Looking at beaten-down stocks is a great way to find companies that still represent good values even as investors may have turned against them. So long as their businesses aren't broken, such companies can offer investors opportunities for making significant returns when the market reawakens to their value.
Yet it's not always easy to discern those that are poised for a comeback from those that are still on their way down. Indeed, even stocks that really don't deserve the confidence placed in them sometimes bounce back.
Below is a mix of all of these types of companies. The stocks under my magnifying glass are Facebook (NASDAQ:FB), Macy's (NYSE:M), and Gaming & Leisure Properties (NASDAQ:GLPI). Read on to see what's wrong with two of these companies, and why the third one is a superior business.
Although Facebook has always had a dubious reputation when it comes to our privacy, the news the social network's own tools were used to improperly to skim user profile data spurred outrage that likely took CEO Mark Zuckerberg by surprise.
While the chief executive's apology tour was meant to mend fences, the social network's reputation may be irreparably harmed. Even beforehand, user engagement was ebbing. The Information reported in 2016 overall sharing on Facebook fell 5.5% between 2014 and 2015 with people sharing 21% fewer personal updates, which the social network called a "context collapse."
Recently eMarketer said Facebook reaches 91% of millennials in the U.S. each month, that also means it's likely hit a saturation point. It forecasts that average daily user time spent on the platform will remain static from 2017 levels at 23 minutes this year.
That could hurt Facebook's standing with advertisers, which rely on user engagement and which Facebook counts on for the bulk of its revenue. It noted in its earnings conference call with analysts that it is focusing on "connections over consumption," so it is still experiencing a dropoff in time spent engaging with certain content.
The combination of self-inflicted wounds and an approaching saturation point may mean the leading social network's best years are behind it. Shares of Facebook are rebounding from the drubbing they took, but this may be as good as it gets for the platform, and I won't touch its stock.
Same old story
Retail's latest trend is experiential shopping. It's no longer enough to have merchandise on hand that consumers want. It's becoming required that shopping be more of an "event." Shopping is boring; experiential retail is exciting. And companies are trying everything from merging the physical with the digital to having no merchandise at all.
Walmart's Bonobos brick-and-mortar spaces and Nordstrom's new Local store are examples of the latter. Customers come in not to shop, but to browse and be guided toward maybe making a purchase...of something. Some of the Local locations offer a nail salon, a bar, a tailor -- but no actual clothes to buy. You can order off its website, though, and in keeping with its reputation for customer service, employees will run and fetch clothes for you to try on from a nearby Nordstrom or Rack store.
Macy's is not going to quite those levels, but its acquisition of STORY is attempting to similarly cater to changing consumer tastes. It literally alters the consumer experience every month by resetting its stores with all-new displays, layouts, and merchandise. Every time customers walk into the store, they're treated to a new experience.
But experiential shopping may simply be the latest fad in retail. Stores still need to sell merchandise, and brick-and-mortar locations have significant costs, particularly if you're changing displays every month. Moreover, this kind of trend is targeting a narrow slice of the retail pie: customers who have the time and inclination to dawdle for entertainment. According to one recent survey, fewer than 38% of people actually prefer to shop in a department store like Macy's, and though most people still prefer buying clothes in a physical location, they dislike the amount of time it takes as well as the difficulty in find styles, sizes, and colors. Changing the layout every month doesn't seem like it will improve that experience.
The brick-and-mortar retailer isn't dead, but it's not a growth story either, and Macy's big comeback may run into the brick wall of reality that investors will want to avoid lest it falls on them.
They're not making any more land
Casino industry real estate investment trust Gaming & Leisure Properties is both familiar and strange at the same time. As a REIT, it pays out most of its profits to investors as dividends. What's different about it is that it was the first to focus solely on the gaming industry, and it's the third-largest publicly traded triple-net-lease REIT, or one which owns the properties but has the tenants (in this case the casinos) agree to pay all real estate taxes, building insurance, and maintenance on the properties.
Created by Penn National Gaming to house its real estate, Gaming & Leisure has since acquired property from Pinnacle Entertainment -- which Penn is now buying -- and it just bought six of Carl Icahn's Tropicana Entertainment resorts that will be operated by Eldorado Resorts.
It just reported first-quarter earnings that showed adjusted funds from operations, a closely watched metric for REITs, of $168.7 million, up slightly from last year's $165.8 million, and net income of $96.8 million, or $0.49 per share, a 9% increase from the year-ago period.
With a portfolio of quality rental assets across several markets, including both major destinations like Las Vegas and growing regional markets, Gaming & Leisure Properties continues to consistently produce reliable cash flow for shareholders. Its stock is down 5% so far in 2018, and with the market valuing its shares at just 15 times analyst estimates for earnings this year, this REIT could be the stock investors should consider buying.