During a bear market, savvy investors generally focus their search for potential new investments on quality stocks selling at bargain prices. It's a sound investment strategy, and there are lots of options right now.
To help you narrow your search a bit, I've pulled together a report on what I believe are four solid bargains right now in the retail sector: two home improvement retailers and two e-commerce operations.
Since investors have different risk tolerances, in each sub-category I've focused on a legacy business as well as a high-growth alternative to help you in determining which might be the right bargain consumer stock investment.
Image source: Getty Images.
Home improvement retailers: Lowe's and Floor & Decor
Of the big-name home improvement companies, shares of Lowe's (LOW 1.99%) trade at the lowest valuation. The price per share has been quite volatile from day to day lately, so there is no telling what the valuation will be exactly by the time you read this. With that said, I feel confident that shares will still be trading at a 10-year low price-to-earnings ratio, price-to-sales ratio, and a decade high dividend yield.
LOW PE Ratio data by YCharts.
Lowe's offers investors a long track record of consistent revenue and earnings growth, in an industry that isn't likely to get replaced by e-commerce due to the challenges of shipping heavy construction materials. While it won't be upended by a completely online store, Lowe's is currently working hard to improve its e-commerce channels to support an omnichannel strategy -- something every modern retailer needs.
It doesn't have the long track record of Lowe's, but shares of Floor & Decor (FND 5.86%) are also a bargain right now. The company only had $2 billion in net sales in 2019, so small disruptions can have a pronounced impact on overall earnings. And indeed, a disruption is here. Due to the novel coronavirus, all orders must be placed online, through its app, or over the phone for limited pickup hours in-store. This limitation could affect comparable sales for now.
But keeping a long-term vision, Floor & Decor is a bargain, trading around 20 times trailing earnings. It has grown its list of locations at least 20% annually for seven years, and it plans to continue that streak in 2020 as it marches toward 400 locations. That's a costly endeavor, and yet the company has maintained profitability by generally accepted accounting principles (GAAP). Net income in 2019 grew 30% to $151 million, easily outpacing its 20% net-sales growth.
Earnings growth that outpaces already-rapid revenue growth is a recipe for market-beating stock performance in the long term.
E-commerce retailers: eBay and The Realreal
E-commerce pioneer eBay (EBAY 1.96%) is still a giant operation with 183 million active buyers. But it isn't a growth stock anymore. Its active buyers were only up 2% year over year in the fourth quarter of 2019. This anemic user growth resulted in organic revenue growth of just 1%. And guidance for 2020 isn't any better. Management is guiding for zero revenue growth at the midpoint of its guidance.
While not big on growth, eBay has transformed into a free cash flow machine. It generated $2.6 billion in 2019, and it expects free cash flow of $2.2 billion to $2.4 billion in the coming year. That's quite a lot for a company trading at around a $23 billion market capitalization. This high cash flow generation has allowed the company to buy back around 35% of its shares since 2015. It also instituted a dividend in the past year that currently yields north of 2%.
While stock buybacks may be falling out of favor with politicians lately as it relates to potential government stimulus measures, there are still multiple alternative ways eBay can put this cash to work for shareholders if it suspends future share buybacks. First, it could increase its dividend payout. But it could also pay down some of its current high debt load -- eBay has $4 billion in net debt. Either of those scenarios would benefit shareholders and could help this stock beat the market in coming years.
Image source: The RealReal.
Investors with a little more risk tolerance might consider online luxury consignment business The RealReal (REAL 6.18%). The company not only modernizes the outdated consignment model with e-commerce, it also fills a niche role in authenticating name-brand luxury items -- items that counterfeiters would love to pass off to naive shoppers.
While The RealReal is very niche and still unprofitable, here's four reasons why it could be a good long-term bet:
- Active buyers grew 40% in the fourth quarter to 582,000.
- The RealReal's buyer acquisition cost (BAC) fell 20% in 2019. This was the third year the BAC declined. Newly acquired buyers now generate enough gross profit in three months to pay back the BAC investment.
- The RealReal's customers seem to be very loyal, with 83% of Q4 sales coming from repeat users.
- The company's take rate (the amount of a sale that can be counted as revenue) increased in 2019 to 36%.
In other words, The RealReal is spending less to continue growing a loyal user base that quickly pays for itself, all while it keeps taking a bigger slice of the sales pie. And these aren't short-term anomalies -- each of these metrics are multiyear business trends for The RealReal. If the trends continue into the future, it's not hard to imagine the stock appreciating significantly after its 80% fall.
