With the market hovering near all-time highs, it can be hard to find stocks with the potential to double within a year. Many growth stocks are now trading at uncomfortably high multiples, indicating that pullbacks could be more likely than rallies.
Therefore, it might be better to look at hated stocks which have been sold off so aggressively that they've become too cheap to ignore. Let's examine two such stocks -- GameStop (NYSE:GME) and GNC Holdings (NYSE:GNC) -- and why they might double within a year.
Video game retailer GameStop has fallen 11% over the past 12 months due to competition from digital distribution platforms, slowing console sales, and an overextended brick-and-mortar presence. The company is countering these challenges by selling its own digital downloads, shuttering stores, diversifying into collectibles, and even publishing its own games -- but its sales have fallen annually for three straight quarters, and it recently reported a 19% drop in comparable store sales in November and December.
Analysts expect GameStop's revenue and earnings to respectively fall 6% and 5% this year. The bearish case against GameStop (which holds that it's the next Blockbuster) is easy to grasp, but the stock has arguably become too cheap to ignore. Its trailing P/E ratio of 6 is less than half the industry average of 13, and it has a P/S ratio of 0.3. It pays a forward dividend yield of 6.5%, which is easily supported by a modest payout ratio of 40%.
GameStop faces a lot of headwinds, but it could become a value play if it stabilizes its top and bottom line growth. 2016 was a sluggish year for console sales, but demand for the new PS4 Pro could rise with more 4K and VR games, Nintendo's eagerly anticipated Switch will launch in March, and the Xbox Scorpio will arrive by the holidays. If those catalysts yield better-than-expected results, we might see GameStop recover to its 2015 levels in the near future.
Nutritional supplements retailer GNC crashed 54% over the past 12 months due to competition from superstores, warehouse retailers, and e-commerce sites. Several lawsuits and probes regarding the advertised efficacy of some of its supplements also tarnished its brand. As a result, GNC's revenue has fallen annually for three straight quarters, and analysts expect its sales and earnings to respectively drop 4% and 16% this year.
Those forecasts look gloomy, but GNC stock has become too cheap for value investors to ignore. It trades at just 4 times earnings, compared to its industry average of 17, and 0.3 times its trailing sales. This means that any good news could help the battered stock recover some of its losses. GNC also pays a whopping forward yield of 7%, which is easily supported by a payout ratio of 29%.
The bears proclaim that GNC's larger competitors will eventually render it obsolete. However, GNC is cutting costs by shuttering low-performing stores, temporarily closing all its stores to revamp pricing strategies and win back mobile shoppers, and gearing up for a big Super Bowl ad blitz to rebuild its brand. The company also attracted takeover interest from Chinese and private equity firms last year. While many of those catalysts seem like longshots, any better-than-expected progress could help the stock rebound.
But will these stocks double... or be cut in half?
There's no guarantee that GameStop or GNC will ever recover, but their low valuations and high dividend yields make them potential turnaround plays. If new consoles and games draw customers back to GameStop stores, its stock could surge. But if the Nintendo Switch and Xbox Scorpio flop, and GameStop continues losing customers to digital distribution platforms, it could certainly become the next Blockbuster.
Likewise, if GNC gets its act together, offers competitive prices, and wins back customers with new marketing campaigns, it could recover. But if it continues fumbling -- as it did over the past few years -- the stock could fall even further. Therefore, investors should note that while these stocks could double in 2017, there's also a good chance that they could be cut in half instead.