With many of the major stock market indexes setting new all-time highs, bargain stocks aren't easy to find these days. The S&P 500 is on the verge of cracking 4,000, and valuations are stretched across most sectors; the index is trading at its highest price-to-earnings ratio since the financial crisis, when earnings crashed. Since Wall Street bottomed out last March, stocks have nearly doubled, leading to plenty of speculation that the stock market is in a bubble.
Despite this challenging environment, you can still find stocks that are on sale today if you know where to look -- and Williams-Sonoma (WSM -1.34%), Alibaba Group (BABA 0.64%), and Perion Network (PERI -0.25%) all fit the bill.
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An undervalued home goods champ
Home furnishings retailers have been big winners during the coronavirus pandemic, as Americans who have been forced to work and attend school remotely have adapted by refreshing their homes, adding home office furniture, or sprucing up playrooms for their kids.
Williams-Sonoma was no exception to that trend. Its same-store sales jumped 17% last year, and it took a huge leap in profitability, with adjusted operating margin expanding by 560 basis points to 14.2%, while adjusted earnings per share nearly doubled to $9.04. By the fourth quarter, nearly 70% of the company's sales were coming from e-commerce, making it more similar to Wayfair, the leader in online home goods retail, than to its brick-and-mortar retail peers.
The good news for investors is that management doesn't view 2020 as a fluke. It's forecasting continued growth in 2021. In the guidance from its recent earnings report, the company predicted revenue growth in the mid-to-high single-digit percentages this year, and an increase in adjusted operating margin in line with its long-term forecast. That should allow the company to grow earnings per share by a double-digit percentage this year.
Despite the strength of its brands, which include West Elm and Pottery Barn in addition to its namesake, and a strong business model delivering growth, income, and profitability, the stock trades at a price-to-earnings ratio (P/E) of just 21, a steep discount to peers like Wayfair and RH (formerly known as Restoration Hardware), and significantly cheaper than the S&P 500. That seems like a mistake the market will eventually have to correct.
A cheap Chinese tech giant
Down almost 30% from the all-time high it touched in October, Alibaba certainly looks like a stock on sale. The Chinese tech giant is the world's biggest e-commerce company, with annual gross merchandise volume of more than $1 trillion. It's also hugely profitable, thanks to the strength of its e-commerce operation as well as its fast-growing cloud computing segment and other businesses, like logistics. In its most recently reported quarter, revenue jumped 37% to $33.8 billion, and adjusted net income rose 27% to $9.1 billion, giving it a profit margin of 27%. Those numbers alone should tell you that Alibaba has a phenomenal business. The stock is also dirt cheap, trading at a P/E ratio of just 26.
What has rattled investors lately is the Chinese government's crackdown on the company, which began last fall when it blocked the initial public offering of Ant Group, Alibaba's financial arm. Worries intensified after founder Jack Ma disappeared from public view after making comments critical of China's financial regulators. Concerns about his status turned out to be unfounded, but the Chinese Communist Party did announce an antitrust investigation into the company in December, and earlier this month, the government asked Alibaba to sell off its media assets, though it didn't specify which ones.
Beijing seems to be seeking to assert its power over the tech giant, but the government isn't going to dismantle it. Companies like Alibaba help attract foreign businesses to China, which plays into the government's long-term goals of making it the world's leading economy.
Given that, this sell-off of Alibaba stock seems exaggerated. Shares should rebound as its growth will remain strong as e-commerce and the Chinese economy continue to expand.
A bargain ad tech stock
Ad tech stocks were big winners in 2020, and Perion Network was no exception, as the supply side platform's growth accelerated. Shares of the Israeli small-cap doubled last year, and were cruising higher through the beginning of 2021 as well. However, after a pop following a hike in the company's 2021 guidance, the stock has fallen by 33% from its early March peak. It's now trading at levels significantly below where it was before it raised its guidance.
Coming off of 51% revenue growth in the fourth quarter, which benefited in part from the company's acquisitions of Content IQ and Pub Ocean, management sees revenue increasing by 13% to 16% this year to $370 million to $380 million, though that guidance could prove to be conservative given the strong performance Perion delivered at the end of the last year. It's also calling for 31% revenue growth in the first quarter.
Even if that forecast turns out to be accurate, Perion is still priced like a bargain, trading at a P/E ratio of less than 20 based on adjusted earnings per share of $0.91. The boom in streaming video consumption caused by the pandemic accelerated a shift toward ad tech platforms like the one Perion operates, and the company is well-positioned in areas like connected TV, or ad-supported streaming, where revenue jumped 132% in its most recently reported quarter. Meanwhile, its display and social segment, which now makes up more than half of the business, saw revenue jump 159%.
Looking at those numbers, Perion seems significantly underpriced for its growth potential.
