The recent unprecedented sell-off in financial markets has created a unique situation. On the one hand, the sell-off has created a huge buying opportunity in certain stocks. On the other hand, the outbreak has caused an unprecedented shutdown of the economy that will bring some companies' revenue to zero. If a company is highly indebted, it could mean bankruptcy, or severe dilution for shareholders.
For those looking to be greedy when others are fearful, you need to buy stocks in companies that have the balance sheets and business models to both survive the lockdown for a few months and then thrive on the other side of the crisis. Here are three names that should fit that profile.
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Ulta Beauty
I know, I know. Retail? I must be crazy! However, Ulta Beauty (ULTA 0.31%) isn't just any retailer.
The leading cosmetics, skincare, and fragrance specialty retailer appears to have both the balance sheet, as well as the omnichannel capabilities to weather the current crisis. Meanwhile, the stock has been crushed, down some 56% from its 52-week high. Ulta had been a high-flying growth stock but now trades at a bargain-basement 13 times earnings as of this writing -- firmly in value territory.
No doubt, Ulta's earnings will take a big hit this year. After initially converting its stores to order-online and pickup-in-store only, the company closed all of its stores as of March 19 and will keep them closed indefinitely until social distancing orders are removed.
Nevertheless, unlike some other department-store retailers, Ulta's sales can easily migrate online to e-commerce -- an area where Ulta has been investing heavily over the past few years. Though online sales only make up 10%-15% of retail sales, those numbers will likely go up during the quarantine, offsetting some losses in stores. (After all, we all still want to look our best on video conferences!)
Ulta also came into the crisis with a very strong balance sheet, with over $500 million in cash. The company also drew down $800 million from its $1 billion revolver capacity, giving it $1.3 billion to ride out the storm, which seems like plenty of liquidity, even as Ulta continues to pay employees. Ulta had even envisioned stepping up share repurchases as of its March 12 conference call with analysts, although amid the escalating crisis, management recently said it was "re-evaluating the pace and timing of its stock repurchase program."
Even if Ulta makes no money this year and only returns to normal one or two years out, shares still seem like a bargain given that Ulta has continued growth plans both in the U.S. and international markets down the road.
Super Micro Computer
Super Micro Computer (SMCI 6.25%) is a small-cap company that makes servers for enterprises and cloud giants. While much of the economy is currently being shut down, recent commentary from leading chip companies indicates server demand is still strong as more and more people work from home and go online. That plays right into Super Micro's hands as the company assembles customized servers for enterprises and cloud-computing giants, specifically designed for new applications such as 5G, edge computing, and the Internet of Things.
Meanwhile, Super Micro is incredibly cheap. This could be because Super Micro only recently emerged from an accounting scandal that arose in 2017 and led to the company's delisting in 2018. However, the accounting issues didn't relate to total sales but rather timing of sales, and the issues were remediated last year. The company was finally relisted on the Nasdaq in January.
During this time, Super Micro generated plenty of cash. As of last quarter, it had about $285 million in net cash on its balance sheet, or about 25% of its $1.05 billion market capitalization. So even though Super Micro has a 12.5 price-to-earnings ratio, that ratio drops to just 8.9 times earnings when subtracting out the company's cash.
That seems like a bargain price for a company that analysts expect to grow earnings at a 10% average annual rate over the next five years.
Discover Financial Services
It may seem like a dangerous move to invest in a financial company at this point in time, but Discover Financial Services (DFS 2.02%), which is down a whopping 60% from its 52-week high, may have fallen much too far. The credit card network and lender now trades at about 3.5 times trailing earnings, as investors have anticipated large write-offs for Discover's lending businesses across credit cards, personal loans, home equity loans, and student loans.
Those charge-offs may come to pass, but the market may have gone a bit overboard with regard to valuation. Discover's business was highly profitable prior to the crisis, with a very high return on equity of 26% and a healthy balance sheet, with an 11.2% CET1 ratio.
Going back to the Great Recession, Discover actually had positive net income in the trough year of 2009, making $112 million from core operations before improving to $765 million in 2010 and $2.2 billion in 2011. Therefore, even though we're in for some sort of recession, Discover will likely survive and get back to normal after one to two years. In addition, the recent $2.2 trillion CARES act stimulus passed by Congress may blunt the effect of the downturn and hopefully shorten its impact.
Discover is no doubt the riskiest of the companies above. However, it also has lots of upside over the longer term given its extremely depressed valuation. That makes it a stock worth the attention of value investors today.