Should Investors Buy These 2 Beaten-Down Stocks Right Now?

If you're looking for the best stocks to buy right now for a bargain, there's certainly not a shortage of options to pick from. In this segment of Backstage Pass, recorded on Jan. 10, Fool contributor Jason Hall and Fool Canada analyst Jim Gillies dive into two stocks trading on sale right now.

Jason Hall: Let's play a game, guys, here. Let's do the fun one here. Stocks are getting crushed. Who is going to go first here? Let's see. Jim, I want you to go first here. What's a stock that's down 50% or more you'd buy right now, and then follow that up with the stock you wouldn't buy with Toby Bordelon's money.

Jim Gillies: With my own money? [laughs]. I've been on record on Fool Live on "The Morning Show" back when the stock was closer to $75-$80 as saying, "I'd be real interested in Pinterest (PINS -0.64%) below $32." Guess where we are today?

The reason for that is that's a cash flow, I have a cash flow-based valuation model for Pinterest. I generally hate these types of companies that come out with multiple share class structures and are really set up to enrich insiders and have just almost an obscene level of equity comp going to everyone and their dog.

We're going to get to another company like that in a minute by the way. You can price these things in. I had a finance prof way back in the day who would say, let insiders pay themselves whatever they want as long as you evaluate and bring it into your valuation process, which I do. Again, stock was $75-$80, now it's around $32.

Now, we're back to a place where I think you can make a reasonable valuation case for Pinterest in spite of the generosity, the self-generosity inside. I'm looking real serious at Pinterest, of course by talking about it, I can't buy it for at least two more days.

What's interesting to me about Pinterest is, I've maintained, since it was pitched to us two years ago at the Team Canada investing team. I've maintained that look, they've got North America, we'll loop Canada with the U.S.

They've got about as good as they are going to get in North America. Anyone who wants to be on Pinterest is on Pinterest. I ironically have a Pinterest account, my significant other does not because she's like, why would I want to do that to myself?

Where they need to monetize is international. If you look at what the ARPU, average revenue per user international, it's 5% of the domestic.

Jason Hall: I think $0.38 compared to $5 compared to change, $6 in change.

Jim Gillies: It's ridiculously low compared. If they can monetize that this will be a home run from this price. If they can't, Pinterest will be acquired by somebody, probably for a lower price than we have today. But Pinterest is risk-reward I think it's gotten into a spot.

See, most of my stocks because I'm not a growth chaser. In fact, I take a certain amount of perverse pride in recommending companies with like low or even negative growth. Because you can do quite well in that way if you want to acknowledge it. Most of my favorite companies aren't off anywhere near 50%.

Even Shopify (SHOP -2.37%) it's not off 50% maybe from its 52-week high, I don't know, I don't think so though. But Pinterest is one that's got my interest.

On the other hand, DocuSign (DOCU 0.10%). I've said a couple of times, DocuSign is a company that is unquestionably built a better mousetrap. If you bought a house before the era of DocuSign and then bought a house, Jason in the era after DocuSign, you will know what I'm talking about because it's just frankly better.

I know they've got a bunch of notary stuff coming down the pike. I know my friend Tim Beyers is quite high about them. He and I have had a couple of debates over the utility of DocuSign.

Not really utility, I think we both agree it's a good platform. The problem about DocuSign, however, is those aforementioned equity cookies that everybody and their dog gets, that has a cost. I know that some CEOs would prefer that you don't pay any attention to that cost. But that doesn't change the fact that there's still a cost.

Jason Hall: You mean when they give a portion of your earnings to somebody else without an asset behind?

Jim Gillies: A portion. How about 165% of my earnings, would that be a portion?

Jason Hall: Yeah.

Jim Gillies: I might be misrepresenting the number because it's been a few weeks since I've actually done the math but DocuSign, since IPO has paid out, well just go over 100%.

They've been a free cash flow engine. They produce free cash flow. They have spent more than 100% of that free cash flow sopping up dilution, buying back shares of themselves from themselves, and yet the dilution of the company has still gone up 6%, 7% annualized since IPO.

That means to me, and some people might like to argue this point, but well, I'm right and they're smart and they'll realize that I'm right.

That means when you essentially have that situation, what that means is the company's free cash flow that it's generated, has not benefited you as a shareholder. Because they've blown all of it out the door to basically sop up the mess they've made.

Jason Hall: It doesn't matter if you're growing your profits if you're not growing your profits per share.

Jim Gillies: It doesn't matter if the profits can accrue to me, and the whole point of a discounted cash flow valuation methodology is forecast the free cash flows from here to eternity, discount it back at an appropriate discount rate.

We can argue about what the free cash flow growth profile is going to be. We can argue what the appropriate discount rate is going to be.

But when literally more than 100% of the cash flow they do generate, at least on the start of your trajectory, goes to insiders, rather than accruing to value to outside investors. Arguably, the value to outside investors is therefore at that point zero.

For me, DocuSign is down, I'm not sure. Again, my friend Tim Beyers really likes DocuSign, I really like Tim Beyers, so I guess by proxy I like DocuSign, but they need to stop hemorrhaging the cash they're generating before I'll be interested.