, there are plenty of solid companies on sale right now.
Three Motley Fool contributors each recently selected a company that could deliver even better returns than the market average. Here's why they picked eBay (EBAY -1.47%), Texas Roadhouse (TXRH -1.78%), and Revolve (RVLV -2.97%).
An inexpensive stock and an asset-light business model
Parkev Tatevosian (eBay): With stock markets plunging and the U.S. economy arguably in a recession, it pays to own companies that can do well against that backdrop. It's one of the reasons that eBay is one of my favorite stocks to buy now. The e-commerce and auction site is known for bargain prices on used and new goods. Moreover, since the company runs on an asset-light business model, it's not as strongly impacted by rising inflation.
eBay does not own any of the inventory sold on its platform. Instead, it brings together buyers and sellers and encourages them to transact. It does this by processing payments, offering buyers and sellers protection from fraud, and supporting the technology that makes it all possible. What's notable is what the company doesn't do: It leaves shipping and handling for buyers and sellers to resolve between themselves, sidestepping a costly service.
eBay is not a high-flying growth stock; revenue has remained relatively flat over the last decade. But earnings per share have grown at a compound annual rate of 23.6% during that period.
Moreover, if the economy enters a prolonged downturn, consumers could look to eBay's lower-priced secondhand goods more often. They could also try to sell more of their own used items to generate cash. Each would be a desirable outcome.
EBAY PS Ratio data by YCharts.
Fortunately, the stock-market plunge has eBay's stock selling at a relatively inexpensive valuation. At a price-to-sales ratio of 2.7, eBay is arguably as cheap as it's been in the last five years.
Consistency and quality service in the restaurant industry
John Ballard (Texas Roadhouse): Finding a successful restaurant early in its growth cycle can be one of the simplest and rewarding ways to generate market-beating returns.
Texas Roadhouse looks very promising. The stock delivered a 15% annualized return to investors over the last 10 years, but its focus on consistency, quality service, and performance-based management culture should keep the growth streak going for many years.
This steakhouse chain was founded in 1993 and has grown to 680 restaurants in 49 states, including a growing footprint in 10 foreign countries. The company started in Clarksville, Indiana, but it now operates restaurants across the world in places like Saudi Arabia and Taiwan. That speaks volumes about how well this concept adapts beyond cultural boundaries.
Despite 40-year-high inflation that's causing higher commodity costs for the food-service industry, consumers are still eating out. Texas Roadhouse expects to report positive comparable-sales growth for the full year. It reported a 18% year-over-year increase in revenue in the first half of the year, with comp sales up 8% in the second quarter.
The restaurant growth stock is attractively priced at a forward price-to-earnings ratio of 23. For a company delivering a consistent return on invested capital in the mid-teens, that's a good price to initiate a position.
A thriving fashion stock with enormous potential
Jennifer Saibil (Revolve Group): Revolve Group is an artificial-intelligence-based fashion retailer that's been doing what many fashion retailers have been unable to do over the past few years: demonstrate meaningful growth. Sales increased 54% year over year in 2021, and the company has continued to deliver strong results in 2022, with a 27% increase in the second quarter. Active customers, average order value, and total orders placed all continue to increase.
Revolve Group is also profitable, although it's feeling the pressure of inflation. Net income came in at $16.3 million in the second quarter, a 48% drop from last year.
Management didn't have an exciting update for the rest of the year. It said that July sales were up 10% over last year, a huge slowdown from what has been fantastic growth. That's not surprising, but investors don't like to hear that growth is coming to a halt, even if it may be temporary. So it's also not surprising that Revolve Group stock is down 57% this year.
But I do think the slowdown is very likely to be temporary. There are several reasons to envision Revolve Group getting back to an amazing future. Most notably, it speaks its market's language.
Revolve Group is in touch with how millennials think and shop, and it gives this core market what it's looking for. It offers a constantly updated and vast collection of designer clothing, shoes, accessories, and beauty products, and it markets those goods though a large network of celebrities, influencers, and other social media personalities and bloggers. Everything it does is powered by artificial intelligence and machine learning, making it easy for Revolve Group to know what's hot and what's not.
Since it's entirely online, it can easily add and delete products. This helps it sell more products at full price instead of being forced to put items on sale at the end of a season. In 2021, 87% of items were sold at full price. That percentage is likely to be lower in 2022, but Revolve Group's model is a demonstrated winner.
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September 03, 2022 at 09:00PM
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