With the S&P 500 index up about 15% in 2020 despite an economy that is facing significant headwinds, many top growth stocks are trading at frothy valuations. But the availability of COVID-19 vaccines could help jumpstart the economy and bolster many of the consumer discretionary companies that have struggled during the pandemic.
If you're looking to double your money next year, a good bet is to look for solid companies with stocks trading down that are likely to see accelerating sales growth as consumer spending recovers. Here are two stocks that have already reported an uptick in demand heading into the holidays and are primed for a prosperous new year.
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1. Revolve: An undervalued growth stock
Revolve Group (RVLV +0.27%) is a leading e-commerce destination for millennials and Generation Z shoppers who are looking to buy on-trend apparel from fashion-forward brands. The company has been around for 17 years, accumulating hundreds of millions of data points that it uses to direct its merchandising strategy, pricing, and marketing.
Revolve revenue nearly doubled between 2016 and 2019, while its data-driven business strategy contributed to rising margins and profitability. It was more challenging to create additional demand in 2020, as social distancing and canceled events pressured sales of party attire, such as dresses, which is Revolve's top sales category.
However, the third-quarter earnings report featured an improving trend. Revenue declined 2% year over year, which shows the business heading in the right direction after a 12% drop in the second quarter. Sales fell by a high-single-digit percentage in October, but Revolve should experience plenty of pent-up demand once vaccines become widely available.
Analysts currently expect Revolve to generate revenue growth of 18% in 2021, consistent with the company's pre-pandemic growth trajectory. What's more, it's posting a healthy profit even with sales down, partly helped by a lower tax rate and lower marketing spending with events canceled. Profits doubled over the year-ago quarter in Q3, bringing Revolve's trailing-12-month net income to $45 million.
Moreover, investors are undervaluing Revolve's growing free cash flow, with the stock currently trading at a price-to-free-cash-flow (P/FCF) ratio of 24. With the company's investments in technology and data analytics, as well as expanding its portfolio of higher-margin owned brands, the stock has a good chance to double from a combination of strong top-line growth and an increase in the P/FCF multiple.
2. Mattel: Entering 2021 with momentum
The maker of Hot Wheels and Barbie has been in turnaround mode over the last few years. CEO Ynon Kreiz has implemented a strategy to improve Mattel's (MAT 1.37%) growth profile and profitability by investing in digital toys and games, in addition to sending its top toy brands to the silver screen, with several film projects underway. Investors have applauded these moves, as you can see in the stock's recent performance.
Turning a globally leading toymaker around is no easy task, but the third-quarter earnings report showed significant progress.
Gross and net sales jumped 10% year over year, while adjusted gross margin improved to 51%, up by 4 percentage points. This translated into a year-over-year increase of 348% in net profit in the third quarter.
Toy sales remained strong during the pandemic, as working-from-home parents purchased new toys to keep their children entertained. Mattel reported robust growth in dolls -- its largest category -- with sales up 22% in the third quarter. Barbie was the standout here, with gross sales rising 30% year over year.
Most importantly, Mattel's sales growth outperformed the industry, a sign that it gained market share. Management expects this momentum to carry through the holiday quarter, which should set the company up for a strong 2021.
Mattel has major growth initiatives in place, including a total of 10 film and television projects underway to unlock more value from the company's rich franchise library. Among these include live-action films based on Hot Wheels and Barbie, in addition to the animated series He-Man and the Masters of the Universe coming to Netflix.
Analysts currently expect Mattel to report a slight sales increase for 2020 before sales reaccelerate to 4.7% growth in 2021. Adjusted earnings are expected to improve by 45% to $0.54 per share.
The shares trade for a forward P/E of 31, which reflects investor expectations for high growth in earnings from current levels. Management's cost-cutting efforts should fuel additional improvement on the bottom line.
But Mattel's relatively low price-to-sales (P/S) ratio of 1.35 reveals plenty of upside potential beyond 2021, especially when compared to competitor Hasbro's current P/S multiple of 2.44. If Mattel can maintain recent momentum in the new year, as management expects, investor sentiment could change, sending the shares even higher in 2021.
