Pricey growth stocks have hit some turbulence in recent weeks, with many highflyers suffering dramatic declines. It's too early to tell whether this marks a shift in sentiment away from growth stocks, but it's certainly a possibility.
In the long run, value investing – buying stocks for less than they're truly worth – works. Value investing is not just about paying a beaten-down price for any old stock, because a stock's value is based on the company's future growth potential. A cheap stock is not automatically a value stock, in other words.
Two stocks that do look like legitimate value stocks are Sprouts Farmers Market (SFM 2.18%) and Skechers (SKX 4.14%). Both stocks are reasonably priced, and both companies have the potential to grow at impressive rates in the coming years.
Sprouts Farmers Market
The grocery business is tough. Margins are low and competition is fierce, particularly now that grocery delivery options have proliferated. Many grocery stores have experienced increased demand during the pandemic, but that will likely normalize once life gets back to normal.
One grocery store stock that looks interesting is Sprouts. The company operates 362 stores in 23 states, so there's plenty of room for future expansion. Sprouts' core focus is on specialty products, which helps differentiate it from run-of-the-mill grocery stores. About two-thirds of Sprouts sales come from what the company calls "attribute-based" products, which include organics, paleo, keto, plant-based, non-GME, gluten free, vegan, dairy-free, grass fed, and raw items. Nearly one-quarter of Sprouts sales are from organics.
Sprouts is aiming to grow its store count by 10% or more annually starting in 2022. The company does expect its comparable sales to slump this year compared to its strong pandemic-era 2020 sales numbers, but that should be a temporary issue. Sprouts is expecting to generate adjusted earnings per share as high as $1.91 in 2021, putting the price-to-earnings ratio at just 12.5.
Sprouts is a grocery stock trading at a reasonable price relative to earnings. The company has the potential to greatly increase its store count in the coming years, and its focus on specialty products differentiates it from normal grocery stores. While 2021's results won't look as impressive as 2020's, Sprouts is a value stock with enough growth potential to drive some serious gains for investors.
The going got tough for shoe manufacturer and retailer Skechers last year during the worst of the pandemic, but the company appears to have mostly recovered. Overall sales were down just 0.5% in the fourth quarter of 2020, with the U.S. wholesale business growing modestly and the China business enjoying nearly 30% growth.
The direct-to-consumer business, which includes Skechers' stores as well as e-commerce, is still suffering as the pandemic lingers. But that business should bounce back once consumers become more confident about visiting stores.
What 2021 holds for Skechers is hard to predict. The company declined to provide guidance due to uncertainty, but with vaccine distribution ramping up, things could be largely back to normal for Skechers by later this year.
Skechers bottom line tumbled in 2020 due to the pandemic, so the stock looks quite expensive based on that figure. But based on the average analyst estimate for 2021, Skechers stock trades for just under 20 times earnings. This ratio is lower if you back out the excess cash on Skechers' balance sheet. Skechers had a net cash position of about $845 million at the end of 2020.
Skechers isn't the cheapest stock, but the company is capable of returning to double-digit revenue growth once the pandemic has fully passed, especially once the retail business recovers. Given the growth potential, Skechers stock looks like a solid value.