In stock investing, low-priced doesn't always mean cheap. Stocks can be considered cheap when the market wrongly undervalues them, or prices them below their actual values. Eventually the market realizes its error and prices such stocks correctly. However, if the underlying company doesn't have a lot to offer investors, the market rightly prices their stocks low. Such low priced stocks are value traps that won't appreciate until the underlying business picks up.
Prudent investors know how to identify value stocks from value traps. But if you do find an undervalued stock, it can be a great addition to your portfolio. Kroger (KR -2.28%), Tapestry (TPR -2.16%), and Bed Bath & Beyond (BBBY) are all solid businesses trading at absurdly cheap valuations right now, and could be worth buying.
Image source: Getty Images.
Benefiting from the pandemic
Kroger typically doesn't experience high sales growth, but it's a stable business with an above-average-yielding dividend. It trades at only 11.5 times trailing 12-month earnings, and there are reasons to be optimistic about the supermarket operator's future.
In 2020, its comparable sales grew by 14% as customers stocked up on essentials and ate out less. Typically, its comps growth is in the low single-digit percentages. For the five-year period that ended in 2019, its compound annual growth rate was only 2.4%. Management expects it to be challenging to match 2020's performance in 2021, so it gave guidance for two years out, which stacks 2020's actual comps with a 3% to 5% 2021 projected comps decrease (factoring out fuel sales).
But the supermarket company has been making moves over the past few years to lean more into digital like competitors Walmart and Target, which typically post higher growth rates. Digital sales increased by 118% year over year in Q4 2020, their third quarter of triple-digit growth.
Management has committed to delivering a total shareholder return of between 8% and 11% annually through its transformation. Its strategy is focused on four areas: a seamless shopping experience, personalized service, fresh products, and owned brands. Kroger's owned brands had record annual sales of more than $26 billion in 2020, and its plant-based brand, Simple Truth, had over $3 billion in annual sales.
Kroger doesn't get a lot of attention as a stock, but it was the 23rd-largest company in the U.S. by 2019 revenue, with 2,800 stores operating under several names. Between its new digital program, owned brands, and quality products, it has a lot of strength. Its stock is up 16% year to date, and it offers value for the long term.
Image source: Getty Images.
Moving past the pandemic
Luxury goods weren't on many customers' minds during the pandemic, and Tapestry -- the owner of brands Coach, Kate Spade, and Stuart Weitzman -- suffered as a result.
The company, which has gone through two new CEOs during the past two years, was struggling even before the pandemic began. Current CEO Joanne Crevoiserat came into a volatile situation as COVID-19 added new layers to the challenge of stemming sales declines and rebuilding the company.
Last year's sales declines bottomed out with a 53% drop in the fourth quarter of its fiscal 2020, which ended June 27. That tightened to a 14% year-over-year sales decline in fiscal 2021's first quarter. In fiscal Q2, which ended Dec. 28, that improved to a 7% year-over-year decline, with a strong quarter all around. Digital sales grew by a triple-digit percentage, and a third of global sales came from digital channels, including half of U.S. sales. Operating margin increased by almost 4%, driven by tighter expense management, more efficient inventory management, and -- most notably -- lower promotional activity. Revenue in China increased by 30% year over year.
As usual, the Coach brand carried the most weight for the company. Its sales declined just 4%. The company is making more changes with the Kate Spade brand, where sales dropped by 13%, creating two new executive positions to bring it forward. And Stuart Weitzman sales decreased by 27% in fiscal Q2.
The company is focusing on improving the customer experience, digital development, and becoming more agile. It's expecting 10% revenue growth for its 53-week fiscal 2021, which would still leave it performing below fiscal Q2 2019 levels. But the company's effective management, top brands, and a recovering economy are all good signs for its return to growth.
Even up 46% year to date, Tapestry stock is trading at only 15 times one-year forward earnings.
Image source: Getty Images.
Growing with the pandemic
Bed Bath & Beyond was also struggling before the pandemic. New CEO Mark Tritton, who came on board after activist investors ousted the prior management team, was implementing a restructuring strategy meant to improve the company's omnichannel program when the crisis struck. Sales declines were inevitable, even as customers began spending more on home improvement. But its digital investment paid off, and by fiscal 2020's second quarter, which ended Aug. 29, comps were up 6% year over year -- the retailer's first comps increase in four years.
That continued with a 5% comps increase for the flagship brand in its fiscal Q3, which ended on Nov. 30. That included a 94% increase in digital sales. Total comps for the company grew by 2%. Bed Bath & Beyond will release its fiscal fourth-quarter results tomorrow before the market opens.
Tritton completely overhauled the executive team and continues to create new leadership positions, including two new hires at the end of March focused on digital acceleration.
Significantly, he is launching company-owned brands, a strategy he used effectively in his prior role as the merchandising chief at Target (TGT -0.36%). Bed Bath & Beyond announced that it will roll out eight new owned brands in 2021, the first of which is a bed linens brand called Nestwell that's already in stores.
Bed Bath & Beyond stock trades at only 0.37 times sales, but it might surge if the earnings release shows further progress.
