Investors have long tried to group stocks into one of two categories: growth or value. While this school of thought might be flawed, it's become standard practice among the investing community.
Truth be told, the best returns can often come from stocks that sit in both camps. A business with strong future growth plus a cheap valuation tends to be a recipe for investment success.
Here are three stocks that fit that mold.
1. Nintendo
Over the last three years, Nintendo (NTDOY +2.72%) has reigned as the global gaming console leader. Since its launch in March of 2017, the Nintendo Switch gaming console has sold nearly 80 million units and, naturally, the number of games sold for the platform has followed suit.
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This rise in dominance over the console market has also led to impressive financial results for the company. Over just the last nine months, Nintendo generated almost $13 billion in revenue, up roughly 37% from the year prior. To supplement the growth in sales, Nintendo also generated $4.8 billion in operating profits, which is 98% more than a year ago.
Yet despite the robust success across the board, Nintendo still trades at a market cap of about 17 times its annual net operating profit after taxes (NOPAT). That's a cheap multiple by traditional metrics, but even more so once investors include Nintendo's cash and equivalents balance of more than $14 billion. But why does it trade so cheap?
The market appears to be incapable of rinsing its memories of the stock price fallout after the WiiU gaming console bust. The original Wii console was incredibly successful, but its successor, the WiiU, is rightfully recognized as a failure. Investors seem to fear that something similar is going to occur with the Nintendo Switch.
However, Nintendo remembers the WiiU failure as well and has taken steps to ensure the Switch doesn't go through the same boom-and-bust cycle. Unlike the Wii, the Switch is less of a strict console and more of a platform. Users can access their Nintendo accounts from different hardware iterations, and the console's more portable, scaled-down version, the Switch Lite has been a success. This structural change should enable a more stable future financially for Nintendo.
2. Sprouts Farmers Market
Sprouts Farmers Market (SFM 3.80%), a health-centric fresh produce grocery chain, has stayed under investors' radars for quite a while. The company has seen its stock decline steadily since its initial public offering despite strong operating performance.
Since the start of 2017, Sprouts has expanded its store base by 43%, reaching a total of 362 locations across the U.S. In each of those years, same-store sales have also increased. However, in 2018, a pivot in management marked the introduction of a new expansion plan. The plan includes rolling out smaller, more profitable stores and management has stated that from 2022 and beyond it will grow store count at 10% per year.
Despite the strong past performance and expected growth ahead, Sprouts Farmers Market trades at only 7.6 times its trailing-12-month free cash flow. While the COVID-19 pandemic might have brought about a one-time spike in demand due to temporary restaurant closures, Sprouts' path to growth is still as clear as ever.
But it's not just shareholders who think Sprouts is trading at a discount, management does as well. Over the last five years, Sprouts' shares outstanding have shrunk by 21%, giving shareholders a bigger slice of the company's consistently increasing profits.
3. Dropbox
Dropbox (DBX 2.56%) stock currently still sits below its public offering price. Investors seem to have passed on the cloud-based collaboration platform due to concerns over competition. With companies like Microsoft, Alphabet, and many others offering their own file-sharing platforms, it's hard not to think of these services as a commodity.
In fact, this notion that file-sharing isn't differentiated has led the market to value Dropbox at only 22.6 times free cash flow. But even with the increased competition, Dropbox continues to spin out strong financial results.
Over the last 12 months, Dropbox's revenue grew 15% to $1.9 billion and growth in free cash flow outpaced sales, reaching $491 million, a 25% increase year over year. This boost doesn't just come from raising prices, either. Dropbox ended the year with 15 million paying users -- 1 million more than a year ago.
Despite the abundance of alternatives, switching file-sharing platforms is never fun, especially when there are multiple members on a team. It's time-consuming to get all members acclimated to a new system, and that's partly why Dropbox has been capable of maintaining and even growing its massive number of business customers. For a business that continues to hum along, Dropbox trades at a significant discount to its peers.
