When bearish sentiment on a stock sets in, it often kicks in hard and triggers steep sell-offs as investors scramble to get out of holdings that are perceived to have dimming outlooks. However, not all stocks that experience a pronounced fall from grace continue on that trajectory, and good companies falling temporarily out of favor with the market tend to present big opportunities for investors willing to go against consensus.
With that in mind, we put together a panel of three Motley Fool contributors and asked each member to profile a stock that he believes the bears are wrong about. Read on to see why they think that Thor Industries (THO 1.04%), eBay (EBAY -0.33%), and Activision Blizzard (ATVI -0.69%) are stocks that are worth sticking with despite their recent performances.
An overreaction to one bad quarter has Thor stock priced to move
Rich Smith (Thor Industries): From a high north of $156 to a recent price closer to $66, shares of RV maker Thor Industries have suffered a frightful fall this year. Wall Street has clearly given up on this stock -- but from where I sit, selling Thor today is a huge mistake.
Sure, last quarter's earnings report was nothing to write home about. Thor suffered a 3% slide in sales and took a much bigger hit to earnings, down 26% year over year. Management also warned of "near-term growth challenges" in the year to come.
But even so, the numbers on Thor stock are just too compelling to pass up. Thor earned $430 million in net income last year. Even if its free cash flow wasn't quite so strong ("only" about $330 million ), that still leaves Thor stock trading for just 8.2 times trailing earnings and only a bit more (10.8) times free cash flow. With its 2.3% dividend yield and 10% projected long-term earnings growth rate, Thor Industries stock looks anything but expensive today.
Could the next few months prove rocky? Sure they could. But strong cash production has given Thor a rock-solid balance sheet boasting nearly $270 million in net cash to tide it over through difficult times. And after it gets through the first half of the year, management is still promising investors "more favorable top-line growth rates in the second half of the fiscal year."
Unless you think baby boomers are all of a sudden going to rethink retirement and Americans will lose their love of the open road, I see a bright long-term future ahead for Thor. Wall Street has given up on this one far too easily, and today's prices on Thor stock are a steal.
Raise your bid for eBay
Demitri Kalogeropoulos (eBay): Wall Street has punished eBay's stock lately in what looks like a classic case of overreacting to (somewhat) bad news. Sure, sales growth hasn't met management's initial targets for 2018. And that implies the company won't be able to build on the rebound it achieved last year. However, the online marketplace is still expanding across key operating metrics. The active buyer base ticked up by 4% in each of the last three quarters, down just slightly from last year's 5% pace. Sales volumes are rising, too.
Meanwhile, this business continues to produce profit margin and cash flow metrics that put fully integrated retailers to shame thanks to its capital-light, platform-based selling approach. Management is predicting further gains here in the quarters to come as eBay shifts its focus toward more promising growth initiatives like its third-party advertising network and its payments-processing offerings. That move is a key reason why the company affirmed its 2018 earnings forecast even though sales gains have disappointed. And investors should reap solid rewards over time from an eBay business that's more efficiently connecting buyers to sellers.
Don't count this industry leader out
Keith Noonan (Activision Blizzard): Activision Blizzard is now down roughly 20% year to date and roughly 40% from the lifetime high that it hit early in October. A disappointing reception for its most recently unveiled game, a lackluster earnings report, and volatility for the broader market have all been factors in the recent slide. There also appears to be some investor concern that video game publishers won't be able to continue growing the sale of in-game items. However, the long-term outlook for the gaming industry remains very promising, and Activision Blizzard is still in position to be one of the space's big winners.
Research firm Newzoo estimates that the global games industry will generate roughly $138 billion in sales this year, and that could climb to $180 billion in 2021. That target suggests a promising backdrop for Activision Blizzard -- a top publisher in the space and the owner and originator of some of gaming's biggest franchises. While the company's ambitions to focus more on bridging many of its big franchises to mobile platforms might not be universally appreciated by hardcore PC and console gamers, the move should allow Activision Blizzard to tap into rapid growth in international markets and significantly expand its total player base.
There might be some bumps in the road, but the interactive entertainment industry looks poised for continued growth. Between the strength of Activision Blizzard's core properties, its penchant for delivering hit new franchises that fit and shape consumer tastes, and the potential for expansion in new markets and fast-growing new categories like esports, the publisher looks like a worthwhile long-term investment, trading at roughly 19 times this year's expected earnings.