While the market overall had a pretty good year in 2021 (the S&P 500, slanted toward large-cap stocks, was up 27%), the performance of small- and mid-cap stocks was mixed. Some tech stocks suffered sharp pullbacks after skyrocketing earlier on in the pandemic, even though the businesses themselves continue to grow at a healthy pace.
After a wild year, Magnite (MGNI -0.58%), Redfin (RDFN -1.88%), and Crocs (CROX 0.63%) look way undervalued right now based on their future potential. Here's why these three mid-cap stocks are worth a closer look.
Image source: Getty Images.
1. Magnite: Steadily expanding with streaming TV
Magnite stock hasn't been able to catch a break since quickly doubling in value in the first couple months of 2021. Share prices are down 77% from their all-time high posted nearly a year ago, valuing the software company at a mere $2.4 billion (as measured by enterprise value).
In hindsight, Magnite was way overpriced 12 months ago. Over-optimism had set in, driven by the company's fast-growing platform, which helps video publishers sell advertising slots. Connected TV (CTV) is taking over the at-home entertainment space as a myriad of new streaming services pick up subscribers and traditional video moves to an internet-delivered format. Magnite is the largest independent CTV software company. Hundreds of publishers rely on it to automate the selling of ads and maximize value for their content.
But a company that expects to grow sales at an average of 25% per year in each of the next five years didn't deserve to trade at a trailing 12-month sales multiple of over 20 (which is where Magnite was early in 2021). Now shares trade for a mere 4.5 times trailing 12-month sales, which seems incredibly cheap considering this is a highly profitable and growing business. Adjusted EBITDA profit margin was 35% in Q3 2021, and management expects it to be at over 40% in the coming years.
Of course, the digital ad software space is highly competitive, and Magnite has a lot of debt due to a couple of acquisitions ($719 million as of the end of September 2021). But Magnite generates plenty of cash to service its debt, and is poised to continue expanding with the CTV industry in the coming years. Even management thinks its stock is a pretty good deal right now. It announced a $50 million share repurchase program in December. I like this CTV ad stock at these levels too.
2. Redfin: A full-service tech-powered brokerage firm
The real estate brokerage business is a cyclical one, and Redfin's stock has been suffering on fears of a too-hot residential housing market. Supply of homes available for sale has been thin during the pandemic as Americans relocate en masse, and now with interest rates set to rise this year, there's another reason to worry. Redfin stock is down nearly 60% in the last year, giving it an enterprise value of $4.2 billion.
Redfin won't be an appropriate stock for every investor. The company is spending heavily to maximize sales growth right now, and generated negative free cash flow of $429 million over the last 12-month stretch. But at just 2.2 times trailing 12-month sales, a substantial amount of negativity has been priced in at this point.
After all, Redfin is still steadily winning market share (1.16% of U.S. existing home value in Q3 2021, compared to 1.04% the year prior). It's still expanding its services into new cities, acquired an online rental listing site last spring, and recently announced it's purchasing Bay Equity Home Loans to expand on its mortgage services. Redfin has a full-service technology stack to help home buyers and sellers, and it has lots of potential avenues for growth ahead -- regardless of where the real estate market goes next.
Management had said to expect year-over-year revenue growth of as much as 148% in Q4 2021, a torrid pace that is unlikely to continue in the new year. Nevertheless, with shares depressed in value and Redfin still making progress in the residential real estate market, now looks like a pretty good time to nibble on this tech stock.
3. Crocs: Comfort and utility for the win
Crocs sales have been soaring during the pandemic, bucking the trend of overall declines elsewhere in the apparel and clothing department. In 2021 alone, the company stated it's expecting record full-year sales topping $2.3 billion, growth of 67% over 2020. In spite of this, share prices have dropped a third in value in recent months. Crocs has an enterprise value of $7.2 billion.
Comfort and utility are in vogue as the pandemic reshapes consumer behavior. As a result of this and a push into new markets in Asia, Crocs thinks it will remain a fast-growing shoe company for years. Management's goal is to reach $5 billion in annual sales by 2026. 2022 is off to a good start working toward that milestone. Excluding the recent acquisition of small casual shoe brand Hey Dude, Crocs expects sales growth to exceed 20%, all while maintaining an adjusted operating profit margin of about 28%. That makes this quirky shoe business one of the most profitable in the industry.
When Crocs announced it was acquiring Hey Dude last month for $2.5 billion, I was initially skeptical. However, it was revealed the small casual brand should bring in as much as $750 million in sales in 2022, with an adjusted operating margin of 26%. Plugged into Crocs' existing distribution channels, this could be a new growth lever for Crocs in the years ahead.
Considering Crocs' 2022 outlook, shares currently trade for just 7 times adjusted operating income (assuming Crocs generates that 28% margin, and Hey Dude 26%). Of course, Crocs will need to prove it's the real deal and deliver the goods. But if it does, this looks like one overlooked cheap shoe stock right now.
